Volume 2, ISSUE2/2011 - Review of Applied Socio-Economic ...

Pag׀ 145 ISSN: 2247-6172ISSN-L: 2247-6172Review of Applied Socio- Economic Research(Issue 2/ 2011)URL: http://www.reaser.eue-mail: editors@reaser.euWithin the “race to the bottom” policy 138 many countries in their endeavour to attract foreign investorshave the tendency to soften their environmental standards, or not consistently use the mechanisms for theircontrol and observance. Such policy may be developed in the absence of unified international standards, or byinvestors themselves, who condition the entry of their investment by a softer environmental regulation.Deterioration of the host country environment, potential softening of the environmental standards also in othercountries, as well as increase in pollution amounts on the global level are the negative environmental impactsresulting from such policy application.In applying the “regulatory chill” 139 policy, the country will not stiffen up its environmental standards,which will so remain “stuck in the mud” It is caused by the fear that if the country were the first to apply thismeasure, its competitiveness in obtaining new, or retaining the existing foreign investors (the “first moverdisadvantage”) would be weakened in comparison with other countries, or by the apprehension that the localenterprise competitiveness would be downgraded.The “race to the bottom”, as well as “regulatory chill” policies come out from the so-called “pollutionhavens” 140 hypothesis. According to this hypothesis foreign investors make foreign investment in the country withsofter environmental standards to save on the environmental costs (i.e. cost that the enterprise must spend tomeet the environmental standards of the host country). 141Experience has shown that the environmental standards influence decisions regarding allocations ofinvestment to an enterprise, mainly in industries demanding natural resources (such as the extraction of rawmaterials) and in industries which generate significant levels of pollution. 142 As the environmental costs ofenterprises in these industries would be in the case of strict standards too high, they have become a decisiveallocation criterion of investment. Products of these industries are usually homogeneous, therefore even a slightchange in the amount of costs would have a considerable impact on the profitability and market position ofa particular foreign investor's enterprise (elasticity of demand is relatively high). 143 In the least developedcountries, the major part of FDI is directed to those industries. 144In contrast to the previous two alternatives, the “race to the top” policy is based on the assumption thatstiffer environmental standards and a consistent and transparent environmental policy improve the competitiveposition of the country in gaining FDI. Such policy from the long-term view stimulates enterprises to introducetechnological innovations and to increase effectiveness that will eventually result in investors’ total cost savings.Stiffening of standards may also be the result of a country's effort to match with the standards of other countries,so that the local enterprises in certain industries (e.g. in industries manufacturing environmentally sensitiveproducts) are able to compete. Investors themselves are very often interested in the stiffening of environmentalstandards and in this respect they exert pressure on the host country.Application of the “race to the top” policy is based on the so-called “pollution haloes” hypothesis,according to which foreign investors prefer countries, where environmental standards are consistentlyobserved. 145 In many cases foreign investors are even interested in applying more modern and cleanertechnologies and environmental management systems necessary with regard to the standards. 146 Investors come138 Fortanier, F., Maher, M.: Foreign Direct Investment and Sustainable Development. In: OECD Global Forum on International Investment,Mexico City, 26-27 November 2001. Available at: .139 Fortanier, F., Maher, M.: Foreign Direct Investment and Sustainable Development. In: OECD Global Forum on International Investment,Mexico City, 26-27 November 2001. Available at: .140 Fortanier, F., Maher, M.: Foreign Direct Investment and Sustainable Development. In: OECD Global Forum on International Investment,Mexico City, 26-27 November 2001. Available at: .141 The above activities are usually termed in literature as “environmental dumping”, “technology dumping”, “capital flight”, or “industrialflight”.142 Mabey, N., Mcnally, R.: Foreign Direct Investment and the environment. From pollution havens to sustainable development. WWF-UK,1999. Available at: .143 Foreign Direct Investment and the Environment. An Overview of the Literature. OECD, 1997. Available at:.144 Mabey, N., Mcnally, R.: Foreign Direct Investment and the environment. From pollution havens to sustainable development. WWF-UK,1999. Available at: .145 Foreign Direct Investment and the Environment. An Overview of the Literature. OECD, 1997. Available at:.146 Low environmental standards may, however, discourage investors from investing in a particular country, for example in the case ofa foreseen enterprise acquisition in the host country, in fear over the “inherited” responsibility for repairing damages to the environment fromthe past and bearing the repair costs and costs associated with environmental modernization of production facilities.