International business activities and their impact on the environment: governance regulations and the pollution haven hypothesis Open Access

The relationship between international business (IB) and environmental sustainability has become increasingly critical in the context of global economic development (Anjum et al., 2024; Yu et al., 2023). As countries deepen their engagement in global economy, its contribution to economic growth and efficiency is often accompanied by significant environmental challenges, particularly in the form of rising greenhouse gas (GHG) emissions such as carbon dioxide (CO₂) (Yu et al., 2023). The expansion of global investment into trade networks intensifies production and transportation, both major contributors to GHG emissions (Dou et al., 2023). Consequently, there is growing concern about the need to balance economic gains from IB with associated environmental costs. This balance is crucial, as unchecked emissions contribute to global climate change, posing long-term risks to both environmental and economic stability. At the macro level, the urgency of examining the link between IB activities and environmental outcomes is heightened by escalating global challenges, including climate change, political instability, trade protectionism and rising inequality (Kano et al., 2025; Zhao et al., 2024). The formal adoption of the United Nations’ Sustainable Development Goals (SDGs) in 2015 codified global expectations, placing multinational enterprises (MNEs) at the forefront of efforts to mitigate environmental impacts and advance sustainable development (Kolk, 2016; Montiel et al., 2021). Furthermore, recent global shocks such as the COVID-19 pandemic and geopolitical tensions have exposed the fragility of global supply chains and amplified the negative social and environmental consequences of cross-border operations (Marano et al., 2024). This context has triggered a perspective shift in corporate expectations, as societal actors increasingly demand that MNEs move beyond short-term financial gains to demonstrate comprehensive accountability for environmental performance across global supply chains (Lartey et al., 2021; Marano et al., 2024). This sustained urgency is reflected in investment trends: although foreign direct investment (FDI) declined in the past recent years, the relationship between IB and environmental impacts remains topical because interest in greenfield investment has shown no sign of decreasing, with $1.3tn recorded as a historical high (UNCTAD, 2025). Such heightened scrutiny underscores the need for scholarly inquiry into the complex interplay between IB activities and environmental sustainability, guiding MNEs in aligning innovations and international strategies with broader sustainability targets (Montiel et al., 2021; Zhao et al., 2024).

As a result, IB’s impact on environmental quality has become a critical and growing area of scholarship (Kano et al., 2025). While some research views MNEs as potential positive forces for climate change mitigation, capable of transferring cutting-edge technologies and best practices (Burritt et al., 2020; Kano et al., 2025), a dominant perspective critiques MNEs as significant contributors to unsustainability (Burritt et al., 2020; Kavadis et al., 2024). This criticism often highlights MNEs’ tendency to relocate pollution-intensive production processes to countries with weaker and less costly regulations, a phenomenon known as the pollution haven hypothesis (PHH) (Kano et al., 2025; Lartey et al., 2021). However, the relationship is complex: MNEs navigate diverse institutional contexts and face challenges such as institutional voids and weak regulatory enforcement in emerging markets (Nippa et al., 2021). The meaning and management of sustainability in these cross-border settings remain debated, with inconsistent conceptualizations and varied approaches to global vs local strategies (Burritt et al., 2020; Marano et al., 2024). Current scholarship on IB, particularly concerning the relationship between MNEs and environmental sustainability, remains fragmented and inconclusive, often presenting conflicting evidence on core debates such as PHH vs the positive effects of clean technology transfer (Cerdeira Bento and Moreira, 2019; Kano et al., 2025). This inconsistency is exacerbated by a methodological tendency to focus narrowly on the MNE itself, using firm-centric metrics like R&D intensity or patent counts that fail to capture the broader societal and ecological impacts of cross-border activities on host countries (Wiessner et al., 2024; Zhao et al., 2024). Consequently, literature often investigates niche problems rather than offering an integrated understanding of how IB activities affect the environment across different institutional contexts (Burritt et al., 2020). While governance and institutional environments are acknowledged as critical in shaping MNE behavior (Arora and De, 2020), a significant gap persists in identifying the precise institutional mechanisms and governance thresholds that condition this relationship. Specifically, beyond general theoretical suggestions of nonlinear effects, empirical research remains absent on how concrete regulatory tipping points such as those determined by environmental tax rates or trade freedom, fundamentally alter the environmental impact of IB activities. Moreover, limited theoretical and empirical insight exists into how recent global disruptions, such as the COVID-19 pandemic or geopolitical tensions, have reshaped the sustainability implications of cross-border operations and global supply chains (Marano et al., 2024). This study addresses these gaps by using moderation analysis to identify specific conditions such as environmental tax rates and regulations at which the environmental impact of IB activities changes.

