Innovate or acquire? An empirical analysis of global firms' strategies to mitigate carbon risk
Lin, Z., Shi, S. and Pain, K.
It is advisable to refer to the publisher's version if you intend to cite from this work. See Guidance on citing. Abstract/SummaryPorter’s hypothesis suggests that environmental regulations motivate firms to innovate by investing in Research and Development (R&D). However, is R&D the sole strategy open to global firms seeking to mitigate their exposure to carbon risk? The study addresses this question by exploring two corporate strategies - innovating strategy via R&D and acquiring strategy via Mergers and Acquisitions (M&As). Our dataset comprises 7,903 global firms that pursued either R&D or M&A strategies between 2000 and 2020, examining the impact of emissions on global firms’ R&D and M&A decisions and their preferences for the two options. We find that elevated pressures on carbon emissions prompt firms to pursue both R&D and M&A. Firms tend to adopt R&D strategies under stringent regulations, while they opt for M&A strategies amidst financial constraints. Our findings not only clarify the strategic trade-offs between innovation and acquisition but also validate the complementary roles of institutional and stakeholder theories in shaping proactive carbon management.
Acemoglu, D., Aghion, P., Bursztyn, L., & Hemous, D. (2012). The environment and directed technical change. American Economic Review, 102(1), 131-166.
Ahuja, G., & Katila, R. (2001). Technological acquisitions and the innovation performance of acquiring firms: A longitudinal study. Strategic Management Journal, 22(3), 197-220. https://doi.org/10.1002/smj.157
Alam, S.S., & Islam, K.Z. (2021). Examining the role of environmental corporate social responsibility in building green corporate image and green competitive advantage. International Journal of Corporate Social Responsibility, 6(1), 8. https://doi.org/10.1186/s40991-021-00062-w
Ambec, S., Cohen, M.A., Elgie, S., & Lanoie, P. (2013). The Porter hypothesis at 20: can environmental regulation enhance innovation and competitiveness?. Review of Environmental Economics and Policy. 7(1), 2-22. https://doi.org/10.1093/reep/res016
Andrade, G., Mitchell, M., & Stafford, E. (2001). New evidence and perspectives on mergers. Journal of Economic Perspectives, 15(2), 103-120. https://doi.org/10.1257/jep.15.2.103
Antón, M., Azar, J., Gine, M., & Lin, L.X. (2022). Beyond the target: M&A decisions and rival ownership. Journal of Financial Economics, 144(1), 44-66. https://doi.org/10.1016/j.jfineco.2022.01.002
Bacq, S., & Aguilera, R. V. (2022). Stakeholder governance for responsible innovation: A theory of value creation, appropriation, and distribution. Journal of Management Studies, 59(1), 29-60.
Banerjee, R., & Gupta, K. (2017). The effects of environmental sustainability and R&D on corporate risk-taking: International evidence. Energy Economics, 65, 1-15. https://doi.org/10.1016/j.eneco.2017.04.016
Bansal, P., & Clelland, I. (2004). Talking trash: Legitimacy, impression management, and unsystematic risk in the context of the natural environment. Academy of Management Journal, 47(1), 93-103.
Bena, J., & Li, K. (2014). Corporate innovations and mergers and acquisitions. The Journal of Finance, 69(5), 1923-1960. https://doi.org/10.1111/jofi.12059
Benjaafar, S., Li, Y., & Daskin, M. (2012). Carbon footprint and the management of supply chains: Insights from simple models. IEEE Transactions on Automation Science and Engineering, 10(1), 99-116. https://doi.org/10.1109/TASE.2012.2203304
Berkhout, F., Verbong, G., Wieczorek, A.J., Raven, R., Lebel, L., & Bai, X. (2010). Sustainability experiments in Asia: innovations shaping alternative development pathways?. Environmental Science & Policy, 13(4), 261-271. https://doi.org/10.1016/j.envsci.2010.03.010
Berrone, P., Fosfuri, A., Gelabert, L., & Gomez‐Mejia, L.R. (2013). Necessity as the mother of ‘green’inventions: Institutional pressures and environmental innovations. Strategic Management Journal, 34(8), 891-909. https://doi.org/10.1002/smj.2041
Black, F. (1976). Studies of stock market volatility changes. Proceedings of the American Statistical Association, Business & Economic Statistics Section, 177-181.
