ABSTRACT
Foreign direct investment (FDI) is often viewed sceptically by environmentalists who are concerned about environmental consequence of strategic mobility of foreign capital: foreign capital moving to countries with low environmental restrictions on production. On the demand side of FDI, there is strong evidence to suggest that major developing countries are competing for FDI from developed countries. In the literature many have considered environmental policies in oligopolistic models. Barrett demonstrates that governments may impose weak environmental standards in oligopolistic markets. Katsoulacos and Xepapadeas examine emission taxes and find that it can over-internalize the externality under free entry and exit. Lahiri and Symeonidis consider welfare and pollution implications for multilateral piecemeal reforms of environmental policies in an international oligopolistic model with and without free entry and exit of firms. The chapter considers a partial equilibrium model in which n number of identical foreign firms and m number of identical domestic firms competes in market for a non-tradeable commodity in a host country.
