Follow the Smoke: The Pollution Haven Hypothesis in Global Sourcing

Abstract

In this study, we empirically examine the pollution haven hypothesis (PHH) in the context of global sourcing. We argue that firms may not only directly invest in establishing operations in countries with weak environmental standards, they may also source from third parties in such countries to take advantage of weaker standards indirectly. Empirical analysis of foreign product flows into the US from 77 countries across 84 industries supports this argument, showing that the share of sourcing from a country increases as its carbon emissions per capita rise. This result holds for both offshore outsourcing and offshore integration, and is robust to the use of the Kyoto agreement as an instrument. Supplementary analyses also show that these results hold irrespective of an industry’s toxic intensity, concentration, or capital intensity, and are more pronounced for industries with low technological intensity. By providing robust empirical evidence for the PHH in the context of global sourcing—especially offshore outsourcing—our study draws attention to an important but hitherto largely neglected aspect of the role of environmental standards in driving international business choices.