Optimal Environmental Regulation on International Joint Ventures in Developing Countries

This paper examines how environmental regulation affects the FDI strategies of parent firms in developing countries (the South) and developed countries (the North) when there are differences in the abatement technology and R&D efficiency between these countries. If there are more lenient regulations, it is more attractive to form a JV in the South. However, southern governments opt for lenient regulation when the abatement technology of the North, while not good, is still superior to that of the South. Furthermore, the welfare of the developing country is optimal when forming a domestic JV. This paper focused on FDI strategies in terms of the welfare of the South, with a view to being able to provide better policy modeling for the developing countries.