Blowers, A., & Pain, K. (1999). The unsustainable city. Unruly Cities? Order/Disorder, 247-298.
Boiral, O. (2007). Corporate greening through ISO 14001: a rational myth?. Organization Science, 18(1), 127-146.
Bolton, P., & Kacperczyk, M. (2021). Do investors care about carbon risk?. Journal of Financial Economics, 142(2), 517-549. https://doi.org/10.1016/j.jfineco.2021.05.008
Boschma, R., Marrocu, E., & Paci, R. (2016). Symmetric and asymmetric effects of proximities. The case of M&A deals in Italy. Journal of Economic Geography, 16(2), 505-535. https://doi.org/10.1093/jeg/lbv005
Bose, S., Minnick, K., & Shams, S. (2021). Does carbon risk matter for corporate acquisition decisions?. Journal of Corporate Finance, 70, 102058. https://doi.org/10.1016/j.jcorpfin.2021.102058
Burke, K.D., Williams, J.W., Chandler, M.A., Haywood, A.M., Lunt, D.J., & Otto-Bliesner, B.L. (2018). Pliocene and Eocene provide best analogs for near-future climates. Proceedings of the National Academy of Sciences, 115(52), 13288-13293. https://doi.org/10.1073/pnas.1809600115
Calel, R., & Dechezleprêtre, A. (2016). Environmental policy and directed technological change: evidence from the European carbon market. Review of Economics and Statistics, 98(1), 173-191. https://doi.org/10.1162/REST_a_00470
Campello, M., Graham, J. R., & Harvey, C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), 470-487.
Capron, L., & Mitchell, W. (2012). Build, Borrow, or Buy: Solving the Growth Dilemma. Harvard Business Press, Brighton.
Cassiman, B., Colombo, M.G., Garrone, P., & Veugelers, R. (2005). The impact of M&A on the R&D process: An empirical analysis of the role of technological-and market-relatedness. Research Policy, 34(2), 195-220. https://doi.org/10.1016/j.respol.2005.01.002
Chapple, L., Clarkson, P.M., & Gold, D.L. (2013). The cost of carbon: Capital market effects of the proposed emission trading scheme (ETS). Abacus, 49(1), 1-33. https://doi.org/10.1111/abac.12006
Christie, A.A. (1982). The stochastic behavior of common stock variances: Value, leverage and interest rate effects. Journal of Financial Economics, 10(4), 407-432. https://doi.org/10.1016/0304-405X(82)90018-6
Christmann, P., & Taylor, G. (2001). Globalization and the environment: Determinants of firm self-regulation in China. Journal of International Business Studies, 32, 439-458. https://doi.org/10.1057/palgrave.jibs.8490976
Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35(1), 128-152.
Conti, R. (2014). Do non‐competition agreements lead firms to pursue risky R&D projects?. Strategic Management Journal, 35(8), 1230-1248. https://doi.org/10.1002/smj.2155
Dasgupta, S., & Wheeler, D. (1997). Citizen Complaints as Environmental Indicators: Evidence from China (Vol. 1704). World Bank Publications. Washington, D.C.
