Politická ekonomie 2026, 74(4) Special issue:665-694 | DOI: 10.18267/j.polek.1537

Effectiveness of Environmental Regulation in E7 and G7 Countries: Revisiting the Pollution Halo and Pollution Haven Hypothesis

Ebru Bilgin ORCID..., Nazmiye Tekdemir ORCID..., Pelin Varol İyidoğan ORCID...
Ebru Bilgin, Department of Public Finance, Faculty of Economics and Administrative Sciences, Harran University, Sanliurfa, Turkey
Nazmiye Tekdemir, Department of Public Finance, Faculty of Economics and Administrative Sciences, Kirikkale University, Kirikkale, Turkey
Pelin Varol İyidoğan (corresponding author), Department of Public Finance, Faculty of Economics and Administrative Sciences, Hacettepe University, Ankara, Turkey

This study examines the environmental impact of foreign direct investment (FDI) in E7 and G7 countries from 2005 to 2020 using the ecological footprint as a comprehensive indicator. Employing both linear and nonlinear dynamic panel models, the findings reveal that the environmental effects of FDI depend on the stringency and type of environmental regulation. In E7 countries, FDI tends to worsen environmental degradation under weak regulatory frameworks, providing partial support for the pollution haven hypothesis (PHV). In contrast, in G7 countries, FDI contributes to environmental improvement when market-based and technology-oriented policies surpass certain thresholds, aligning with the pollution halo hypothesis (PHL). The study disaggregates the OECD Environmental Policy Stringency Index (EPS) and identifies regime-dependent effects of FDI across different policy types. It is asserted that while non-market-based policies are more effective in E7 countries, market-based instruments have a larger influence on the environment in G7 economies. Our paper also acknowledges theoretical limitations of the PHV and the PHL, including assumptions of industry mobility, and suggests alternative mechanisms such as technology spillovers. Overall, the results emphasize the importance of context-sensitive policy design to ensure that FDI supports environmental sustainability goals.

Keywords: Foreign direct investment, environmental regulation, pollution haven hypothesis, pollution halo hypothesis, ecological footprint, dynamic panel threshold model
JEL classification: C23, F18, Q56, Q58

Received: January 21, 2025; Revised: August 25, 2025; Accepted: October 13, 2025; Prepublished online: March 4, 2026; Published: September 1, 2026  Show citation

