Does Environmental Regulation Matter? Determinants of the Location of New Manufacturing Plants in India in 1994

The costs attributable to complying with environmental regulation are not as important as other determinants of where Indian businesses locate new plants. The level of existing business activity overwhelms all other factors affecting location decisions. The cost of complying with environmental regulations has been cited as a major burden on businesses. Is it enough of a burden to influence where businesses locate new plants, which are not restricted in their choice of location?Mani, Pargal, and Huq examine a unique establishment level dataset to find out whether the stringency of environmental regulation affects where firms locate new plants. Using a conditional logit model, they estimate the importance of different variables in plant location choice. After controlling for the impact of factor price differentials, infrastructure, and agglomeration, they find that the number of new plants commissioned in different states of India in 1994 does not appear to be adversely affected by more stringent environmental enforcement at the state level. In other words, an environmental race to the bottom is unlikely. They find that the level of existing business activity overwhelms all other factors affecting location decisions. Reliable infrastructure and factors of production are also critical.This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger effort in the department to study environmental regulation