Recent evidence shows that developing countries and transition economies are
increasing privatizing their public firms at the same time experiencing rapid
growth of inward foreign direct investment (FDI). In an international mixed
oligopoly, we analyze the interaction between privatization and FDI in the
context of environmental pollution and regulation. We find that the FDI
incentive generally increases with privatization. Under export, welfare increases
with privatization calling for complete privatization. However, under FDI due to
the increasing pollution effect resulting from the relocation, the optimal degree
of privatization is partial. If the degree of privatization that is required to attract
FDI is very high, such that the welfare under FDI is lower than the welfare
under export, the host country will deter FDI through lower degree of
privatization.