Foreign Direct Investment and the Environment: A Review of the Literature

In this paper we review the literature that investigates the relationship between foreign direct investment (FDI) and the environment. After reviewing the theoretical literature we discuss two broad strands of research. First, the impact of environmental regulations on the choice of plant location and second, the impact of FDI on the emissions of various pollutants and the related question of whether we can observe environmental spillovers from foreign to domestic firms. Finally, we review the more recent literature on environmental outsourcing as an alternative to FDI and conclude with suggestions for future research.