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Carbon emission evidence on multinationals

What methods are multinational companies using to reduce carbon emissions?

Reducing greenhouse gases, particularly carbon dioxide (CO2) emissions from industrial companies worldwide, has become a crucial issue in international forums due to climate change and the measures taken to prevent it. In this study, we investigate the role of research and development (R&D) expenditures in reducing CO2 emissions for both multinational companies (MNCs) and domestic companies to determine whether the type of firm matters. We used CO2 emissions data on industrial firms from the Thomson Reuters Refinitiv Environmental Social and Governance (ESG) database.

Firm type and location matter

It is important to investigate the role of MNCs compared to domestic companies in reducing carbon emissions worldwide. MNCs have the resources to invest in large-scale R&D spending to achieve carbon neutrality while moving carbon-intensive activities between their geographically diversified production facilities, thus avoiding a reduction in emissions.

Our analysis is on a sample of 19,929 firm-year observations of 2,884 unique companies from 44 countries. We classify sample countries as developed (or advanced economies) and developing countries (including emerging economies) based on the International Monetary Fund (IMF) World Economic Outlook Database. This database classifies economies based on factors such as high per capita income, exports of diversified goods and services, and greater integration into the global financial system. The location of an MNC is based on its fiscal home country, where its corporate headquarter is identified by Thomson Reuters.

Emission reduction outcomes

The emissions intensity is calculated as the ratio of the CO2 emissions level in kilotons to total sales. The variable R&D intensity is the ratio of R&D expenditure to total sales. Figure 1 shows the time trend in the relationship between carbon emission intensity and R&D intensity. The mean values of firm-level emissions intensity decreased over time, but the reduction is a clear trend, especially after 2009. This can be explained by increasing awareness of climate change, leading to environmental concerns and stricter regulations. R&D intensity, on average, decreased until 2009 and then steadily increased for the rest of the sample period.

Figure 1 - Time trends in carbon emissions and R&D expenditures
Figure 1: Time trends in carbon emissions and R&D expenditures
Credit Source: Halit Gonenc and Aleksandra Poleska (authors)

MNCs seek places to operate

Globalisation has enabled countries and businesses around the world to become more interconnected. Foreign direct investment (FDI) can create an important way for MNCs to operate in places that are weaker in the enforcement of emissions reduction, which in turn raises their net global carbon emissions. MNCs move their operations to countries, i.e. to developing countries, where firm-level pollution is expected to be higher because of more lax environmental regulations. This allows MNCs to reduce the emergence of environmental costs in their home countries, but it also leads to increased pollution and natural resource exhaustion in foreign countries.

We find that carbon emissions decrease with larger R&D spending, but the decrease is, on average, 19.5% higher for MNCs compared to domestic companies. To improve firms’ energy-related environmental performance, managers should coordinate research activities to develop new, low-carbon technologies that lead to innovation efficiency. From a policy perspective of controlling climate change, companies – and MNCs in particular — should be given incentives to increase R&D investments.

R&D investment for low-carbon technologies

However, the decrease in overall carbon emissions is smaller for MNCs that have high R&D when they have comparatively high flows of FDI in developed countries. These high flows of FDI are expected to occur within the same MNC corporate boundary. This finding is particularly relevant for the later portion of the study period (2015-2019), during which increased awareness of climate change and tightening of environmental regulations worldwide may have led to more careful oversight of FDI deals by MNCs In a world with uneven regulatory settings, MNCs can continue to produce in a way that is harmful to the climate without bearing significantly higher costs. The aim should lead MNCs to help their counterparts to develop new technologies to control carbon emissions when transferring production to developing countries.

Our study provides initial evidence suggesting that MNCs management of FDI results in carbon leakage, especially when the MNC is based in a developed country. To draw a strong conclusion on this point, it would be necessary to examine the ability of MNCs to shift production locations, and to compare activity based on their home location in developed countries versus their operations in developing countries. A detailed analysis of the carbon emissions of global polluters is required to provide strong evidence on this issue.

MNCs activities should be monitored

Strong evidence requires a very detailed analysis into the carbon emissions of global polluters. For example, MNCs may move one of their plants to a developing country with less stringent carbon laws. However, another alternative could be that MNCs transform their business to create some green mergers, thus driving emissions down.

This allows an MNC to still be in the same industry, but use more efficient, less polluting technologies. The reduction in emissions of a large polluter MNC over time is due to the nature of its management decisions and whether they are organic (driven by internal changes) or inorganic (driven by external changes).

This is similar to how corporate growth can be organic (e.g. driven by new investments or increasing revenues in current product lines) or inorganic (e.g. buying companies through mergers). Investigating the root of MNCs’ activities will shed light on how they manage carbon leakage by allocating their production facilities to developing countries or countries with high or low emissions.

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Journal reference

Gonenc, H., & Poleska, A. (2022). Multinationals, research and development, and carbon emissions: international evidence. Climate Policy, 1-16. https://doi.org/10.1080/14693062.2022.2135484

Halit Gonenc received his Ph.D. in International Business with a focus on Finance at the College of Business and Public Administration, Old Dominion University, in Virginia, USA. He is an Associate Professor at the Department of Economics, Econometrics & Finance in the Faculty of Economics and Business, and a Research Fellow at SOM Graduate School at the University of Groningen in the Netherlands. In addition to supervising master's and PhD theses, Dr. Gonenc teaches multiple courses in both undergraduate and graduate programs. He has published numerous articles on finance and business topics in renowned international academic journals.

Aleksandra Poleska is a graduate of Queen Mary University of London and the University of Groningen. During her MSc studies at the University of Groningen, she developed a strong interest in energy and climate financing. She is employed at Mileway, a leading provider of last-mile logistics real estate assets in Europe headquartered in Amsterdam. As a member of the Transactions Finance team, she plays a key role in the transactions relating to company acquisitions.