The Two Coases of Green Governance: Multinational Enterprises and the Internalization of Environmental Externalities Through Green Innovation

Green governance aims to resolve environmental externalities at minimum cost. By uniting Coase's two foundational theories (Economica 4: 386–405, 1937; J Law Econ 3: 1–44, 1960) we reframe MNEs not merely as profit-seeking entities but as transnational institutions capable of internalizing environmental externalities through green innovation across borders. We show how national environmental regulation spurs subsidiary-level green patenting with profit spillovers into third-country markets, thereby yielding environmental benefits. Using data on over 1.4 million MNE-owned green patents (including 10,444 patents from 103 foreign subsidiaries of 89 MNEs, 1998–2014), we examine how host-country environmental regulatory stringency shapes subsidiary innovation. We find that a higher national mix of market-based over non-market regulatory stringency significantly increases local subsidiaries’ green patenting, and that green patenting in one jurisdiction enhances parent MNEs’ net profits in third-country markets. These effects suggest MNEs can operate as low-cost institutional engines of the Green Agenda by diffusing green innovation, complementing fragmented international governance efforts. They also imply that large economies can exercise policy leadership by prioritizing market-based regulation design that induces green innovation with cross-border benefits. Our Coasean approach to global environmental governance highlights MNEs’ promise for addressing grand challenges, particularly in extending the reach of the Green Agenda and in realizing the Sustainable Development Goals.