Environmental taxes, environmental policy stringency and foreign direct investment

Purpose This paper examines the impact of environmental taxes and environmental policy stringency on foreign direct investment (FDI) inflows. The study further investigates how environmental policy stringency influences the relationship between environmental taxes and FDI. Design/methodology/approach We employed data from the Organization for Economic Co-operation (OECD) countries covering the period 2000 to 2021. The data was analyzed using the Driscoll-Kraay Standard Errors technique. Findings The empirical results show that environmental taxes and policy stringency are relevant instruments that can be employed to reduce environmentally harmful FDIs. However, the results further suggest that environmental taxes play a more central role in reducing environmentally unfriendly FDIs in OECD countries with stringent environmental policies. Thus, the findings emphasize a simultaneous application of the two policy instruments in mitigating harmful FDIs. Moreover, the results demonstrate that environmental taxes will discourage environmentally damaging FDIs only above a threshold point. In addition, we report that the FDI-reducing effect of environmental taxes is reinforced across both high- and low-stringency regulatory environments, with limited difference in magnitude. Originality/value The value of this study is in its contribution to the extant literature on how environmental taxes and environmental policy stringency affect the amount of FDI inflows to OECD countries.