Does Environmental Quality Influence FDI Inflows? A Panel Data Analysis for Indian States

Increased integration between the developed and developing countries has seen substantial decrease in trade-related barriers. In addition, there is a debate that developing countries tend to lower the environmental standards to attract more foreign direct investment (FDI). In this context, the objective of this article is to examine the relationship between FDI and environmental status in different Indian states. Using data for the period 1996–2006 covering 16 states in India, we test for the pollution haven hypothesis (PHH) that is, if air quality has a role in influencing FDI in Indian states. Our result does not support that FDI flows into the states with poor air quality. Other economic, demographic and geographic variables play a significant role in attracting FDI.