Home-country climate regulation and strategic response of multinational enterprises: Investment relocation or green innovation?

Understanding how multinational enterprises respond to climate regulatory risks is essential for sustainable cross border investment. Existing studies have focused on regulatory avoidance through production relocation, while giving limited attention to the internal mechanisms through which firms achieve institutional adaptation. Drawing on institutional theory and the resource-based view, this study examines two strategic responses, outward direct investment and green technology innovation, following the introduction of China’s pilot Emission Trading System. Using a staggered difference-in-differences design, we compare regulated and unregulated multinational enterprises. We find no evidence of investment leakage, as the policy does not influence outward direct investment. In contrast, firms with stronger innovative experience and exposure to more intensive regulation increase their green innovation following policy implementation. Regulatory intensity also provides a credible signal of environmental commitment that shapes positive stakeholder evaluations and reduces the liability of origin. Green innovation therefore constitutes a more viable adaptation path than relocation. © 2026 The Authors.