ACS AIP APA ASA Harvard Chicago Chicago Notes IEEE ISO690 MLA NLM Turabian Vancouver
Bilgin, E., Tekdemir, N., & İyidoğan, P.V. (2026). Effectiveness of Environmental Regulation in E7 and G7 Countries: Revisiting the Pollution Halo and Pollution Haven Hypothesis. Politická ekonomie, 74(Special Issue), 665-694. doi: 10.18267/j.polek.1537
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Abid, M., Sekrafi, H. (2021). Pollution haven or halo effect? A comparative analysis of developing and developed countries. Energy Reports, 7, 4862-4871. https://doi.org/10.1016/j.egyr.2021.07.076 Go to original source...
    2. Adebayo, T. S. (2022). Impact of financial globalization on environmental degradation in the E7 countries: application of the hybrid nonparametric quantile causality approach. Problemy Ekorozwoju, 17(2), 148-160. https://doi.org/10.35784/pe.2022.2.16 Go to original source...
    3. Adebayo, T. S. (2025). Transforming environmental quality: Examining the role of green production processes and trade globalization through a Kernel Regularized Regression approach. Journal of Cleaner Production, 145232. https://doi.org/10.1016/j.jclepro.2025.145232 Go to original source...
    4. Adebayo, T. S., Olanrewaju, V. O. (2025). Journey toward affordable and modern energy: Role of income inequality and technological innovation. Environmental Progress & Sustainable Energy, 44(2), e14555. https://doi.org/10.1002/ep.14555 Go to original source...
    5. Adebayo, T. S., Özkan, O. (2024). Investigating the influence of socioeconomic conditions, renewable energy and eco-innovation on environmental degradation in the United States: A wavelet quantile-based analysis. Journal of Cleaner Production, 434, 140321. https://doi.org/10.1016/j.jclepro.2023.140321 Go to original source...
    6. Aggarwal, S., Khurana, S. (2018). Empirical examination of stock market volatility: An international comparison. Indian Journal of Finance, 12(1), 47-61. https://doi.org/10.17010/ijf/2018/v12i1/120741 Go to original source...
    7. Akbulut, H., Yereli, A. B. (2023). A new look at the pollution halo hypothesis: the role of environmental policy stringency. Estudios de Economía, 50(1), 31-54. https://doi.org/10.4067/S0718-52862023000100031 Go to original source...
    8. Ali, M. U., Wang, Y. (2024). Pollution haven or pollution halo? The role of global value chains in belt and road economies. Review of Development Economics, 28(1), 168-189. https://doi.org/10.1111/rode.13041 Go to original source...
    9. Aliyu, M. A. (2005). Foreign direct investment and the environment: pollution haven hypothesis revisited. In: Paper prepared for the Eight Annual Conference on Global Economic Analysis, June 9th-11th, 2005, Lübeck, Germany.
    10. Álvarez-Herránz, A., Balsalobre, D., Cantos, J. M., et al. (2017). Energy innovations-GHG emissions nexus: fresh empirical evidence from OECD countries. Energy Policy, 101, 90-100. https://doi.org/10.1016/j.enpol.2016.11.030 Go to original source...
    11. Arellano, M., Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29-51. https://doi.org/10.1016/0304-4076(94)01642-D Go to original source...
    12. Balsalobre-Lorente, D., Gokmenoglu, K. K., Taspinar, N., et al. (2019). an approach to the pollution haven and pollution halo hypotheses in MINT countries. Environmental Science and Pollution Research, 26(22), 23010-23026. https://doi.org/10.1007/s11356-019-05446-x Go to original source...
    13. Balsalobre-Lorente, D., Ibáñez-Luzón, L., Usman, M., et al. (2022). The environmental Kuznets curve, based on the economic complexity, and the pollution haven hypothesis in PIIGS countries. Renewable Energy, 185, 1441-1455. https://doi.org/10.1016/j.renene.2021.10.059 Go to original source...
    14. Bekun, F. V., Gyamfi, B. A., Etokakpan, M. U., et al. (2023). Revisiting the pollution haven hypothesis within the context of the environmental Kuznets curve. International Journal of Energy Sector Management, 17(6), 1210-1231. https://doi.org/10.1108/IJESM-12-2020-0013 Go to original source...
    15. Botta, E., KoĽluk, T. (2014). Measuring Environmental Policy Stringency in OECD Countries: A Composite Index Approach. OECD Economics Department Working Papers No. 1177. https://doi.org/10.1787/5jxrjnc45gvg-en Go to original source...
    16. Bulus, G. C., Koc, S. (2021). The effects of FDI and government expenditures on environmental pollution in Korea: the pollution haven hypothesis revisited. Environmental Science and Pollution Research, 28(28), 38238-38253. https://doi.org/10.1007/s11356-021-13462-z Go to original source...
    17. Bulut, U., Ucler, G., Inglesi-Lotz, R. (2021). Does the pollution haven hypothesis prevail in Turkey? Empirical evidence from nonlinear smooth transition models. Environmental Science and Pollution Research, 28, 38563-38572. https://doi.org/10.1007/s11356-021-13476-7 Go to original source...
    18. Caner, M., Hansen, B. E. (2004). Instrumental variable estimation of a threshold model. Econometric Theory, 20(5), 813-843. Go to original source...
