Environment and Development Economics 17: 163–186 © Cambridge University Press 2012 doi:10.1017/S1355770X11000398 Multinationals and environmental regulation: are foreign firms harmful? EVANGELINA DARDATI Complex Engineering Systems Institute and Center for Applied Economics, University of Chile, Santiago, Chile. Email: edardati@dii.uchile.cl MERYEM SAYGILI Department of Economics, University of Texas at Austin, 1 University Station, C3100 Austin, TX 78712, USA. Email: tekinmrym@gmail.com Submitted July 16, 2010; revised August 23, 2011; accepted November 1, 2011; first published online 31 January 2012 ABSTRACT. The rise of globalization has directed the attention of economists to the effect of trade and multinational production on the environment. We explore whether multina- tional firms, frequently the target of environmentalists, are harmful for a host country’s environment. We introduce environmental regulation in a two-country model of hetero- geneous firms with monopolistic competition. Using plant-level data from Chile, we test the model implications. We find that foreign firms are cleaner than domestic plants even after controlling for productivity that is likely to be negatively correlated with emissions. We also show that increasing the stringency of environmental regulations in a previously unregulated market affects the domestic firms more than the multinationals. 1. Introduction The rise of globalization has directed the attention of economists to the effect of trade and multinational production on pollution. The Pollution Haven Hypothesis (PHH) is the most popular argument for those who believe that globalization harms the environment. The PHH suggests that uneven environmental regulations between developing and developed countries cause the relocation of pollution-intensive activities to devel- oping countries where regulations are less strict. Multinationals become the main culprits since they can easily relocate their production when The authors are grateful to Natalia Ramondo, Don Fullerton and seminar participants at the University of Texas at Austin for their helpful comments and discussions. We thank Natalia Ramondo for providing us with the data. The first author acknowledges financial assistance from Complex Engineering Systems Institute (ICM: P-05-004-F, CONICYT: FBO16). This manuscript has also bene- fited from comments by the editor and two anonymous referees. All remaining errors are ours.