This paper provides three main contributions to existing literature on IB and environmental sustainability. First, it revisits and reaffirms the IB–environmental issues relationship by incorporating the impact of the COVID-19 pandemic as a global shock, offering new empirical evidence that IB activities continue to exacerbate environmental degradation, even during periods of extreme condition. Second, it is among the first papers which introduce moderation analysis of governance in the relationship between IB and environmental issues. This approach allows the identification of the moderating impact of IB on CO₂ and GHG emissions, which strengthens the PHH. Finally, using a large sample of 121 countries over the 1990–2023 period, the study provides robust evidence that the negative impact of IB on the environment is more likely to be stronger in developing countries with less stringent environmental regulations. This finding highlights the critical role of the regulation quality in shaping the IB–environment relationship. Importantly, the findings implicate actionable policy insights by demonstrating how fiscal instruments (environmental taxes) and regulations can be leveraged to mitigate the environmental costs of IB while supporting a balanced pursuit of SDG 8 (Decent work and Economic growth) and SDG 13 (Climate Action).

The impacts of IB on the environment have long attracted scholarly attention (Dou et al., 2023; Yu et al., 2023), yet the findings from the literature remain inconsistent. IB activities generate concurrent and conflicting mechanisms that determine whether they increase or decrease environmental degradation in host countries, resulting in mixed empirical evidence. Recent reviews in IB research further confirm the fragmentation and evolving nature of the field, emphasizing the need for integrative perspectives that connect environmental outcomes with broader IB theories and contexts (Bui et al., 2025).

On the negative side, the primary mechanism driving environmental degradation is the PHH, which posits that MNEs relocate production or export pollution-intensive industrial processes to jurisdictions with less stringent environmental regulations or weaker enforcement mechanisms (Cerdeira Bento and Moreira, 2019; Merza and Alhussainan, 2024; Meyer, 2004). This strategic relocation, often aimed at maximizing profits and lowering operating costs, exposes emerging and developing host countries to greater environmental burdens (Bu and Wagner, 2016; Cerdeira Bento and Moreira, 2019). Furthermore, this can trigger a “race-to-the-bottom” dynamic, where host governments intentionally lower environmental standards to attract much-needed FDI (Cerdeira Bento and Moreira, 2019; Meyer, 2004). MNEs may also contribute negatively by transferring outdated production technologies to foreign affiliates rather than deploying the cleaner, cutting-edge equipment available in their home countries (Meyer, 2004). Beyond relocation, the sheer scale of IB activities, including increased production and cross-border transportation, intensifies emissions and resource, exacerbating environmental concerns such as climate change and pollution arbitrage (Brandl et al., 2022; Kano et al., 2025).

Regarding international trade, Yu et al. (2011) conducted an ex-post analysis of how trade openness between Mexico and the USA influenced GHG emissions as an indicator of environmental pollution and found a positive relationship. After NAFTA’s passage, trade openness contributed to increased GHG emissions in both countries. also proposed that multinationals, through their manufacturing in host countries, can generate environmental degradation. Similarly, the investigation into 10 Asian countries by Wenlong et al. (2023) during 1995–2018 supported the conclusion about the detrimental impact of trade openness on environmental quality. Wiessner et al. (2024) asserted that research on FDI’s impacts on environment, such as GHG emissions, remains scarce in IB scholarship.

Conversely, IB activities can lead to a “pollution halo effect” fostering environmental improvements in host nations, particularly through the diffusion of advanced technologies and responsible practices (Meyer, 2004). MNEs often transfer superior technologies, knowledge and environmentally responsible management practices to their foreign operations and local partners (Cerdeira Bento and Moreira, 2019; Montiel et al., 2021). This positive effect is frequently driven by the MNEs’ adoption of global environmental standardization, opting to apply the highest environmental standards across all their international sites to achieve economies of scale and mitigate the risk of global reputational damage from local environmental incidents (Meyer, 2004; Nippa et al., 2021). Moreover, MNEs subject to strict regulations in their home countries are incentivized to develop “green” firm-specific advantages, such as innovation in processes that reduce pollution, which they then exploit globally (Meyer, 2004; Nippa et al., 2021). This transfer of cleaner production techniques and management know-how benefits local firms through spillovers and cross-border knowledge flows, thereby improving the host country’s overall environmental outcomes and making the MNE a driver of environmental value creation (Choi and Cho, 2022; Kano et al., 2025; Meyer, 2004).

