Offshoring Pollution while Offshoring Production?
| Published date | 01 November 2017 |
| Date | 01 November 2017 |
| Author | Xiaoyang Li,Yue M. Zhou |
| DOI | http://doi.org/10.1002/smj.2656 |
Strategic Management Journal
Strat. Mgmt. J.,38: 2310–2329 (2017)
Published online EarlyView 3 May 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2656
Received 27 October 2015;Final revision received6 March 2017
Offshoring Pollution while Offshoring Production?
Xiaoyang Li1and Yue M. Zhou2*
1Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai,
China
2Department of Strategy, Stephen M. Ross School of Business, University of
Michigan, Ann Arbor, Michigan
Research summary: We examine the role of rm strategyin the global effort to combat pollution.
We nd that U.S. plants release less toxic emissions when their parent rm imports more from
low-wage countries (LWCs). Consistent with the Pollution Haven Hypothesis, goods imported
by U.S. rms from LWCs are in more pollution-intensive industries. U.S. plants shift production
to less pollution-intensive industries, produce less waste, and spend less on pollution abatement
when their parent imports more fromLWCs. The negative impact of LWC imports on emissions is
stronger for U.S. plants located in counties with greater institutional pressure for environmental
performance, but weaker for more-capableU.S. plants and rms. These results highlight the role of
local institutions and rm capability in explaining rms’ offshoring and environmentalstrategies.
Managerial summary: Using condential trade, production,and pollution data of more than 8,000
rms and 18,000 plants fromthe U.S. Census Bureau for years 1992 –2009, we nd that U.S. plants
release less toxic emissions when their parentrm imports more from low-wage countries (LWCs).
In addition, goods imported by U.S. rms from LWCs are in more pollution-intensive industries.
U.S. plants shift production to less pollution-intensive industries, produce less waste, and spend
less on pollution abatement when their parent imports more from LWCs. However, not all U.S.
rms choose to “offshore pollution.” U.S. plants located in counties with greater institutional
pressure for environmental performance offshore more, but more-capable U.S. plants and rms
offshore less. Copyright © 2017 John Wiley & Sons, Ltd.
Introduction
The global effort to combat pollution has gained
tremendous momentum in recent years. The United
States and China, the two largest emitters of green-
house gas, issued a joint announcement in 2014
to strengthen bilateral cooperation, including joint
technological initiatives, research efforts, and eco-
nomic policies, to tackle climate change (The White
House, 2014). One hundred ninety-six countries
attending the 2015 United Nations Climate Change
Keywords: environmental strategy; pollution haven;
offshoring; institutional arbitrage; corporate social
responsibility
*Correspondence to: Yue M. Zhou, Stephen M. Ross School of
Business, University of Michigan, 701 Tappan St., R4446, Ann
Arbor, MI 48109-1234. E-mail: ymz@umich.edu
Copyright © 2017 John Wiley & Sons, Ltd.
Conference voted to adopt a joint agreement to
curb global warming (NPR, 2015). India and France
launched a global alliance to mobilize investments
from rich countries to develop solar power around
the world, especially in sun-rich but cash-poor trop-
ical countries (The Financial Times, 2015). Partici-
pation in these global initiatives is not always wel-
comed at home, however.Only recently have politi-
cians, the media, and large businesses in the United
States started to openly accept climate change and
global warming concerns. Other critics are con-
tent with the empirical evidence that strict environ-
mental regulations and informal institutional pres-
sure in the United States have already signicantly
improved its environment (Chay & Greenstone,
2003; Levinson, 2009; J. Shapiro & Walker, 2014).
Signicant portions of Americans still think their
Offshoring Pollution while Offshoring Production? 2311
government should not take responsibility for other
countries’ environmental problems.
