Reducing greenhouse gases, particularly CO2 emissions from industrial companies worldwide, has become a vital topic in international forums. This is due to climate change, the consequences it brings and the measures taken to prevent it, such as the Kyoto Protocol or the Paris Agreement. Creating technologies to manage these goals requires high investments in Research and Development (R&D). Halit Gonenc, an associate professor at the department of Economics, Econometrics & Finance, studies the effect of R&D investments on carbon emissions for both Domestic Companies (DCs) and Multinational Companies (MNCs). In this blog, he shares his thoughts and findings.

R&D leads to the discovery of new products and processes, greater efficiency and advancements in the production chain, which eventually could all contribute to the goal of reducing carbon emissions. Thus, Martin Pei, chief technical officer at SSAB (A Nordic steel company), pointed out in the Financial Times last year: “If we really want to contribute to realising the climate goals set in the Paris agreement, then there’s a quite widespread consensus that only doing further efficiency improvements in the blast furnace will not be enough. Breakthrough technologies are needed urgently.”

High R&D expenditures

Gonenc expects a huge R&D spending – enabling rapid innovation - to be needed to switch from traditional energy resources (such as coal, gas, and oil) to renewable energy sources in production processes. “The goal of reducing carbon emissions must be driven by carbon offsetting projects supported by high R&D expenditures”, the associate professor states. As MNCs rely heavily on R&D activities to internalize their product innovation capabilities and have resources to support such large-scale spending, they have a special role and are expected to contribute to setting climate policies by promoting actions to reduce carbon emissions.

Relative to DCs, MNCs are less financially constrained based on their internally generated funds and have easy access to international capital markets to finance their exceptional R&D capacities. Gonenc: “Therefore, they are capable of creating superior technologies that contribute to actions needed to be taken in order to reduce emissions worldwide and thus control global warming. But MNCs also have the ability to overcome controls on pollution levels by shifting their production facilities - and thus their CO2 emissions - among geographically diversified locations.” This is enabled by globalization and foreign direct investments (FDI). FDI on the one hand stimulate the transfer of resources, in the form knowledge and technological spillovers (human capital, know-how), and on the other hand capacitate carbon leakage.

Cross border investments

The associate professor explains: “With cross border investments in the form of FDI, MNCs move their operations to countries where environmental regulations are less rigorous. Thus, as a result of MNCs operations in different geographic regions, there will be environmental costs due to increased pollution and natural resource exhaustion.” All in all, this makes it very difficult to determine the net effect MNCs have on the carbon emission levels. MNCs can show that they decrease carbon emissions in some countries, but that doesn’t necessarily mean their total emission decreases, since their emission can still increase in other countries.

Findings

In his current research, that is still in progress, Gonenc finds a negative effect of R&D investments on carbon emissions for both DCs and MNCs. “Yet, the decrease in the sample mean of carbon emission intensity is, on average, 19.5% higher for MNCs. Next to this, I document a moderating effect of FDI on the relationship between R&D intensity and carbon emissions for MNCs. This joint effect shows the ability of MNCs to transfer their carbon emissions, as a decrease in overall carbon emissions of MNCs with high R&D and high FDI is smaller than that of MNCs with high R&D and low FDI in low emissions or developed countries.” Gonenc observes that these main results are more relevant for a sample period after 2015. “This evidence could be explained by the increasing awareness and tightening of environmental regulations worldwide, leading to better supervision of FDI deals by MNCs for their own benefits.”

 For more information, please contact Halit Gonenc.