Ultimately, the net effect of IB on the environment is highly context-dependent, shaped by the institutional environment of the host country (Lartey et al., 2021). In advanced economies where environmental standards are strictly enforced, MNEs are compelled toward sustainability, whereas in emerging markets characterized by weak regulatory enforcement, their commitment may be less pronounced (Lartey et al., 2021). However, strong democratic voice and accountability within a country’s institutional environment can significantly boost the effectiveness of sustainability efforts (Arora and De, 2020). Luu et al. (2026) highlight the critical role of institutional environments and supports mechanisms in shaping how firm-level digitalization and sustainability practices translate into internationalization outcomes. Mixed environmental outcomes must be understood within an increasingly turbulent global environment, characterized by geopolitical tensions, rising protectionism and greater government intervention in FDI and trade (Contractor et al., 2026). In such a context, MNEs are no longer driven solely by efficiency considerations but must balance resilience, regulatory pressures and non-market strategies, which can significantly reshape global value chains and the environmental footprint of IB activities.

While the critical role of MNEs in fostering and spearheading sustainable innovations has been well recognized (Zhao et al., 2024), most researchers have focused on corporate social responsibility and examined niche problems within specific industries or countries (Burritt et al., 2020) while lacking a consolidation and integration across countries. In a recent study of 53 nations by Thi et al. (2023), FDI was shown to reduce carbon emissions with the data from 1990 to 2019. Similarly, Akbar et al. (2025) proved that China’s outward FDI negatively influenced CO₂ emissions. Given the inconsistency in the literature and the need for macro and institutional evidence, this study further contributes to uncovering the relationship between IB and environmental outcomes (Merza and Alhussainan, 2024).

While the relationships between IB and environmental quality have been extensively investigated in literature, it is surprising to find that such relationships have rarely been tested against the influence of external events such as financial crises, Paris Agreement and COVID-19 pandemic. There are few that tested these interrelationships, focusing on trade. Using panel data from 98 economies during the period from 1990 to 2021, Wang et al. (2023) found that the 2008 global financial crisis impacted the relationship between imports/exports and consumption-based CO₂ emissions for some countries, and specific impacts were dependent on countries’ income levels. After the global financial crisis in 2008, the relationships between both exports and imports with consumption-based CO₂ emissions increased. Specifically, the export-pollution relationship in the high-income and lower middle-income countries was affected. In addition, the import–pollution relationship in the lower middle-income countries was impacted.

Another study assessed the effect of the Paris Agreement on global trade activities but not the relationship between global trade and CO₂ emissions. Vrontisi et al. (2020) found that global trade activities declined following the Paris Agreement, and the main reason was attributed to the reduction of fossil fuels on a global scale. Similarly, COVID-19 was found to negatively influence countries’ trade performance but positively affected environmental quality a study with the data from 2018 to 2020 (Borojo et al., 2022). The mechanism in which the pandemic influenced the relationship between IB and environment was not examined. As concluded by Wang et al. (2023), previous literature has not reported or investigated how a crisis could alter the relationships between the two variables with the exception of the study itself on the financial crisis.

The PHH posits that developed countries relocate and export pollution-intensive industries to the developing world where there is a lack of environmental standards and regulations. The concept of PHH was first discussed by Pethig (1976) when exploring how the principles of neoclassical trade theory could be applied to environmental sustainability. In particular, it proposed the potential impacts of IB on pollution levels under different environmental regulation regimes. Pethig (1976) suggested that developing countries were more likely to produce and export environmentally intensive goods due to the comparative advantage arising from lower costs of compliance with environmental regulations. Thus, without stringent environmental management and control, developing countries would become pollution havens for the environment-intensive industries of the developed countries.

