Conditioning the Pollution Haven Hypothesis: Climate Policies, Transaction Costs, and Sunset Industry Firms’ Cross-Border Acquisitions

To reduce global heating, many governments have implemented climate policies of varying stringency that are likely to have a marked effect on sunset-industry firms, which are often heavy polluters and rely on outmoded technologies. The ‘pollution haven hypothesis’ posits that firms in polluting industries will relocate their activities to countries with weaker climate regulations. Using transaction-cost economics, we extend this research. Sunset-industry firms’ cross-border acquisitions (CBAs) are marked by high asset specificity and stranded-asset risk, making transaction costs pertinent. Yet, existing empirical PHH tests often overlook how transaction costs associated with host-country 1) public expropriation, and 2) policy uncertainty influence CBAs. We hypothesize that stringent host-country climate policies are associated with sunset-industry firms’ higher 1) investment amounts and 2) equity stakes in CBAs, with host-country public expropriation risks and policy uncertainty moderating these relationships. Using multi-level regressions and a large sample (up to 21,442 CBAs) between 2006 and 2022, we find stringent host-country climate policies are associated with higher financial outlays and equity stakes. A complementary ‘gate and chain’ configurational analysis supports these findings. While stringent host-country climate policies attract acquisitions, this association reverses when host-country public expropriation risks or policy uncertainty is high. By identifying how transaction costs and the stringency of climate policies combine to influence sunset-industry firms’ CBAs, we reveal the complexity of these investments and the implications for climate policies. We provide some boundary conditions for the PHH, highlighting the importance of asset specificity, stranded-asset risk and transaction costs for firms’ responses to host-country climate policies.