We examine these critical views by focusing on
the role of rm strategy in the global ght against
pollution. We rst propose based on the Pollution
Haven Hypothesis (hereafter PHH) that the United
States’ strict regulations and institutional pressure
for environmental performance might come at the
expense of the environment in other countries due to
U.S. rms’ offshoring strategy. According to PHH,
“liberalized trade in goods will lead to the relocation
of pollution intensive production from high income
and stringent environmental regulation countries to
low income and lax environmental regulation coun-
tries” (Taylor, 2005). For example, a recent study
in China using atmospheric modeling found that
17– 36% of four major anthropogenic air pollu-
tants (sulfur dioxide, nitric oxide, carbon monox-
ide, and black carbon) emitted in that country are
associated with the production of goods for export,
and that about 21% of export-related emissions are
attributable to goods destined for the United States
(Lin et al., 2014). Unfortunately,most prior research
on PHH has relied on aggregate country-, state-, or
industry-level information (Antweiler, Copeland, &
Taylor, 2001; Grossman & Krueger, 1995; Hanna,
2010; Levinson, 2009, 2010), which partly explains
some contradictory results in this research. To our
knowledge, very few papers (e.g., Dowell, Hart, &
Yeung, 2000) have studied the issue at the level
of the rm, where production-pollution decisions
are made.
Do rms lower their emissions in developed and
highly regulated countries by offshoring production
to poor and less regulated countries? Theoretically,
rms can arbitrage between varying institutional
demands. For example, rms can redesign their
supply chain, shifting their domestic production
to cleaner segments and importing from poor or
low-wage countries (LWCs) products that are more
polluting to produce, thereby achieving compliance
and avoidance at the same time. LWCs have com-
parative advantage in labor costs, therefore they
should attract more labor-intensive industries rather
than the more polluting capital-intensive indus-
tries (Cole & Elliott, 2005). However, the lax
environmental standards and poor environmental
regulatory quality in LWCs might inuence rms’
offshoring strategy to be based on environmental
rather than pure labor-cost considerations (Esty &
Porter, 2002).
To test these ideas, we linked rm-level imports
and plant-level production statistics maintained by
the U.S. Census Bureau (Census) to plant-level
toxics emissions information from the Envi-
ronmental Protection Agency’s (EPA’s) Toxics
Release Inventory (TRI) database. We found that
domestic plants pollute less on American soil as
their parent rm imports more from LWCs: When
a plant’s parent rm increases its share of imports
from LWCs by 10 percentage points, the plant’s
toxic emissions on American soil fall by 4– 6%.
We then explored a few micro-mechanisms and
uncovered evidence consistent with the PHH and
a “pollution-offshoring” strategy. In particular,
we found that goods imported by U.S. rms from
LWCs are in more pollution-intensive industries
than goods imported from the rest of the world,
and U.S. plants shift their production to less
pollution-intensive industries, produce less waste,
and spend less on pollution abatement when their
parent rm imports more from LWCs. Taken
together, our evidence suggests that a signi-
cant number of U.S. rms are offshoring more
pollution-intensive production to LWCs.
Despite its potential benet, an institutional
arbitrage strategy brings about multinational
coordination costs and regulatory risks. Therefore,
we investigate two sources of heterogeneity that
would affect rms’ pollution-offshoring strategy.
The rst source of heterogeneity is the local institu-
tion. Drawing insights from the social activism and
environmental justice literature (Hiatt, Grandy, &
Lee, 2016; King, 2008; Mohai, Pellow, & Roberts,
2009), we conjecture that American rms will
engage in more pollution offshoring if their plants
are located in counties where the local institutions
can exert greater pressure on environmental per-
formance, such as counties with a more informed
(educated) population, a higher voter turnout
in presidential elections, or a stronger presence
of environmental nongovernment organizations
(NGOs) like the Sierra Club. The second source
of heterogeneity is rm capability. Drawing from
the stakeholder and slack-resource arguments in
the corporate social responsibility (CSR) liter-
ature (Berchicci, Dowell, & King, 2012; Chin,
Hambrick, & Treviño, 2013; Dowell etal., 2000;
Waddock & Graves, 1997), we hypothesize that
more-capable rms will enjoy greater compliance
benets and lower compliance costs; they will
therefore have greater incentive to comply with
strict environmental requirements in the United
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2310–2329 (2017)
DOI: 10.1002/smj
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