Legitimacy under pressure: Energy firms’ expansion in countries with weak environmental performance

Abstract

Environmental pollution and climate change have become alarming global issues in the process of rapid economic growth and accelerated internationalization. Due to the environmentally sensitive nature of energy firms, maintaining their legitimacy in the international expansion process, especially in countries with weak environmental performance, is a largely underexplored area in the existing literature. Building on legitimacy as a theoretical perspective, this study examines energy firms’ international expansion patterns when facing environmental pressure. We analyze a dataset of 2134 cross-border mergers and acquisitions conducted by energy firms between 1992 and 2019 to examine the impact of host-country environmental performance, encompassing environmental health (i.e., environmental conditions that affect human well-being) and climate change (i.e., variations in weather patterns), on their expansion. We also investigate the boundary conditions underpinning this relationship. We find that firm-level internalization capability and country-level diplomatic relations make energy firms appear legitimate to their internal and external audiences, respectively. The findings bring fresh insights to the literature on international expansion under environmental threats, enrich the legitimacy perspective, and outline practical implications for firms to preserve and enhance legitimacy for international growth. Additionally, we discuss important policy implications for governments to strengthen regulatory standards on environmental issues in support of sustainable world development.