How MNEs respond to environmental regulation: integrating the Porter hypothesis and the pollution haven hypothesis

Abstract

The Porter hypothesis claims that well-designed environmental regulation stimulates innovation and contributes to firms’ competitive advantage towards international rivals. Multinational firms face the opportunity not to comply with environmental regulation and to escape towards countries with lax environmental regulation (i.e. the pollution haven hypothesis). However, the studies on how firms respond to environmental regulation fail to take into account the specific behaviour of multinational firms. Accordingly, I advance a conceptual framework based on the international business literature to guide future research agenda on how multinational firms respond to environmental regulation. In particular, by integrating the Porter hypothesis and the pollution haven hypothesis in an international business context, I suggest that multinational firms are attracted to countries with lax environmental regulation when they lack the capabilities to respond creatively to environmental regulation in advanced countries.