ABSTRACT
Like any economic activity, direct investment usually results not only in profits, but also in various external economies. It is well known that the pursuit of private gain does not maximize social welfare when there are external economies-meaning that marketpriced transactions do not incorporate all the costs and benefits associated with transactions between economic agents. One category of external economies, which has increasingly attracted attention as important for the undertaking of direct investment, is ‘environmental’ effects (see, for example, James 1981). Activities which result in costly environmental effects, unless checked by pollution abatement, are referred to as ‘pollution intensive’ in the following.
