International production chains and the pollution offshoring hypothesis: An empirical investigation

Most analyses of the impact of heterogeneous environmental policy stringency on the lo-cation of industrial firms have considered the relocation of entire activities - the well-known pollution haven hypothesis. Yet international enterprises may decide to only offshore a subset of their production chain - the so-called pollution offshoring hypothesis (POH). We introduce a simple empirical approach to test the POH combining a comprehensive industrial mergers and acquisitions dataset, a measure of sectoral linkages based on input-output tables and an index score of environmental policy stringency. Our results confirm the impact of relative environmental policy stringency on firms' decisions to engage in cross-country M&As. Our findings also indicate that environmental taxation have a stronger impact on international investment decisions than standards-based policies. Further, we find that transactions in-volving a target firm operating in a sector upstream of the acquirer are more sensitive to environmental policy stringency, especially when that sector is highly pollution-intensive. This empirical evidence is consistent with the pollution offshoring hypothesis.(c) 2023 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).