Do Environmental Policies Affect MNEs’ Foreign Subsidiary Investments? An Empirical Investigation

We build on institutional theory to examine the impact of countries’ environmental policies on MNEs’ foreign subsidiary investments. We extend prior IB research that finds both positive and negative associations between environmental policies and MNE investments by showing that the relationship between environmental policy and MNE subsidiary investments is mediated by the effectiveness with which host countries enforce these policies. Specifically, we posit that environmental policies are effective when countries align them with tangible institutional outcomes such as actual reductions in emissions or increases in renewable energy production. This reduces uncertainty by providing a reliable and efficient framework for economic transactions. We test our arguments on a sample of 882 public US firms and their subsidiaries in 102 countries from 2000 to 2015, in conjunction with the Kyoto Protocol. We find that ratifying the Kyoto Protocol is associated with reductions in countries’ emission levels and increased reliance on renewables. Further, increased reliance on renewables positively mediates the relationship between the ratification of the Kyoto Protocol and MNEs foreign subsidiary investments. For host countries, this relationship is stronger when there are greater improvements in institutions’ quality. For MNEs, this relation is weaker for those MNEs associated with higher pollution. We find no such relationships for greenhouse gas emissions. Our findings contribute to the growing IB literature on environmental sustainability by highlighting the importance of effective institutions and their interaction with country- and firm-level heterogeneities.