The Pollution Outsourcing Hypothesis: An empirical test for Japan

This paper investigates whether firms that engage in outsourcing improve their environmental performance using Japanese firm-level data for the period 2009-2013. To identify the causal effect of production outsourcing on firm carbon dioxide (CO₂) emission intensities, we employ a non-parametric approach combining propensity score matching (PSM) and difference-in-differences (DiD). Our results show that, relative to the control group, the growth in CO₂ emission intensities (relative to the year before treatment) of new production outsourcers is 5.1% lower in the year when they start outsourcing, and 6.6% and 9.5% lower one and two years after outsourcing, respectively. When we decompose firms' outsourcing activities into domestic and foreign according to the destination of the outsourced production, we find that the effects on emission intensity growth are driven by overseas outsourcing. Firms that outsource part(s) of their production overseas have a 7.3% lower emission intensity growth when they start outsourcing and a 7.7% reduction in the following year. We also investigate whether the decision to import or export has an impact on firm level environmental performance as predicted by the more traditional pollution halo hypothesis (PHH) literature. Firms are found to have a 3.3% lower growth rate of CO₂ emission intensity when they start to import, but no significant impact is found for exporting.