What is Race-to-the-Bottom Effect on FDI Inflow?

The inflow of foreign direct investment (FDI) increased rapidly during the late 1980s and the 1990s in almost every region of the world revitalizing the long and contentious debate about the costs and benefits of FDI inflows. The race-to-the-bottom hypothesis was initially formulated in the context of local competition for investments within countries, where the decentralized environmental responsibilities gave in setting their environmental standards in line with their priorities (WTO 1999). Most critics argue that increased competition for foreign direct investment could lead to lowering of environmental standards and regulations (WB 2000). Furthermore, governments which attempt to maintain high standards will see their efforts undermined by the existence of less stringent regulations elsewhere. This will then lead to an overall lowering of environmental standards internationally (Jenkins et al. 2002). This paper aim is examination of race-to-the-bottom effects on the FDI inflow for 4 euro-Mediterranean countries, over 1980-2010. I have found that a decrease in the environmental regulations stringency has positive and statistically significant effect on the FDI inflow to this region.