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The impacts of energy prices on industrial foreign investment location: evidence from global firm level data

Sato, Misato and Saussay, Aurélien (2018) The impacts of energy prices on industrial foreign investment location: evidence from global firm level data. Centre for Climate Change Economics and Policy (344). Centre for Climate Change Economics and Policy and Grantham Research Institute on Climate Change and the Environment, London, UK.

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Abstract

This paper analyzes the role of energy prices in firms’ investment location decisions in the manufacturing sector. Building on the application of discrete choice theory to the firm location problem, we specify a conditional logit model linking bilateral foreign direct investment (FDI) activity to relative energy prices. We then empirically test this link using a global dataset of M&A deals in the manufacturing sector covering 41 countries between 1995 and 2014, using econometric techniques adapted from the estimation of gravity models. The results suggest that upon deciding to invest, firms are attracted to regions that have lower energy prices. However, counterfactual simulations reveal that unilateral implementation of a $50/tCO2 carbon tax by various coalitions of countries is expected to have limited negative impact on the attractiveness of economies to foreign industrial investments. Hence, our results support the pollution haven effect, but find the magnitude is limited and could be addressed with targeted measures in the most energy intensive sectors

Item Type: Monograph (Working Paper)
Official URL: http://www.lse.ac.uk/GranthamInstitute
Additional Information: © 2018 The Authors
Divisions: Grantham Research Institute
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor
JEL classification: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment; Long-Term Capital Movements
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q5 - Environmental Economics > Q52 - Pollution Control Costs; Distributional Effects; Employment Effects
Date Deposited: 21 Jun 2019 08:36
Last Modified: 10 Jul 2019 23:26
URI: http://eprints.lse.ac.uk/id/eprint/101044

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