Under PHH, differences in regulatory stringency between countries create incentives for pollution-intensive industries to relocate from jurisdictions with stringent environmental controls to those with weaker enforcement, where compliance costs are lower and environmental standards are lax. This relocation, reflected in trade and FDI flows, is driven by firms’ efforts to minimize regulatory compliance costs and exploit comparative advantages arising from weaker governance (Copeland and Taylor, 2004; Pethig, 1976). Stronger governance and more rigorous environmental regulations raise the cost of environmentally harmful production practices, thereby altering firms’ location and investment decisions. Countries with high regulatory quality are more likely to enforce emissions standards, monitoring and sanctions, reducing the relative attractiveness of lax regulatory environments that would otherwise attract pollution-intensive investments. Consequently, robust governance can weaken the positive association between IB activities and environmental degradation predicted by PHH by compelling multinational enterprises to adopt cleaner technologies and adhere to stricter environmental practices, even when operating internationally.

Empirical evidence of PHH in prior research is mixed (Cerdeira Bento and Moreira, 2019). Mani and Wheeler (1998) found that a pattern of evidence is in favor of the PHH. The cross-country analysis from 1960 to 1995 showed that pollution-intensive industries had decreased significantly in the OECD and increased in the developing world in the period of increasing cost of pollution abatement in the OECD economies. However, the evidence of a pollution haven was self-limited due to the pressure leading to international adjustments of increasing regulation throughout economic growth. Cole (2004) also found evidence of temporary pollution havens in certain regions and sectors in a sample of North-South trade flows.

In a critical review of PHH, Gill et al. (2018) highlighted that investors who try to avoid countries without stringent environmental regulations often also have lax legal systems. Porter and Linde (1995) proposed the Porter Hypothesis indicating that strict regulations and requirements of high environmental standards can encourage innovation in clean technologies leading to lower marginal costs and higher firm productivity, making firms more competitive.

While whether regulations alleviate or intensify the IB-environmental quality is still debatable, Wang and Shen (2016) and Hu et al. (2019) argued that there is a potential nonlinear effect of environmental regulations on the relationship between IB and green development. Within an optimal range, IB can positively contribute to green development. Huang and Liu (2022) found a dual environmental regulatory threshold effect in 110 cities in China. If the environmental regulation intensity is below the first threshold, it alleviates the trade-green development. Whereas it surpasses the second threshold, trade openness significantly enhances green development. However, the study uses waste emissions as a proxy of the intensity of environmental regulations.

To examine the impact of IB on CO₂ emission, we estimate the following equation:

CO₂ emissions represent the amount of carbon dioxide released into the atmosphere from various sources within a country each year. It includes emissions from fossil fuel combustion, industrial processes and other activities that release carbon dioxide. We also use GHG as the outcome variable for robustness test.

Our main variable of interest is IB activities, which consists of international trade (IT) and FDI, and participation in global value chains involving trade low-CO₂-technology products (LCT). IT is measured as the ratio of the sum of exports and imports to the GDP. This variable captures the extent of a country’s integration into the global economy. In the context of IB research, the trade-to-GDP ratio captures multiple dimensions of IB engagement by indicating how intensively a country participates in cross-border economic activity. Higher levels of trade relative to GDP reflect greater participation in global trade flows, increased exposure to international competition and associated technology transfer, deeper integration into global value chains through the exchange of intermediate and final goods and a broader degree of policy and institutional openness shaped by trade agreements, tariff structures and logistical capacity. Increased trade can lead to higher emissions due to the scale effect, where greater economic activity results in more pollution. However, it can also lead to reduced emissions through the technique effect, where cleaner technologies are adopted due to trade-induced efficiency improvements (Lartey et al., 2021). FDI is the net inflow of capital investments relative to the GDP. FDI involves establishing or expanding ownership, control or managerial influence in productive assets abroad, such as subsidiaries, joint ventures or mergers and acquisitions. Thus, FDI represents a direct form of cross-border business engagement that facilitates international production networks, technology and knowledge transfer and integration into global value chains. Higher levels of FDI signal a greater presence of multinational enterprises and deeper participation in IB activities. FDI can influence CO₂ emissions positively or negatively where it can bring in cleaner technologies and practices or it may also lead to a pollution haven effect where firms relocate to countries with lax environmental regulations (Lartey et al., 2021).As an IB indicator, LCT trade captures the extent to which firms and economies participate in global value chains organized around the production, adoption and deployment of climate-friendly technologies. Higher levels of LCT trade reflect greater integration into markets for technologies that are capital-intensive, innovation-driven and increasingly strategic in climate and industrial policy agendas.