De Angelis, T., Tankov, P., & Zerbib, O.D. (2023). Climate impact investing. Management Science, 69(12), 7669-7692. https://doi.org/10.1287/mnsc.2022.4472
De Mello Jr, L.R. (1999). Foreign direct investment-led growth: evidence from time series and panel data. Oxford Economic Papers, 51(1), 133-151. https://doi.org/10.1093/oep/51.1.133
De Villiers, C., Naiker, V., & Van Staden, C.J. (2011). The effect of board characteristics on firm environmental performance. Journal of Management, 37(6), 1636-1663. https://doi.org/10.1177/0149206311411506
Delmas, M.A., & Burbano, V.C. (2011). The drivers of greenwashing. California Management Review, 54(1), 64-87. https://doi.org/10.1525/cmr.2011.54.1.64
Delmas, M.A., & Pekovic, S. (2013). Environmental standards and labor productivity: Understanding the mechanisms that sustain sustainability. Journal of Organizational Behavior, 34(2), 230-252. https://doi.org/10.1002/job.1827
Dietz, S., Bowen, A., Dixon, C., & Gradwell, P. (2016). ‘Climate value at risk’of global financial assets. Nature Climate Change, 6(7), 676-679. https://doi.org/10.1038/nclimate2972
Eccles, R.G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), 2835-2857. https://doi.org/10.1287/mnsc.2014.1984
Eckstein, D., Künzel, V., & Schäfer, L. (2021). The Global Climate Risk Index 2021. Bonn: Germanwatch.
Edenhofer, O., Lessmann, K. & Tahri, I. (2024). Asset pricing and the carbon beta of externalities. Journal of Environmental Economics and Management, 125, 102969. https://doi.org/10.1016/j.jeem.2024.102969
European Commission (2021). Carbon Border Adjustment Mechanism (accessed on 15 April 2024 from https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en).
Farrukh, A., Mathrani, S., & Sajjad, A. (2022). A natural resource and institutional theory‐based view of green‐lean‐six sigma drivers for environmental management. Business Strategy and the Environment, 31(3), 1074-1090.
Griffin, P., & Heede, C.R. (2017). The carbon majors database. CDP carbon majors report 2017, 14. Climate Accountability Institute. United States of America.
Griffin, P.A., Lont, D.H. & Sun, E.Y. (2017). The relevance to investors of greenhouse gas emission disclosures. Contemporary Accounting Research, 34(2), 1265-1297. https://doi.org/10.1111/1911-3846.12298
Han, C., Li, C., Pei, J. & Wang, C. (2024). Environmental regulation and intermediate imports: Firm-product-level evidence. Journal of Environmental Economics and Management, 127, 103043. https://doi.org/10.1016/j.jeem.2024.103043
Hart, S.L. (1995). A natural-resource-based view of the firm. Academy of Management Review, 20(4), 986-1014. https://doi.org/10.2307/258963
Hart, S.L. (1997). Beyond greening: strategies for a sustainable world. Harvard Business Review, 75(1), 66-77.
Herger, N., & McCorriston, S. (2016). Horizontal, vertical, and conglomerate cross-border acquisitions. IMF Economic Review, 64(2), 319-353. https://doi.org/10.1057/imfer.2015.42
Hettige, H., Huq, M., Pargal, S., & Wheeler, D. (1996). Determinants of pollution abatement in developing countries: evidence from South and Southeast Asia. World Development, 24(12), 1891-1904. https://doi.org/10.1016/S0305-750X(96)00076-9
Hitt, M.A., Harrison, J.S., & Ireland, R.D. (2001). Mergers & Acquisitions: A Guide to Creating Value for Stakeholders. Oxford University Press, Oxford.
Hockerts, K., & Wüstenhagen, R. (2010). Greening Goliaths versus emerging Davids—Theorizing about the role of incumbents and new entrants in sustainable entrepreneurship. Journal of Business Venturing, 25(5), 481-492.
Hottenrott, H., & Peters, B. (2012). Innovative capability and financing constraints for innovation: more money, more innovation?. Review of Economics and Statistics, 94(4), 1126-1142.
In, S.Y., Park, K.Y., & Monk, A. (2017). Is “being green” rewarded in the market? An empirical investigation of decarbonization risk and stock returns. International Association for Energy Economics (Singapore Issue), 46(48), 46-48.
Ishikawa, J., & Cheng, H. (2021). Carbon tax, cross-border carbon leakage, and border tax adjustments (accessed on 15 April 2024 from https://cepr.org/voxeu/columns/carbon-tax-cross-border-carbon-leakage-and-border-tax-adjustments).
