provide an overview of strategic CSR and the potential role of information in an international framework. Section 2 outlines the theoretic set up. Subsections (2.1.) and (2.2.) will elaborate the sub game perfect equilibrium of the basic CSR game with imperfect information, then (2.3.-2.6.) will derive the main proposition regarding the interaction between international firm location and regulation as well as analyze and discuss welfare and policy implications. Section 3 concludes.

# _1. A Quick Look at "Trade versus Environment"_

Recent decades have been characterized by unprecedented transnational economic integration and trade liberalization, inducing both firms and the public goods and externalities they produce to expand geographically. Constant technological and political advances such as the internet or the end of the East West Divide in 1990 led to significant reductions in transport and communication costs, a fact that required competitive firms to increasingly decide about international location, outsourcing or relevant markets. According to the United Nations, the number of transnational corporations increased from 37,000 in 1990 to over 60,000 in 2001, with foreign affiliates growing from 170,000 to over 800,000, while OECD data on Foreign Direct Investment (FDI) suggest significant growth in international corporate (investment) activity with worldwide FDI outflows increasing from 241,824 to 1,249,275 million US$ and worldwide FDI outward stocks growing from 1,797,630 to 11,891,825 million US$ between 1990 and 2009<sup>4</sup> . Naturally, the globalization of economic activity opened up the opportunity for firms to stretch supply chains across countries and, in theory, international competition should have acted as a major pull factor for locations endowed with cheap production factors and low regulatory costs. This idea is formalized within the literature on the Pollution Haven Hypothesis (PHH) and Environmental Dumping (ED). In a nutshell, the PHH states that a country's comparative advantage in hosting pollution intensive industries is decreasing in stringency of its respective regulatory framework. Assuming that an increase in environmental regulation makes a state's pollution intensive production more expensive, imports of such "dirty" goods will increase while their home production will decrease. Then, the lower are trade barriers between states, the more clean and dirty industries will sort across different (stringent=developed country and lax=developing country) regulatory environments (see Copeland and Taylor (1994) and Taylor (2004) for a detailed discussion). Such a pure effect of environmental regulation (stringency) may trade off with a Heckscher-Ohlin factor endowment effect<sup>5</sup> that assumes a positive correlation between a sector's capital and pollution intensity. Then, trade liberalization would induce specialization of capital abundant, developed countries into pollution intensive production. Furthermore, if the regulatory effect was true and states started to interact strategically by competing for production, international capital and/or firm location, equilibrium levels of environmental (or social) regulation could end up well below optimal levels and give rise to ED or, in the extreme case, lead to a "race to the

> 4 Source: OECD FDI Statistics (Directorate for Financial and Enterprise Affairs, www.oecd.org/investment/statistics)

> 5 also referred to as the capital labor effect by Cole and Elliott (2003)

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