X_it is a vector that represents country’s economic activities and country’s specifics. The first variables included are GDP and its squared term (Grossman and Krueger, 1995). Urbpop reflects the percentage of the population living in urban areas, which correlates with higher CO₂ emissions due to increased energy consumption and transportation (Dodman, 2009). Measured by the share of industry in GDP, industrialization is a major contributor to CO₂ emissions due to the energy-intensive nature of manufacturing and production processes. The share of renewable energy in total energy consumption (Renewable energy) also matters as higher usage of renewable energy sources generally leads to lower CO₂ emissions (Zhao et al., 2024). Investment in R&D (EnvRD) aimed at environmental protection can lead to innovations that reduce CO₂ emissions. Environmental taxes, which imposed on activities that cause environmental harm, are designed to internalize the external costs of pollution, thus incentivizing lower emissions (Pearce, 1991). Government regulations (Regulations) are associated with lower emissions as they compel firms to adopt cleaner technologies, which are obtained from World Governance Index. Trade freedom (Tradefreedom) and investment freedom (Invfreedom), are variables representing IB freedom, measure the degree of policy openness and the regulatory environment affecting trade and investment respectively. Greater IB freedom can lead to increased economic activities, potentially raising emissions, but can also promote the transfer of cleaner technologies and practices (Zhao et al., 2024).

Estimation of equation (1) might face some potential issues. First, CO₂ emission might depend on itself in the previous period, causing autocorrelation. This dependence is logical because CO₂ emissions are influenced by persistent factors such as energy infrastructure, industrial activities and long-term environmental policies, which do not change drastically from one period to the next (Baltagi, 2008). Furthermore, IB might be correlated with the error term in the regression model. Factors such as technological advancements, regulatory changes or economic cycles can influence both IB and CO₂ emissions. For example, technological improvements can reduce emissions through more efficient production processes while also boosting trade by making products more competitive in international markets (Grossman and Krueger, 1995).

The generalized method of moments (GMM) is a robust econometric technique used to address issues of autocorrelation and endogeneity in regression models. GMM is particularly useful in dynamic panel data where the dependent variable is lagged. By incorporating lagged dependent variables as instruments, GMM can effectively handle the persistence in the data (Arellano and Bond, 1991). To address potential endogeneity, GMM uses instruments variables that are correlated with the endogenous explanatory variables but uncorrelated with the error term. This helps isolate the exogenous variation in the explanatory variables, providing consistent estimates. The advantage of using GMM is that it allows us to use lagged values of the endogenous variables to serve as. This is particularly useful when external instruments are not available or difficult to justify. By using internal instruments, GMM can effectively control for endogeneity (Arellano and Bover, 1995).

Applying system GMM estimation approach, our equation (1) now becomes:

where CO_2i,(t−1) represents emission at the previous year. Lag values of CO₂, IB and other explanatory variables are used as internal instruments.

To examine the role of PHH and COVID-19 shocks on the relationship between IB activities and environmental issues, we interact moderators (Mor) with IB. This allows us to test whether environmental outcomes associated with IB vary under different regulatory stringencies or economic conditions. By including interaction terms, we can identify whether PHH mechanisms intensify pollution effects when macro shocks weaken environmental governance. Model (3) specifies the interactions:

This specification therefore allows us to quantify whether IB impacts on the environment varies depending on the moderators, including regulation enforcement (environmental tax and regulation) or heightened disruptions such as COVID-19, compared to normal economic conditions.

The data for this research spans from 1990 to 2023, using the latest data sets from authoritative sources such as the World Development Indicators (WDI), the International Monetary Fund (IMF) and the Heritage Foundation. We describe variables and their sources in Table 1.

The data are collected from these sources and merged using country’s name and year for all countries across the world. Due to data limitations in some countries for some variables, our final data set is a strong balanced data set consists of 121 countries over 33 years from 1990 to 2023 with 4,250 observations. We provide in Table 2 some main statistics of the variables.

With a mean value of 5.428 and a standard deviation of 7.598, CO₂ emissions show significant variability, reflecting diverse economic activities and energy usage patterns across countries and over time. The wide range (0.022–51.977) suggests the presence of both low-emission economies and highly industrialized nations with substantial carbon footprints.