Jaffe, A.B., & Palmer, K. (1997). Environmental regulation and innovation: a panel data study. Review of Economics and Statistics, 79(4), 610-619. https://doi.org/10.1162/003465397557196
Jänicke, M., & Jacob, K. (2005). Ecological modernisation and the creation of lead markets. In Towards environmental innovation systems. Berlin, Heidelberg: Springer Berlin Heidelberg, 175-193. https://doi.org/10.1007/3-540-27298-4_10
Jin, C., Tsai, F. S., Gu, Q., & Wu, B. (2022). Does the porter hypothesis work well in the emission trading schema pilot? Exploring moderating effects of institutional settings. Research in International Business and Finance, 62, 101732.
Lanoie, P., Laurent‐Lucchetti, J., Johnstone, N., & Ambec, S. (2011). Environmental policy, innovation and performance: new insights on the Porter hypothesis. Journal of Economics & Management Strategy, 20(3), 803-842. https://doi.org/10.1111/j.1530-9134.2011.00301.x
Matsumura, E.M., Prakash, R. & Vera-Muñoz, S.C. (2014). Firm-value effects of carbon emissions and carbon disclosures. The Accounting Review, 89(2), 695-724. https://doi.org/10.2308/accr-50629
McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: correlation or misspecification?. Strategic Management Journal, 21(5), 603-609. https://doi.org/10.1002/(SICI)1097-0266(200005)21:5<603::AID-SMJ101>3.0.CO;2-3
Mercure, J.F., Pollitt, H., Viñuales, J.E., Edwards, N.R., Holden, P.B., Chewpreecha, U., Salas, P., Sognnaes, I., Lam, A., Knobloch, F. (2018). Macroeconomic impact of stranded fossil fuel assets. Nature Climate Change, 8(7), 588-593. https://doi.org/10.1038/s41558-018-0182-1
Misch, F., & Wingender, M.P. (2021). Revisiting Carbon Leakage. International Monetary Fund (downloaded on 15 April 2024 from https://www.imf.org/en/Publications/WP/Issues/2021/08/06/Revisiting-Carbon-Leakage-462148).
Mohr, R.D. (2002). Technical change, external economies, and the Porter hypothesis. Journal of Environmental Economics and Management, 43(1), 158-168. https://doi.org/10.1006/jeem.2000.1166
Nordhaus, W. (2013). The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. Yale University Press, New Haven.
Pain, K., Black, D., Blower, J., Grimmond, C.S., Hunt, A., Milcheva, S., Crawford, B., Dale, N., Doolin, S., Manna, S., Shi, S., Pugh, R., Supporting Smart Urban Growth: Successful investing in density, 2018, Urban Land Institute / New Climate Economy, London.
Popp, D. (2005). Lessons from patents: Using patents to measure technological change in environmental models. Ecological Economics, 54(2-3), 209-226. https://doi.org/10.1016/j.ecolecon.2005.01.001
Porter, M.E. (1991). Towards a dynamic theory of strategy. Strategic Management Journal, 12(S2), 95-117. https://doi.org/10.1002/smj.4250121008
Porter, M.E., & Linde, C.V.D. (1995). Toward a new conception of the environment-competitiveness relationship. Journal of Economic Perspectives, 9(4), 97-118. https://doi.org/10.1257/jep.9.4.97
Reid, E.M., & Toffel, M.W. (2009). Responding to public and private politics: Corporate disclosure of climate change strategies. Strategic Management Journal, 30(11), 1157-1178. https://doi.org/10.1002/smj.796
Safiullah, M., Alam, M.S., & Islam, M.S. (2022). Do all institutional investors care about corporate carbon emissions?. Energy Economics, 115, 106376. https://doi.org/10.1016/j.gfj.2024.100939
Schmalensee R., & Stavins R.N. (2017). Lessons learned from three decades of experience with cap and trade. Review of Environmental Economics and Policy. 11(1), 59-79. https://doi.org/10.1093/reep/rew017
Servaes, H. (1991). Tobin's Q and the Gains from Takeovers. The Journal of Finance, 46(1), 409-419. https://doi.org/10.1111/j.1540-6261.1991.tb03758.x
Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569-592.
