This paper examines empirically whether countries with relatively more lax environmental regimes
have a comparative advantage in their competition for foreign direct investment. It seeks to contribute to
the literature in several important ways. First, we use a measure of environmental stringency which is
based on managers’ perceptions of the stringency in a given country and which gives us the opportunity to
analyse a broad sample of both source and host countries. Second, an important strength of the technical
analysis is the non-linear modeling of the impact of policy stringency on FDI. Third, we use a ‘state-of-theart’
FDI modelling strategy, which allows us to differentiate between different models of production
fragmentation. Support is found for the effect of relative environmental policy stringency on foreign direct
investment patterns. However, the effect is relatively small in comparison with other factors, including
more general regulatory quality. Moreover, the relationship appears to be non-linear with the effects of
increased relative environmental policy stringency in the host country decreasing after a certain threshold.