The results indicate a robust positive relationship between IB and CO₂ as well as GHGs emissions ^[1]. This suggests that higher levels of IB, mostly through export and import activities, are associated with increased environmental pollution. The increases in trade activities, likely leads to greater industrial activity, transportation and energy consumption, all of which contribute significantly to emissions. These findings align with previous studies that highlight the environmental costs of globalization and increased economic activity (Yu et al., 2023). FDI, however, is found to not have any significant impacts on both CO₂ and GHG emissions. FDI net inflows may not significantly impact CO₂ emissions because FDI often introduces advanced, energy-efficient technologies and cleaner production methods, especially from developed countries (Lartey et al., 2021; Thi et al., 2023). Much of the investment may also target low-emission sectors such as services or technology rather than heavy industry. Additionally, multinational corporations involved in FDI are frequently subject to international environmental standards and sustainability expectations, encouraging them to adopt greener practices (Zhao et al., 2024; Table 3).

The results in Table 3 also highlight that trade in low CO₂ technology products are associated with lower CO₂ emissions. Countries that invest in renewable energy technologies and promote the import and export of low CO₂ goods are better positioned to mitigate the environmental impacts of increased trade and investment activities. This supports the technology spillover theory, which suggests that IB facilitates the diffusion of advanced technologies, leading to improved environmental outcomes, especially in countries that have the capacity to adopt these technologies (Grossman and Krueger, 1995). Furthermore, public investments in environmental protection R&D and the implementation of environmental taxes are crucial in enhancing a country’s ability to manage the negative externalities associated with trade (Marano et al., 2024).

Our results in Table 4 focusing on developing countries show that IB (especially export and import activities) exacerbates environmental degradation in these nations more than in developed countries, primarily through increased GHG emissions (column 3). This result re-confirms the PHH and supports Lartey et al.’s (2021) findings that more relaxing environmental standards in developing countries result in less positive impacts of IB activities on environment. This heightened impact is due to several key factors such as the economic structure of developing countries relies on agriculture and manufacturing, which are high in carbon intensity. Expansion of these industries to boost exports leads to increased emissions from factories, power plants and transportation (Cole, 2004). Furthermore, environmental regulations in developing countries are weaker and less enforced compared to developed nations, allowing higher emissions (Lartey et al., 2021). Finally, rapid industrialization and urbanization further increase emissions in these regions (Copeland and Taylor, 2004).

COVID-19 represents a significant shock to both IB and emissions due to its widespread and disruptive effects. The pandemic caused severe disruptions in global trade by interrupting supply chains, limiting manufacturing capacities and constraining transportation networks due to lockdowns and movement restrictions. Countries also imposed trade barriers, including export restrictions on essential goods, exacerbating the decline in IB. While some GHGs like methane and nitrous oxide temporarily decreased due to reduced transportation, CO₂ emissions increased as economic activities resumed ^[2]. Table 5 below reports the results.

The interaction term between IB and COVID-19 shows how the impact of IB on CO₂ emission change with the present of COVID-19 shock. The negative significant impact found for both interactions between IT*COVID-19 and FDI*COVID-19 indicates that IB during the pandemic leads to less CO₂ emission. During the pandemic, lockdowns and reduced production as well as economic activity led to a significant drop in energy demand. Many countries took this opportunity to transition toward cleaner energy sources, reducing reliance on fossil fuels like coal. This shift contributed to lower CO₂ emissions as IB activities resumed according to International Energy Agency (IEA) ^[3]

The disruptions caused by COVID-19 forced companies to rethink and optimize their supply chains. Consolidating shipments, optimizing logistics and shifting toward local sourcing reduced the need for long-distance transportation. This reduction in transportation-related emissions played a critical role in lowering CO₂ emissions ^[4].

We test the PHH by using a moderating model with environmental tax and government’s regulations (rqe). The PHH suggests that up to a certain level of regulation, the impact of IB on CO₂ emissions might change, as firms relocate to countries with laxer regulations to avoid stringent environmental policies (Copeland and Taylor, 2004). Our analysis finds a moderating impact of environmental tax, indicating that higher environmental tax rate reduces the negative impact of IB activities on the environment, especially with global trade activities. High taxes may lead firms to increase production efficiency, inadvertently raising CO₂ emissions or to invest in technologies that reduce other pollutants but not CO₂ specifically. Additionally, firms might scale up production to spread the tax burden, increasing overall emissions. The finding empirically confirms PHH. Table 6 reports the results.

We examined the regulation level as another threshold measurement. As shown in Table 7, higher levels of regulatory enforcement weaken the positive relationship between IB activities and CO₂/GHG emissions. This implies that multinational enterprises operating in countries with more stringent environmental regulations are incentivized to internalize environmental costs through improved resource efficiency, adoption of abatement technologies and compliance with monitoring and reporting mechanisms.

