The costs attributable to complying with environmental
regulation are not as important as other determinants of where
Indian businesses locate new plants. The level of existing business
activity overwhelms all other factors affecting location decisions.
The cost of complying with environmental regulations has been cited as a major burden on businesses. Is it enough of a burden to influence where businesses locate new plants, which are not restricted in their choice of location?
Mani, Pargal, and Huq examine a unique establishment level dataset to find out whether the stringency of environmental regulation affects where firms locate new plants. Using a conditional logit model, they estimate the importance of different variables in plant location choice.
After controlling for the impact of factor price differentials, infrastructure, and agglomeration, they find that the number of new plants commissioned in different states of India in 1994 does not appear to be adversely affected by more stringent environmental enforcement at the state level. In other words, an environmental "race to the bottom" is unlikely.
They find that the level of existing business activity overwhelms all other factors affecting location decisions. Reliable infrastructure and factors of production are also critical.
This paper — a product of the Environment, Infrastructure,
and Agriculture Division, Policy Research Department — is part
of a larger effort in the department to study environmental regulation.
Copies of this paper are available free from the World Bank, 1818
H Street NW, Washington, DC 20433. Please contact Evelyn de Castro,
room N10-019, telephone 202-458-9121, fax 202-522-3230, Internet
address edecastro@worldbank.org. (24 pages)
The full report is available in PDF format.