With economic globalization, Third World enterprises are increasingly collaborating with foreign firms through trade, subcontracting and equity linkages. The paper examines under which conditions linkages to foreign firms lead to environmental upgrading of Third World enterprises. Derived from the authors' research in a number of developing countries, the paper presents preliminary evidence of such upgrading. As the existing literature on environmental upgrading has a normative bias and tends to ignore economic mandates and constraints, the remaining part of the paper presents four theoretical frameworks based on standard business economics that may explain under which conditions linkages between Third World enterprises and foreign firms may be accompanied by environmental upgrading. It is argued that environmental upgrading in the value chain must be understood partly as a result of external industry and market forces, and partly as a result of the internal resources and competitive strategies of the companies involved. Copyright © 2004 John Wiley & Sons, Ltd and ERP Environment.