Does host market regulation induce cross‐border environmental innovation?

• Published date: 01 July 2019
• Date: 01 July 2019
• Author: Antonello Zanfei,Giovanni Marin
• DOI: http://doi.org/10.1111/twec.12784

ORIGINAL ARTICLE

Does host market regulation induce cross‐border

environmental innovation?

Giovanni Marin

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Antonello Zanfei

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1

Department of Economics, Society and Politics, University of Urbino “Carlo Bo”, Urbino, Italy

2

SEEDS Sustainability Environmental Economics and Dynamics Studies, Ferrara, Italy

KEYWORDS

environmental policy, MNE, patent data

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INTRODUCTION

Big companies, and multinational enterprises (MNEs) in particular, play a crucial role in the evolu-

tion of global environment. On the one hand, they heavily affect the availability and quality of nat-

ural resources. On the other hand, they provide a remarkable contribution to technical change,

including green innovation, which can eventually reduce the burden of economic activities on the

environment.

In terms of environmental impact, about one‐third of total carbon dioxide emissions in EU‐28

is released by just 312 large installations and as much as one‐third of total sulphur oxides (a local

pollutant) emissions is released by just 40 large installations (own elaboration on E‐PRTR and

EEA data for 2012).

In terms of technical change, the combination of top 1,000 EU companies and top 1,000 non‐

EU companies contributes to more than 90% of world business R&D expenditure (Dernis, Dosso,

Hervás, Millot, Squicciarini, & Vezzani, 2015). Most of these R&D performers are multin ational

enterprises (Dachs, Stehrer, & Zahradnik, 2014; UNCTAD, 2005). There is also sparse and largely

anecdotal evidence that MNEs play a substantial role in the generation and diffusion of green inno-

vation through their R&D facilities both in their home countries and in foreign locations.

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In this context, the main contribution of this paper is twofold. First, it provides systematic evi-

dence on the role played by the world’s top innovating companies in the development of environ-

mental technologies. Second, it sheds some light on how environmental regulation in host

countries affects green inventive activities of foreign MNEs active in those countries.

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For instance, based on press information, Noailly and Ryfisch (2015) documented that the Chinese‐based division of Gen-

eral Motors has expanded its involvement in R&D activities relating to battery manufacturing for hybrid and electric vehi-

cles. According to the Ford Sustainability Report 2016/17 (Ford, 2016), the company’s engineers in Europe have been

successful in inventing a cutting‐edge green technology for the 1.0‐l EcoBoost petrol engine. Li, Xue, Truong, and Xiong

(2017) mention different cases of subsidiaries of MNEs that have become essential for promoting the diffusion of green

technologies to local firms in China, and Park, Song, Choe, and Baik (2015) illustrate experiences of MNEs greening their

regional and global value chain networks.

Received: 21 March 2018

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Revised: 9 November 2018

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Accepted: 10 January 2019

DOI: 10.1111/twec.12784

World Econ. 2019;42:2089–2119. wileyonlinelibrary.com/journal/twec © 2019 John Wiley & Sons Ltd

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By focusing on top R&D investors and on MNEs in particular, the paper fills both a theo-

retical and an empirical gap in extant research on the role of environmental policies in green

innovation.

From a theoretical point of view, while it is widely acknowledged that MNEs are key actors in

international knowledge transmission, the literature has not fully analysed their specific ability to

deal with a fundamental trade‐off that characterises environmental policies and innovation off-

shoring. On the one hand, the stringency of environmental regulation increases the costs of produc-

tion, hence favouring the location of manufacturing and R&D where there are weaker

environmental requirements. From this perspective, innovation offshoring is hampered by environ-

mental regulatory stringency, unless these regulation‐related costs are compensated by other loca-

tional advantages. On the other hand, environmental restrictions may also act as fundamental

inducing mechanisms and generate pressures to innovate both on the supply side—by focusing

firms’attention on compelling technological needs and opportunities—and on the demand side—

by creating new or wider markets for green technologies. These pressures may induce domestic as

well as foreign firms to localise innovation activities where regulatory measures are introduced.

MNEs are particularly well‐placed dealing with this trade‐off for at least three reasons. First,

they are by definition exposed to multiple local institutional settings, giving rise to greater

demands for compliance technology and to a wider set of stimuli to improve their own knowledge

in environmentally sensitive domains (Kawai, Strange, & Zucchella, 2018; Rugman & Verbeke,

1998; Tatoglu, Demirbag, Bayraktar, Sunil, & Glaister, 2014). Second, they exhibit large R&D

expenditures (Dachs et al., 2014) and distinctive abilities to exploit their own knowledge assets on

a global scale, as well as to absorb technology from foreign sources (Castellani, Mancusi, Santan-

gelo, & Zanfei, 2015; Narula & Zanfei, 2005). The availability of important research budgets and

of asset‐exploiting/asset‐seeking capacities can be particularly rewarding in some environmental

sensitive domains where technical change is particularly demanding in terms of R&D investment

and skills, and when green innovation projects are particularly risky (EEA, 2014; Walley & White-

head, 1994). Third, large and established MNEs have historically accumulated organisational and

managerial abilities enabling them to lower the costs of coordinating multiple locations and of

dealing with diverse regulatory settings (Dunning, 1993). These “economies of common gover-

nance,”that are a function of the previous experience of foreign markets and institutional contexts,

may well compensate the extra‐costs of complying with different regulatory requirements, and

make it possible for MNEs to undertake green projects in countries where less structured firms

would not dare.

As a result of this combination of factors, MNEs can be expected to be particularly responsive

to changes in environmental policies across countries, when taking their innovation offshoring

decisions. Once location‐specific advantages and other drivers are controlled for, we should thus

observe a substantially positive effect of environmental regulation on cross‐border innovation activ-

ities of the world’s top firms.

As far as empirical research is considered, the literature has mostly paid attention to the impact

of environmental regulation on innovation activities of domestic firms, with special regard to small

and medium enterprises (see Ambec, Cohen, Elgie, & Lanoie, 2013; Barbieri, Ghisetti, Gilli,

Marin, & Nicolli, 2016 for recent reviews). While there is an increasing attention to the impact of

environmental policy on innovation performance, and some studies also pay attention to the effects

of regulatory stringency on international transfer of green technology, only a few studies explicitly

address MNEs' role in cross‐border innovation in this field. Whenever they do tackle this issue,

they are either based on case studies or surveys, with relatively low capacity to draw the general

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MARIN AND ZANFEI