The impact of environmental policy on international competitiveness in manufacturing

The aim of this study is to test the hypothesis that environmental stringency adversely affects the international competitiveness (net exports) in manufacturing sectors. The model follows the standard factor endowment approach to explain the effects of environmental regulatory policy on net exports in different product-based industries. An econometric model is constructed, which includes factor endowments and environmental regulations to examine how strict environmental policies impact export competitiveness. A panel dataset of 10 Organisation for Economic Co-operation and Development (OECD) countries, over 17 years, 1987–2003, was constructed for the modelling effort. The study finds that environmental regulations can be a way to combat the flight of manufacturing out of developed countries if the output from these industries can be identified as environmentally friendly. A positive relationship between net exports and environmental regulations was found for paper products, wood products and textile products. However, most manufacturing industries are harmed by increased environmental regulations.