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As countries pursue environmental protection at differing speeds, there is significant variation in energy prices across the world. This paper investigates whether the basic logic of comparative advantage can explain the patterns of industrial firms' investment location decisions, particularly focusing on the role of heterogeneous energy prices. To overcome the lack of global, disaggregated sector-level bilateral FDI data, we use an exhaustive Thomson-Reuters dataset of all cross-border M&A deals in the manufacturing sector across 41 countries, both OECD and non-OECD. Our final dataset includes close to 70,000 deals -- of which 22,000 are cross-border -- between 1995 and 2014 and covers 23 manufacturing subsectors. We specify a conditional logit model linking M&A activity to relative bilateral energy prices. To control for the large number of potential confounding factors, our identification strategy rests on within-country cross-sectoral energy price differentials. We then estimate our model using a custom PPML estimator, designed to accommodate our specific high-dimensional fixed effects structure. We find that industrial firms perform more cross-border investments when the differential between their domestic sectoral energy price and that of foreign countries increases. Specifically, we find that a 10% increase in the relative energy price differential between two countries is expected to increase by 2.5% the number of firms acquired in the lower energy price country by firms based in the more expensive country. This result has important implications for the adoption of environmental policies which affect energy prices. In particular, it suggests that uncompensated unilateral carbon taxation runs the risk of leading to offshoring and carbon leakage in industrial sectors.
