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The Impacts of Energy Prices on Industrial Foreign Investment Location: Evidence from Global Firm Level Data

Author

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  • Aurélien Saussay

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Misato Sato

    (LSE - London School of Economics and Political Science)

Abstract

As countries pursue environmental protection at differing speeds, there is significant variation in energy prices across the world. This paper investigates whether the basic logic of comparative advantage can explain the patterns of industrial firms' investment location decisions, particularly focusing on the role of heterogeneous energy prices. To overcome the lack of global, disaggregated sector-level bilateral FDI data, we use an exhaustive Thomson-Reuters dataset of all cross-border M&A deals in the manufacturing sector across 41 countries, both OECD and non-OECD. Our final dataset includes close to 70,000 deals -- of which 22,000 are cross-border -- between 1995 and 2014 and covers 23 manufacturing subsectors. We specify a conditional logit model linking M&A activity to relative bilateral energy prices. To control for the large number of potential confounding factors, our identification strategy rests on within-country cross-sectoral energy price differentials. We then estimate our model using a custom PPML estimator, designed to accommodate our specific high-dimensional fixed effects structure. We find that industrial firms perform more cross-border investments when the differential between their domestic sectoral energy price and that of foreign countries increases. Specifically, we find that a 10% increase in the relative energy price differential between two countries is expected to increase by 2.5% the number of firms acquired in the lower energy price country by firms based in the more expensive country. This result has important implications for the adoption of environmental policies which affect energy prices. In particular, it suggests that uncompensated unilateral carbon taxation runs the risk of leading to offshoring and carbon leakage in industrial sectors.

Suggested Citation

  • Aurélien Saussay & Misato Sato, 2018. "The Impacts of Energy Prices on Industrial Foreign Investment Location: Evidence from Global Firm Level Data," Working Papers hal-03475473, HAL.
  • Handle: RePEc:hal:wpaper:hal-03475473
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    2. Saussay, Aurélien & Zugravu-Soilita, Natalia, 2023. "International production chains and the pollution offshoring hypothesis: An empirical investigation," Resource and Energy Economics, Elsevier, vol. 73(C).
    3. Li, Minghui & Liu, Chong & Shen, Chaohai, 2020. "Does cheap electricity in a target's location add value to the acquirer? Evidence from China," Energy Policy, Elsevier, vol. 145(C).
    4. Damien Dussaux & Francesco Vona & Antoine Dechezleprêtre, 2020. "Carbon Offshoring: Evidence from French Manufacturing Companies," Working Papers hal-03403069, HAL.
    5. Cole, Matthew A. & Elliott, Robert J.R. & Okubo, Toshihiro & Zhang, Liyun, 2021. "Importing, outsourcing and pollution offshoring," Energy Economics, Elsevier, vol. 103(C).
    6. Manderson, Edward J. & Kneller, Richard, 2020. "Energy endowments and the location of manufacturing firms," Journal of Environmental Economics and Management, Elsevier, vol. 101(C).
    7. Bijnens, Gert & Hutchinson, John & Konings, Jozef & Saint Guilhem, Arthur, 2021. "The interplay between green policy, electricity prices, financial constraints and jobs: firm-level evidence," Working Paper Series 2537, European Central Bank.
    8. Dussaux, Damien & Monjon, Stéphanie, 2023. "Selling under other skies when energy prices skyrocket: How do the companies adapt their export strategy when energy prices rise?," Energy Policy, Elsevier, vol. 183(C).
    9. Gert Bijnens & Jozef Konings & Stijn Vanormelingen, 2022. "The impact of electricity prices on European manufacturing jobs," Applied Economics, Taylor & Francis Journals, vol. 54(1), pages 38-56, January.
    10. repec:hal:cesptp:hal-04248556 is not listed on IDEAS
    11. Michael Reiter & Christian Kimmich & Elisabeth Laa & Daniel Schmidtner & Adrian Wende & Klaus Weyerstraß, 2024. "Auswirkungen von Energiepreisen auf Österreichs Exportwirtschaft," FIW Research Reports series y:2024:m:05, FIW.
    12. repec:hal:spmain:info:hdl:2441/7j6trda2ip9uja53ghj5qo32rg is not listed on IDEAS
    13. repec:spo:wpmain:info:hdl:2441/7j6trda2ip9uja53ghj5qo32rg is not listed on IDEAS
    14. Böschemeier, Jonas & Jochem, Axel, 2024. "The effect of foreign carbon prices on German outward FDI," Economics Letters, Elsevier, vol. 234(C).

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    More about this item

    Keywords

    FDI; Mergers and Acquisitions; Environmental regulation stringency; Energy prices;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F64 - International Economics - - Economic Impacts of Globalization - - - Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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