Firm level offshoring activities, pollution regulation, triple bottom line, and market structure: What do they have in common?

Facing global competition, multinational corporations (MNCs) have considered offshoring as a viable alternative to domestic production. By offshoring production, MNCs have generally enjoyed lower labor costs and higher production efficiencies, in addition to other benefits. Unfortunately, target countries chosen for such activities tend to be pollution friendly countries. To make matter worse, strong environmental pollution regulations in host countries (for example, through carbon taxes, focus on the triple bottom line, incentives to select green technology investment options) have incentivized MNCs to offshore more activities. In this study, an optimization model is presented where a domestic firms' propensity to offshore is shown to be function of the market structure in the industry. The findings suggest that a domestic firms' propensity to offshore pollution via production in pollution friendly host countries is directly related to the degree of competition in the industry. In this context, the paper presents specific scenarios where governments could effectively force firms operating in less competitive industry environments to pay an “offshoring penalty”. These proceeds could then be used to subsidize firms in competitive industries who could then be incentivized to adopt green technology instead of offshoring production and pollution.