The moderating effect of environmental tax and regulation is consistent with the PHH, which posits that firms shift polluting activities toward countries with weaker environmental oversight to minimize production costs (Copeland and Taylor, 2004). When regulatory quality increases, the comparative advantage of lax jurisdictions diminishes, thereby limiting incentives for relocating pollution-intensive operations. The results suggest that a stronger regulatory framework can partially offset the environmental risks associated with IB activities by increasing compliance costs sufficiently to deter environmentally harmful practices. These findings contribute to the PHH literature by showing that not only explicit fiscal policies (such as environmental taxes) but also institutional regulatory strength play a central role in moderating the environmental consequences of global production networks.

We conducted several robustness checks to ensure that our empirical results are not sensitive to measurement choices. First, we validate the findings using an alternative indicator of environmental performance: CO₂ emissions per unit of GDP expressed in purchasing power parity (PPP) terms (Table 8). According to the World Bank, this indicator measures the kilograms of carbon dioxide emitted per international dollar of GDP adjusted by purchasing power parity and captures the carbon intensity of economic output. By replacing the original CO₂ metric with CO₂ emissions per PPP dollar of GDP, we control for cross-country differences in price levels and economic output measurement, thereby providing a more comparable proxy for emissions efficiency across economies.

Second, we complement the existing robustness specification using GHG emissions per capita by additionally including total GHG emissions (in logarithmic form) (Table 9). Total GHG emissions represent the aggregate annual volume of emissions in metric tons of all major GHGs.

The results remain consistent with our main specification. The findings continue to support the argument that IB activities, including trade flows, FDI and participation in global value chains involving low-CO₂ products, are associated with reduced carbon intensity. Low-CO₂ products refer to goods whose production and distribution generate lower carbon emissions relative to conventional alternatives, typically due to higher energy efficiency, cleaner production technologies or reduced fossil-fuel inputs. Consistent estimates across alternative specifications reinforce the conclusion that IB engagement contributes to environmental performance through mechanisms that promote lower-emission economic activities.

Our study reconfirms the negative impact of IB on environmental quality, which is more pronounced in developing countries. However, during the COVID-19 pandemic, reduced IB activities led to a significant decrease in CO₂ emissions, highlighting the complex relationship between IB and environmental sustainability. Our findings also suggest that in developing countries, or places where environmental tax is high or regulation is strong, the environmental impacts of IB activities reduces. This phenomenon aligns with the PHH, where firms shift operations to countries with less stringent environmental laws, resulting in higher emissions.

These findings suggest multiple implications for policy makers, IB research and multinational enterprise (MNE) strategy. First, the positive association between IB activity and CO₂ emissions reinforces a core debate in IB: cross-border expansion can generate growth and upgrading, but it can also intensify environmental harm through carbon-intensive production, logistics and fragmented global value chains. Recent debates within IB research argue that the sustainability role of MNEs is conditional rather than automatic, depending on how firm capabilities interact with regulatory, stakeholder and institutional pressures across countries (Allen et al., 2025).

Second, the finding that stronger environmental taxation weakens the environmental damage associated with IB activity suggests that regulation does more than raise compliance costs. It can reshape the strategic environment in ways that encourage cleaner technologies, greener production processes and lower-carbon operating models. This contributes to ongoing IB discussions by showing that sustainability outcomes are shaped not only by firm-level intentions, but also by the incentives created by national policy frameworks. For managers, the implication is that long-run international competitiveness increasingly depends on the ability to internalize environmental costs and build credible green capabilities, rather than relying on regulatory arbitrage (Allen et al., 2025).

Finally, the results also speak to concerns that firms may relocate activities to jurisdictions with weaker environmental standards. That possibility highlights the limits of purely national approaches and the need for stronger international coordination. Without some degree of policy alignment, countries may face pressure to weaken standards to attract trade and investment, undermining both climate goals and the credibility of sustainable IB strategies. To prevent a race to the bottom where countries lower environmental standards to attract trade and investment, there must be international efforts to harmonize environmental regulations and taxes. This could involve establishing global minimum standards for environmental protection, as well as creating international agreements that promote the sharing of green technologies and best practices. By doing so, countries can together achieve sustainable development goals, including SDG 8 (Economic growth) and SDG 13 (Climate Action).