The trade-off between the economic and environmental footprints of multinationals’ foreign affiliates

Abstract

The side effects of the production activities of multinational enterprises (MNEs) are a constant source of controversy. It is claimed that MNEs stimulate employment and technological progress in the countries where they operate, but they are simultaneously accused of intensifying inequality and environmental damages, especially in developing countries. Using a multiregional input-output model, in this paper, we trace the CO2 emissions and value added attributable to the foreign affiliates of multinational enterprises (FMNEs) to quantify the trade-offs between the economic benefits and environmental impacts along their global supply chains. The results show that FMNEs in most countries induce greater contributions to CO2 emissions than to value added along their supply chains. This is mostly explained by the concentration of MNEs production in industries with a high CO2 burden (manufacturing sectors) and their relatively low participation in high-value added activities (services). The analysis also shows that FMNEs generally have higher carbon intensities than domestic-owned firms in the same sector, especially in OECD countries, which undermines the efforts made by those countries to reduce global emissions. FMNEs incorporate larger portions of imported emissions into their carbon footprint than domestic companies, so they more often take advantage of carbon leakages and are more vulnerable to a potential carbon border tax. Since developed countries own the affiliates producing 89% of FMNEs’ global output, those countries should design policies to reduce the carbon footprints of their MNEs’ foreign activities in both developed and developing countries.