206 / 2024-04-23 11:02:48

Follow the Smoke, But at What Costs? Environmental Regulation, Global Sourcing Adjustment, and Firm Performance

Environmental regulation,Global sourcing,Pollution Haven Hypothesis,Firm performance

 

Environmental regulation is increasingly recognized as a crucial factor affecting firm behaviors. The stringency of environmental regulations differs across countries, potentially influencing the global sourcing decisions of firms. This difference raises questions about whether firms prefer countries with laxer environmental regulations as their sourcing destinations and what the potential hidden costs are for firms making "follow the smoke" sourcing decisions. Using firm-level global supply chain data, our study empirically examines the relationship between environmental regulations and global sourcing adjustments, as well as the subsequent impacts of these adjustments on firm performance. Our findings indicate that firms tend to adjust their sourcing networks towards countries with laxer environmental regulations, as evidenced by an increase in the number of suppliers and sourcing volume in these countries. Such sourcing adjustment decisions are particularly attractive to firms facing financial pressure, those perceiving high environmental policy risk in home country, and those with a substantial customer base in pollution haven countries. Firms are also likely to establish new sourcing relationships and decentralize their sourcing networks in response to the laxity of environmental regulations. Furthermore, we find that the "follow the smoke" sourcing strategy backfires, as demonstrated by its adverse effects on firms' environmental and operational performance. Supplier ESG risk is the mechanism underlying irresponsible sourcing and firm performance deterioration. Our study provides insights that although the laxity of environmental regulations enhances the attractiveness of these countries as global sourcing destinations, firms should remain cautious and avoid falling into the trap of pollution havens.