Foreign Direct Investment and Policy Stability of Environmental Regulations in Polluting Sectors

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Welfare is generally higher when not allowing FDI in the polluting sector, indicating a potentially negative impact of foreign investment.
The pollution tax is higher in a polluting sector open to FDI across all policy stability levels compared to when it is closed.
Welfare losses due to uncertainty are reduced as policy stability increases, moving towards an optimal pollution tax level.
The difference in realized welfare between closed and open FDI cases is most significant when marginal pollution damage is low.

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This research finds that higher policy stability lowers pollution taxes in the polluting sector, suggesting improved welfare outcomes.

Galinato et al. (2025) studied this question.

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