Shi, S., Wong, S.K., & Zheng, C. (2022). Network capital and urban development: An inter-urban capital flow network analysis. Regional Studies, 56(3), 406-419. https://doi.org/10.1080/00343404.2021.1955098
Stock, J.H., Wright, J.H., & Yogo, M. (2002). A survey of weak instruments and weak identification in generalized method of moments. Journal of Business & Economic Statistics, 20(4), 518-529. https://doi.org/10.1198/073500102288618658
Szücs, F. (2014). M&A and R&D: Asymmetric effects on acquirers and targets?. Research Policy, 43(7), 1264-1273. https://doi.org/10.1016/j.respol.2014.03.007
Tampakoudis, I., & Anagnostopoulou, E. (2020). The effect of mergers and acquisitions on environmental, social and governance performance and market value: Evidence from EU acquirers. Business Strategy and the Environment, 29(5), 1865-1875. https://doi.org/10.1002/bse.2475
Wang, Y., Ni, J., Xu, K., Zhang, H., & He, C. (2024). Intricate synergistic effects between air pollution and carbon emission: An emerging evidence from China. Environmental Pollution, 123851. https://doi.org/10.1016/j.envpol.2024.123851
Wittneben, B.B., Okereke, C., Banerjee, S.B., & Levy, D.L. (2012). Climate change and the emergence of new organizational landscapes. Organization Studies, 33(11), 1431-1450. https://doi.org/10.1177/0170840612464612
Xepapadeas, A., & de Zeeuw, A. (1999). Environmental policy and competitiveness: the Porter hypothesis and the composition of capital. Journal of Environmental Economics and Management, 37(2), 165-182. https://doi.org/10.1006/jeem.1998.1061
Yakita, A., & Yamauchi, H. (2011). Environmental awareness and environmental R&D spillovers in differentiated duopoly. Research in Economics, 65(3), 137-143. https://doi.org/10.1016/j.rie.2010.02.003
Yenipazarli, A. (2019). Incentives for environmental research and development: Consumer preferences, competitive pressure and emissions taxation. European Journal of Operational Research, 276(2), 757-769. https://doi.org/10.1016/j.ejor.2019.01.037 University Staff: Request a correction | Centaur Editors: Update this record |
University of Reading
CentAUR: Central Archive at the University of Reading
Accessibility navigation
Innovate or acquire? An empirical analysis of global firms' strategies to mitigate carbon risk
Lin, Z., Shi, S. and Pain, K.
It is advisable to refer to the publisher's version if you intend to cite from this work. See Guidance on citing. Abstract/SummaryPorter’s hypothesis suggests that environmental regulations motivate firms to innovate by investing in Research and Development (R&D). However, is R&D the sole strategy open to global firms seeking to mitigate their exposure to carbon risk? The study addresses this question by exploring two corporate strategies - innovating strategy via R&D and acquiring strategy via Mergers and Acquisitions (M&As). Our dataset comprises 7,903 global firms that pursued either R&D or M&A strategies between 2000 and 2020, examining the impact of emissions on global firms’ R&D and M&A decisions and their preferences for the two options. We find that elevated pressures on carbon emissions prompt firms to pursue both R&D and M&A. Firms tend to adopt R&D strategies under stringent regulations, while they opt for M&A strategies amidst financial constraints. Our findings not only clarify the strategic trade-offs between innovation and acquisition but also validate the complementary roles of institutional and stakeholder theories in shaping proactive carbon management.
Deposit Details References University Staff: Request a correction | Centaur Editors: Update this record |
Lists
Lists
![[thumbnail of Innovate or Acquir(e accepted for upload.pdf]](https://centaur.reading.ac.uk/style/images/fileicons/text.png "Innovate or Acquir(e accepted for upload.pdf")