    19. Cole, M. A., Elliott, R. J., Fredriksson, P. G. (2006). Endogenous pollution havens: does FDI influence environmental regulations? The Scandinavian Journal of Economics, 108(1), 157-178. https://doi.org/10.1111/j.1467-9442.2006.00439.x Go to original source...
    20. Copeland, B. R., Taylor, M. S. (2004). Trade, growth, and the environment. Journal of Economic Literature, 42(1), 7-71. https://doi.org/10.1257/002205104773558047 Go to original source...
    21. Global Footprint Network (2024). Global footprint network: Ecological footprint. [Retrieved 2024-05-01] Available at: https://www.footprintnetwork.org/our-work/ecological-footprint/
    22. Gyamfi, B. A., Bein, M. A., Udemba, E. N., et al. (2021). Investigating the pollution haven hypothesis in oil and non-oil Sub-Saharan Africa countries: Evidence from quantile regression technique. Resources Policy, 73, 102119. https://doi.org/10.1016/j.resourpol.2021.102119 Go to original source...
    23. Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345-368. https://doi.org/10.1016/S0304-4076(99)00025-1 Go to original source...
    24. Hoffmann, R., Lee, C. G., Ramasamy, B., et al. (2005). FDI and pollution: a granger causality test using panel data. Journal of International Development: The Journal of the Development Studies Association, 17(3), 311-317. https://doi.org/10.1002/jid.1196 Go to original source...
    25. Javorcik, B. S., Wei, S. J. (2003). Pollution havens and foreign direct investment: dirty secret or popular myth? Contributions in Economic Analysis & Policy, 3(2), 14-25. https://doi.org/10.2202/1538-0645.1244 Go to original source...
    26. Karimov, M. (2020). An empirical analysis of the relationship among foreign direct investment, gross domestic product, CO2 emissions, renewable energy contribution in the context of the environmental Kuznets curve and pollution haven hypothesis regarding Turkey. European Journal of Engineering and Formal Sciences, 4(1), 110. Go to original source...
    27. Kaur, S., Aggarwal, S., Arora, V. (2025). Co Movement of Stock Market of BRICS with G7 Stock Market. Asia-Pacific Financial Markets, 32(2), 327-356. https://doi.org/10.1007/s10690-024-09455-w Go to original source...
    28. Kaur, S., Aggarwal, S., Garg, V. (2023). A study of macroeconomic effects on the growth of BRICS: A systematic review. International Journal of Economic Policy in Emerging Economies, 18(1), 57-81. https://doi.org/10.1504/IJEPEE.2023.134805 Go to original source...
    29. Kisswani, K. M., Zaitouni, M. (2023). Does FDI affect environmental degradation? Examining pollution haven and pollution halo hypotheses using ARDL modelling. Journal of the Asia Pacific Economy, 28(4), 1406-1432. https://doi.org/10.1080/13547860.2021.1949086 Go to original source...
    30. Kremer, S., Bick, A., Nautz, D. (2013). Inflation and growth: new evidence from a dynamic panel threshold analysis. Empirical Economic, 44, 861-878. https://doi.org/10.1007/s00181-012-0553-9 Go to original source...
    31. Kruse, T., Dechezleprêtre, A., Saffar, R., et al. (2022). Measuring Environmental Policy Stringency in OECD Countries: An Update of the OECD Composite EPS Indicator. OECD Economics Department Working Papers No. 1703. https://doi.org/10.1787/90ab82e8-en Go to original source...
    32. Liu, J., Jingya, Q., Kai, Z. (2019). Is China's development conforms to the environmental Kuznets curve hypothesis and the pollution haven hypothesis? Journal of Cleaner Production, 234, 787-796. https://doi.org/10.1016/j.jclepro.2019.06.234 Go to original source...
    33. Murshed, M. (2023). An empirical Re-investigation for verifying the pollution haven hypothesis concerning the foreign direct investment-carbon intensity nexus: Contextual evidence from BRICS. Environmental Challenges, 13, 100793. https://doi.org/10.1016/j.envc.2023.100793 Go to original source...
    34. Mwilima, N. (2003). Foreign Direct Investment in Africa. Windhoek: Labor Resource and Research Institute.
    35. NASA Goddard Institute for Space Studies (2023). GISS Surface Temperature Analysis. Global Temperature Trends: 2023 Annual Summation. [Retrieved 2024-05-02] Available at: https://climate.nasa.gov/vital-signs/global-temperature/?intent=121
    36. Nathaniel, S., Aguegboh, E., Iheonu, C., et al. (2020). Energy consumption, FDI and urbanization linkage in coastal mediterranean countries: Re-assessing the pollution haven hypothesis. Environmental Science and Pollution Research International, 27(28), 35474-35487. https://doi.org/10.1007/s11356-020-09521-6 Go to original source...
    37. OECD (2024). Environmental policy stringency index. [Retrieved 2024-05-01] Available at: https://stats.oecd.org/
    38. Our World in Data (2024). Primary energy consumption. [Retrieved 2024-05-01] Available at: https://ourworldindata.org/grapher/primary-energy-cons
    39. Özkan, O., Adebayo, T. S. (2024). Unraveling the time-varying asymmetric impact of fossil fuel price volatility on high cleantech investments. Environment, Development and Sustainability, 28, 11525-11548. https://doi.org/10.1007/s10668-024-05432-5 Go to original source...
