Multinationals, research and development, and carbon emissions: international evidence

ABSTRACT

We investigate the relationship between research and development (R&D) and firm-level carbon emissions to determine whether firm type matters. Multinational corporations (MNCs) with high-level R&D expenditure have a greater ability than domestic companies to generate technologies that will contribute to controlling environmental pollution and climate change. However, we know less about whether MNCs contribute to reducing carbon emissions worldwide, because they also have the ability to overcome controls on pollution levels by shifting their production facilities from regions with more restrictions to those with fewer restrictions. The sample we use includes roughly 20,000 firm-year observations from 44 countries for the period 2003-2019. We find that MNCs decrease their carbon emissions by increasing their R&D spending more than domestic companies do. We further demonstrate that foreign direct investment (FDI) creates opportunities for MNCs to adjust their overall carbon emissions if they are located in developed countries.

Key policy insights

• R&D investment in low-carbon technologies and practices decreases carbon emissions intensity and the impact on average is larger for MNCs than for domestic companies, showing that firm-type matters to emission reduction outcomes.

• MNCs manage their geographically diversified production so as to avoid reducing overall net global carbon emissions.

• MNCs may seek to operate in places that are weaker in enforcement of emissions reduction, which in turn raises their net global carbon emissions.

• MNCs located in developed countries are comparatively more important as corporate actors to drive carbon emission reductions due to changing location of operations.

KEYWORDS:

• Carbon leakage
• climate
• CO₂ emissions
• foreign direct investment
• MNCs
• R&D

Acknowledgments

The authors thank Bert Scholtens, Arjan Trinks, Daniel te Kaat, the editor Jan Corfee-Morlot, and three anonymous reviewers for valuable comments and suggestions on earlier versions of the paper.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The use of this threshold is a common practice in the literature, between 20%, used by Park et al. (2013), and 30%, used by Aabo et al. (2015). A firm with a ratio of less than 25% or no foreign sales is defined as a domestic company.

2 The WGI data aims to construct detailed measures of governance for broad cross-country comparisons. A country level indicator relates to the process of selecting, monitoring and replacing governments, the capacity of the government to formulate and implement sound policies, and the respect of citizens and the state for the institutions that govern economic and social interactions among them. It contains six measures; voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption.

3 For further research on cross-country comparisons, see Musolesi et al. (2010), who investigate CO₂ emissions in 109 countries with a very long time panel for the period 1959-2001. They show that the length of the series is important for showing dynamic associations between economic growth and emissions levels based on different subsamples of countries.