Environmental Regulation, Multinational Companies and International Competitiveness

Abstract

There is considerable public concern that globalization — the liberalization of trade and capital flows — leads to policy competition between governments, which in the context of environmental policy may induce governments to set environmental policies (environmental dumping) that are too lax in order to protect their international competitiveness. It is further argued that this incentive is particularly strong when firms are footloose so that governments may worry about ‘capital flight’, and multinational firms are particularly prone to such footloose behaviour. The fear of environmentalists is that competition between governments to retain or attract such footloose firms is thought to trigger a ‘race-to-the-bottom’ in environmental policies. In the NAFTA debate the possibility of firms/plants relocating from the US to Mexico was an issue and a similar concern is expressed about the enlargement of the EU to include Eastern European countries. To counteract such incentives for environmental dumping it is often suggested that agencies such as the European Union should seek to harmonize environmental policies of member states or at least set ‘minimum standards’ for environmental policies.

OECD Environment Directorate and OECD Economics Department, respectively. We would like to thank useful comments from the participants at EIIW Conference on Economic Globalisation and International Organisations Potsdam, 4–7 December 1997 and, in particular, Hans-Georg Petersen. The opinions expressed in this paper are those of the authors, and do not necessarily reflect the views of either the OECD Secretariat or any OECD Member country.