    40. Özkan, O., Alola, A. A., Adebayo, T. S. (2023). Environmental benefits of nonrenewable energy efficiency and renewable energy intensity in the USA and EU: examining the role of clean technologies. Sustainable Energy Technologies and Assessments, 58, 103315. https://doi.org/10.1016/j.seta.2023.103315 Go to original source...
    41. Pethig, R. (1976). Pollution, welfare, and environmental policy in the theory of comparative advantage. Journal of Environmental Economics and Management, 2(3), 160-169. https://doi.org/10.1016/0095-0696(76)90031-0 Go to original source...
    42. Rana, R., Sharma, M. (2019). Dynamic causality testing for EKC hypothesis, pollution haven hypothesis and international trade in India. The Journal of International Trade & Economic Development, 28(3), 348-364. https://doi.org/10.1080/09638199.2018.1542451 Go to original source...
    43. Roodman, D. (2009). How to do Xtabond2: An Introduction to Difference and System GMM in Stata. The Stata Journal, 9(1), 86-136. https://doi.org/10.1177/1536867X0900900106 Go to original source...
    44. Sabir, S., Rafque, A., Abbas, K. (2019). Institutions and FDI: evidence from developed and developing countries. Financial Innovation, 5(8), 1-20. https://doi.org/10.1186/s40854-019-0123-7 Go to original source...
    45. Sadik-Zada, E. R., Ferrari, M. (2020). Environmental policy stringency, technical progress and pollution haven hypothesis. Sustainability, 12(9), 3880. https://doi.org/10.3390/su12093880 Go to original source...
    46. Sarkodie, S. A., Strezov, V. (2019). Effect of foreign direct investments, economic development and energy consumption on greenhouse gas emissions in developing countries. Science of the Total Environment, 646, 862-871. https://doi.org/10.1016/j.scitotenv.2018.07.365 Go to original source...
    47. Shahbaz, M., Balsalobre-Lorente, D., Sinha, A. (2019). Foreign direct investment-CO2 emissions nexus in Middle East and North African countries: Importance of biomass energy consumption. Journal of Cleaner Production, 217, 603-614. https://doi.org/10.1016/j.jclepro.2019.01.282 Go to original source...
    48. Shahbaz, M., Nasreen, S., Abbas, F., et al. (2015). Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries? Energy Economics, 51, 275-287. https://doi.org/10.1016/j.eneco.2015.06.014 Go to original source...
    49. Singhania, M., Saini, N. (2021). Demystifying pollution haven hypothesis: Role of FDI. Journal of Business Research, 123, 516-528. https://doi.org/10.1016/j.jbusres.2020.10.007 Go to original source...
    50. Sun, C., Zhang, F., Xu, M. (2017). Investigation of pollution haven hypothesis for China: An ARDL approach with breakpoint unit root tests. Journal of Cleaner Production, 161, 153-164. https://doi.org/10.1016/j.jclepro.2017.05.119 Go to original source...
    51. Wagner, U., Timmins, C. (2009). Agglomeration effects in foreign direct investment and the pollution haven hypothesis. Environmental and Resource Economics, 43(2), 231-256. https://doi.org/10.1007/s10640-008-9236-6 Go to original source...
    52. Walter, I., Ugelow, J. L. (1979). Environmental policies in developing countries. Ambio, 62, 102-109.
    53. Wang, C. H., Padmanabhan, P., Huang, C. H. (2021). The impact of renewable energy, urbanization, and environmental sustainability ratings on the environmental Kuznets curve and the pollution haven hypothesis. Sustainability, 13(24), 13747. https://doi.org/10.3390/su132413747 Go to original source...
    54. Wang, Q., Wang, X., Li, R. (2022). Does urbanization redefine the environmental Kuznets curve? An empirical analysis of 134 Countries. Sustainable Cities and Society, 76, 103382. https://doi.org/10.1016/j.scs.2021.103382 Go to original source...
    55. Wang, X., Zhang, C., Zhang, Z. (2019). Pollution haven or porter? The impact of environmental regulation on location choices of pollution-intensive firms in China. Journal of Environmental Management, 248, 109248. https://doi.org/10.1016/j.jenvman.2019.07.019 Go to original source...
    56. Wen, Y., Haseeb, M., Safdar, N., et al. (2022). Does degree of stringency matter? Revisiting the pollution haven hypothesis in BRICS countries. Frontiers in Environmental Science, 10, 949007. https://doi.org/10.3389/fenvs.2022.949007 Go to original source...
    57. Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25-51. https://doi.org/10.1016/j.jeconom.2004.02.005 Go to original source...
    58. World Bank (2024). World Development Indicators. [Retrieved 2024-05-01] Available at: https://databank.worldbank.org/source/world-development-indicators
    59. World Bank (2024). Worldwide governance indicators. [Retrieved 2024-05-01] Available at: https://databank.worldbank.org/source/world-development-indicators
    60. Zhang, C., Zhou, X. (2016). Does foreign direct investment lead to lower co2 emissions? Evidence from a regional analysis in China. Renewable and Sustainable Energy Reviews, 58, 943-951. https://doi.org/10.1016/j.rser.2015.12.226 Go to original source...

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content