KAIST: "Environmental Regulations Are a Foundation for Enhancing Green Product Competitiveness, Not a Constraint"

A new theory has been proposed suggesting that environmental regulations serve not as a 'constraint' hindering corporate activities, but rather as a foundation for enhancing the competitiveness of green products.

This challenges the traditional 'pollution haven' hypothesis, which posits that companies relocate their production bases to countries with more lenient environmental regulations. Instead, it now implies that companies should seek new survival strategies in 'green havens.'

On October 17, KAIST announced that a research team led by Professor Inarae Lee from the Department of Management Science and Engineering, in collaboration with Professors Heather Berry and Jasmina Chauvin from Georgetown University and Professor Lance Chung from the University of Texas, has revealed through an international joint study that the stricter a country's environmental regulations, the more competitive its green products, such as electric vehicles, become.

(From left) Inarae Lee, Professor at KAIST; Heather Berry, Professor at Georgetown University; Jasmina Shovin, Professor at Georgetown University; Lance Chung, Professor at the University of Texas. Courtesy of KAIST

Green products refer to energy-efficient home appliances that use less electricity, as well as eco-friendly vehicles such as electric and hybrid cars.

Until now, multinational corporations have typically concentrated their production and exports in countries with relatively lax environmental regulations.

However, with the recent strengthening of responses to climate change and the rise of environmental, social, and governance (ESG) management, global trade in green products has been rapidly increasing. As a result, new patterns have emerged that cannot be easily explained by existing theories.

To explain these patterns, the joint research team conducted a detailed analysis of trade patterns for over 5,000 products across 92 importing countries and 70 exporting countries from 2002 to 2019, using data from the UN Comtrade global trade database operated by the United Nations.

The analysis confirmed the typical pollution haven effect, where overall trade volume decreases as environmental regulations are tightened. At the same time, however, it found that trade in green products actually increases under stricter regulations. In other words, the data shows that the more stringent the environmental regulations, the more active the trade and procurement of green products become.

This phenomenon suggests that companies are not simply relocating to countries or regions with fewer regulations to cut production costs. Instead, in the production and distribution of green products, they tend to prefer countries with stronger regulations in order to secure transparency and legitimacy.

This trend was especially pronounced in everyday consumer goods that directly interact with consumers, such as smartphones, clothing, food, cosmetics, home appliances, and automobiles. The preference for regulated markets was even stronger for green product companies exporting to countries with active environmental movements or NGOs.

Professor Lee stated, "This study demonstrates that new patterns are emerging in global supply chains that cannot be explained by cost efficiency alone. It empirically identifies a shift in corporate focus from 'pollution havens' to 'green havens.' Strong environmental policies are not a constraint on corporate activities; rather, they can serve as a foundation for enhancing the competitiveness of green products."

Meanwhile, the results of this study (paper) were recently published in the Journal of International Business Studies (JIBS), an academic journal in the field of international business.