Strategic Management Journal Strat. Mgmt. J., 38: 2310–2329 (2017) Published online EarlyView 3 May 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2656 Received 27 October 2015; Final revision received 6 March 2017 Offshoring Pollution while Offshoring Production? Xiaoyang Li1 and Yue M. Zhou2* 1 Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai, China 2 Department of Strategy, Stephen M. Ross School of Business, University of Michigan, Ann Arbor, Michigan Research summary: We examine the role of firm strategy in the global effort to combat pollution. We find that U.S. plants release less toxic emissions when their parent firm imports morefrom low-wage countries (LWCs). Consistent with the Pollution Haven Hypothesis, goods imported by U.S. firms 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. 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-capable U.S. plants and firms. These results highlight the role of local institutions and firm capability in explaining firms’ offshoring and environmental strategies. Managerial summary: Using confidential trade, production, and pollution data of more than 8,000 firms and 18,000 plants from the U.S. Census Bureau for years 1992–2009, we find that U.S.plants release less toxic emissions when their parent firm imports more from low-wage countries (LWCs). In addition, goods imported by U.S. firms 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. firms 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 firms offshore less. Copyright © 2017 John Wiley & Sons, Ltd. Introduction Conference voted to adopt a joint agreement to curb global warming (NPR, 2015). India and France The global effort to combat pollution has gained launched a global alliance to mobilize investments tremendous momentum in recent years. The United from rich countries to develop solar power around States and China, the two largest emitters of green- the world, especially in sun-rich but cash-poor trop- house gas, issued a joint announcement in 2014 ical countries (The Financial Times, 2015). Partici- to strengthen bilateral cooperation, including joint pation in these global initiatives is not always wel- technological initiatives, research efforts, and eco- comed at home, however. Only recently have politi- nomic policies, to tackle climate change (The White cians, the media, and large businesses in the United House, 2014). One hundred ninety-six countries States started to openly accept climate change and attending the 2015 United Nations Climate Change global warming concerns. Other critics are con- tent with the empirical evidence that strict environ- Keywords: environmental strategy; pollution haven; mental regulations and informal institutional pres- offshoring; institutional arbitrage; corporate social sure in the United States have already significantly responsibility improved its environment (Chay & Greenstone, *Correspondence to: Yue M. Zhou, Stephen M. Ross School of 2003; Levinson, 2009; J. Shapiro & Walker, 2014). Business, University of Michigan, 701 Tappan St., R4446, Ann Arbor, MI 48109-1234. E-mail: [email protected] Significant portions of Americans still think their Copyright © 2017 John Wiley & Sons, Ltd. Offshoring Pollution while Offshoring Production? 2311 government should not take responsibility for other To test these ideas, we linked firm-level imports countries’ environmental problems. and plant-level production statistics maintained by We examine these critical views by focusing on the U.S. Census Bureau (Census) to plant-level the role of firm strategy in the global fight against toxics emissions information from the Envi- pollution. We first propose based on the Pollution ronmental Protection Agency’s (EPA’s) Toxics Haven Hypothesis (hereafter PHH) that the United Release Inventory (TRI) database. We found that States’ strict regulations and institutional pressure domestic plants pollute less on American soil as for environmental performance might come at the their parent firm imports more from LWCs: When expense of the environment in other countries due to a plant’s parent firm increases its share of imports U.S. firms’ offshoring strategy. According to PHH, from LWCs by 10 percentage points, the plant’s “liberalized trade in goods will lead to the relocation toxic emissions on American soil fall by 4–6%. of pollution intensive production from high income We then explored a few micro-mechanisms and and stringent environmental regulation countries to uncovered evidence consistent with the PHH and low income and lax environmental regulation coun- a “pollution-offshoring” strategy. In particular, tries” (Taylor, 2005). For example, a recent study we found that goods imported by U.S. firms from in China using atmospheric modeling found that LWCs are in more pollution-intensive industries 17–36% of four major anthropogenic air pollu- than goods imported from the rest of the world, tants (sulfur dioxide, nitric oxide, carbon monox- and U.S. plants shift their production to less ide, and black carbon) emitted in that country are pollution-intensive industries, produce less waste, associated with the production of goods for export, and spend less on pollution abatement when their and that about 21% of export-related emissions are parent firm imports more from LWCs. Taken attributable to goods destined for the United States together, our evidence suggests that a signifi- cant number of U.S. firms are offshoring more (Lin et al., 2014). Unfortunately, most prior research pollution-intensive production to LWCs. on PHH has relied on aggregate country-, state-, or Despite its potential benefit, an institutional industry-level information (Antweiler, Copeland, & arbitrage strategy brings about multinational Taylor, 2001; Grossman & Krueger, 1995; Hanna, coordination costs and regulatory risks. Therefore, 2010; Levinson, 2009, 2010), which partly explains we investigate two sources of heterogeneity that some contradictory results in this research. To our would affect firms’ pollution-offshoring strategy. knowledge, very few papers (e.g., Dowell, Hart, & The first source of heterogeneity is the local institu- Yeung, 2000) have studied the issue at the level tion. Drawing insights from the social activism and of the firm, where production-pollution decisions environmental justice literature (Hiatt, Grandy, & are made. Lee, 2016; King, 2008; Mohai, Pellow, & Roberts, Do firms lower their emissions in developed and 2009), we conjecture that American firms will highly regulated countries by offshoring production engage in more pollution offshoring if their plants to poor and less regulated countries? Theoretically, are located in counties where the local institutions firms can arbitrage between varying institutional can exert greater pressure on environmental per- demands. For example, firms can redesign their formance, such as counties with a more informed supply chain, shifting their domestic production (educated) population, a higher voter turnout to cleaner segments and importing from poor or in presidential elections, or a stronger presence low-wage countries (LWCs) products that are more of environmental nongovernment organizations polluting to produce, thereby achieving compliance (NGOs) like the Sierra Club. The second source and avoidance at the same time. LWCs have com- of heterogeneity is firm capability. Drawing from parative advantage in labor costs, therefore they the stakeholder and slack-resource arguments in should attract more labor-intensive industries rather the corporate social responsibility (CSR) liter- than the more polluting capital-intensive indus- ature (Berchicci, Dowell, & King, 2012; Chin, tries (Cole & Elliott, 2005). However, the lax Hambrick, & Treviño, 2013; Dowell et al., 2000; environmental standards and poor environmental Waddock & Graves, 1997), we hypothesize that regulatory quality in LWCs might influence firms’ more-capable firms will enjoy greater compliance offshoring strategy to be based on environmental benefits and lower compliance costs; they will rather than pure labor-cost considerations (Esty & therefore have greater incentive to comply with Porter, 2002). strict environmental requirements in the United Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J., 38: 2310–2329 (2017) DOI: 10.1002/smj 2312 X. Li and Y. M. Zhou States and engage in less pollution offshoring. Our other hand, institutions can be developed indepen- empirical results support these conjectures. dent of efficiency and diffused through coercive, This paper makes a few contributions to the mimetic, and normative processes (DiMaggio & study of environmental strategy. It provides the Powell, 1983; Meyer & Rowan, 1977). Institutions first micro-level empirical evidence, based onthe vary not only by their strength and benefits/costs most comprehensive sample of U.S. manufactur- to organizations, but also by time and space.