The third-country effects in carbon emissions transfer: Beyond the FDI home-host country perspective

Multinational enterprises (MNEs) manufacture goods in foreign direct investment (FDI) host countries, catering not only to the needs of host and home countries but also fulfilling the demand of third countries. By introducing the concept of third countries, this study extends the decomposition framework of MNEs’ carbon emissions using an input-output model. This framework allows us to trace the flows of MNEs’ carbon emissions among host, home, and third countries, thereby depicting a more detailed network of MNEs’ emissions within global value chains. Our findings reveal that 25.9% of MNEs’ carbon emissions were exported to satisfy third countries’ final demand from 2000 to 2019. At the national and sectoral levels, great variation in the third-country effects exists. Countries with large domestic markets, such as the United States, China, and Japan, generally exhibit relatively smaller third-country effects. In contrast, small open economies like Singapore demonstrate much higher third-country effects, reaching 68.5%. Factors such as regional economic integration and weaker environmental regulations in host countries may also drive the growth of third-country effects. Further analysis indicates that under trade policy uncertainty, FDI relocation and subsequent exports to third countries would increase the global mitigation burden. Our study provides important insights for MNEs, host countries and policymakers to effectively mitigate MNE-related carbon emissions within global value chains.