Innovate or Acquire? An Empirical Analysis of Global Firms' Strategies to Mitigate Carbon Risk

ABSTRACT Porter's hypothesis suggests that environmental regulations motivate firms to innovate by investing in research and development (R&D). However, is R&D the sole strategy open to global firms seeking to mitigate their exposure to carbon risk? The study addresses this question by exploring two corporate strategies—innovating strategy via R&D and acquiring strategy via mergers and acquisitions (M&As). Our dataset comprises 7903 global firms that pursued either R&D or M&A strategies between 2000 and 2020, examining the impact of emissions on global firms' R&D and M&A decisions and their preferences for the two options. We find that elevated pressures on carbon emissions prompt firms to pursue both R&D and M&A. Firms tend to adopt R&D strategies under stringent regulations, while they opt for M&A strategies amidst financial constraints. Our findings not only clarify the strategic trade‐offs between innovation and acquisition but also validate the complementary roles of institutional and stakeholder theories in shaping proactive carbon management.