How to Induce MNFs’ Local Sourcing to Break Carbon Lock-in?

To address the carbon lock-in problem, many developing countries have utilized multinational firms’ (MNFs’) mandatory carbon emission reduction requirements for the domestic manufacturers they source from, thereby triggering the latter’s investment in carbon emission reduction. But facing eco-conscious customers, the MNFs may prefer to source from carbon-neutral overseas manufacturers even at a high import tariff cost. We are therefore interested in how the local government adjusts the tariff rate and/or the domestic manufacturer’s carbon emission reduction efficiency to induce an MNF’s local sourcing. We find that, even if the MNF has already decided to source locally, the overall emissions can be effectively reduced only when the domestic manufacturer’s carbon emission reduction efficiency exceeds a unique threshold. Regarding the social welfare, we show that it exhibits a hump-shaped curve with respect to the import tariff rate if the overseas sourcing strategy is chosen. We identify a triple-win situation in which the MNF’s local sourcing can harmonize the MNF’s profit-maximization goal, the local government’s environment protection goal, and the social welfare maximization goal. This paper sheds light on the value of MNFs’ sustainability requirements and local sourcing strategy to abate emissions and address the carbon lock-in problem worried by many developing countries