Regulatory integration and transregional corporations’ new investments under ex-ante regulation and ex-post liability: A real option perspective

Corporations operating across diverse regions face complex rules and regulations that impact corporate investment behavior. To evaluate the economic implications of regulatory heterogeneity, in this paper, we analyze optional harmonized regulation by comparing two regulatory regimes at the multi-regional (national) level: harmonized regulation (HR) and individual regulation (IR). Utilizing a real option model incorporating ex-ante regulation and ex-post liability, we find that, under optional harmonized regulation, there is a noticeable threshold, the number of regions, where bigger firms (above the threshold) would follow HR, and smaller firms (below the threshold) benefit more from adhering to IR. More importantly, our study finds that differential economic impacts of changes in regulatory integration for firms of varying sizes. Bigger firms could benefit from increased regulatory integration, while smaller firms may be adversely affected. Conversely, decreased regulatory integration would have the opposite effect. Moreover, the identified threshold decreases when considering the options to expand to additional regions. Finally, we conduct a Monte Carlo simulation using the EU fertilizer regulation as a case study and the policy implications that follow.