A dynamic perspective on environmental innovation and national competitiveness : an assessment of policy and empirical evidence from the solar energy sector

It is widely accepted that sustainable development is dependent on innovation in environmental technologies and their global diffusion. Simultaneously, innovation in environmental technologies is increasingly perceived as a pathway to sustaining national competitiveness and enabling future economic development. Correspondingly, global competition in the field of environmental technologies has increased markedly. Not only industrialized countries - the traditional leaders in this field - but China and other emerging economies are positioning themselves to capture leadership positions in the related industries (Gallagher 2014). Increased global competition is placing pressure on policy makers to help domestic firms compete in this growing sector of the economy. As pointed out in the European Commission’s 2020 growth strategy, Europe’s first mover advantages in the field of green solutions are being challenged by important competitors, most notably the US and China (European Commission 2010, p. 14). The questions that this raises are particularly controversial, as markets for environmental technologies are typically policy- driven. Market support policies play a crucial role in enabling the development and diffusion of these technologies (Jänicke & Lindemann 2010). In this context, market support for environmental technologies is increasingly viewed as a new generation of industrial policy. Rather than representing a mere subfield within the realm of environmental policy, it is considered a strategic investment in building a competitive advantage in an emerging industrial sector. At the same time, the growing role of emerging economies and the related competitive pressures are raising new questions regarding the effectiveness of such a green industrial policy approach. In the field of solar photovoltaics, for instance, critics have argued that German market support has mainly benefited suppliers abroad, most notably in China (EFI 2013; BMBF 2011). Against this background, this thesis seeks to answer the following inter-related questions: 1. How are developments in important emerging economies influencing the global dynamics of innovation and economic competition in policy-driven markets for environmental technologies? 2. What are the implications of these global dynamics for the design and assessment of policies aimed at promoting innovation in environmental technologies, while sustaining national competitiveness? The thesis consists of four papers, two of which aim to answer the first research question (Papers #1 and #2) and two of which focus on answering the second research question (Papers #3 and #4). Each pair of papers includes both a primarily conceptual (Papers #1 and #3) and a primarily empirical contribution (Papers #2 and#4). Both empirical papers draw on case studies of the solar energy sector, more specifically the field of solar photovoltaics (PV). As an archetypical example of a policy- driven market, the solar photovoltaics sector is a particularly suitable case for exploring the questions outlined above. Conceptually, all four papers build on evolutionary and system-based approaches to studying environmental innovation and technological change. In particular, they draw on literature in this field, which discusses the link between environmental innovation and national competitiveness and the role of policy in this context. The contribution of each paper is briefly outlined in the following: Paper #1: The concept of “lead markets” revisited: Contribution to environmental innovation theory Paper #1 focuses on the lead market concept and discusses its key contributions to the literature on environmental innovation and as well as policy debates on the relationship between environmental innovation and economic competitiveness. It finds that it offers a unique approach for capturing how the role of cross-country competitive dynamics influences the global diffusion of environmental innovations. Hence, the concept has also offered an important entry point for policy debates on the promotion of environmental innovation and national competitiveness. Moreover, the literature on lead markets has offered important empirical evidence of the global diffusion of policy-driven markets for environmental technologies. In doing so, it has provided an empirical basis for the claim that ambitious and well-designed environmental policies may provide early mover advantages for firms in countries that anticipate global regulatory trends. At the same time, the lead market concept suffers from a number of important weaknesses. Among a number of gaps that are identified, two are particularly salient for addressing the first of the two research questions formulated above. Firstly, the original lead market literature has focused exclusively on competition between OECD countries. It does not yet reflect the increasing role of emerging economies, in particular China, within the global economy in general and in the field of environmental technologies in particular. Secondly, the lead market concept builds on the strong assumption that the global diffusion of demand typically precedes the globalization of supply in emerging industries. The dynamics of supply-side competition during the process of lead market development are not considered. To close these important gaps in the literature, the paper outlines a number of questions for further research. Among other things, it calls for research on the dynamic interaction between lead and lag markets within a global system of innovation. It is this question that is taken up in the following paper (Paper #2). Paper #2: Dynamics of a Policy-Driven Market: The Co-evolution of Technological Innovation Systems for Solar Photovoltaics in Germany and China Based on the concept of technological innovation systems (TIS), paper #2 develops an analytical framework for analyzing the role of geographical differences and cross-country inter- dependencies in the dynamic development of emerging technology fields. The central pillar of this framework is the set of seven system functions developed by Hekkert et al. (2007) for the analysis of TIS functional dynamics. Adding to this, the paper proposes the concept of asymmetrical yet co-evolving country-level TIS. The concept of co-evolution is defined as a development process characterized by reciprocal influences between two or more sub-systems. These reciprocal influences in turn are enabled by what is referred to as direct transnational linkages as well as more indirect channels, which manifest themselves in the form of cross-country spillovers and feedbacks. This analytical framework is applied for the dynamic analysis of the co-evolutionary process of TIS development in the field of crystalline- based solar PV technologies, focusing on developments in Germany and China between 1999/2000 and 2010/2011. The central empirical finding of the paper is that developments in Germany and China were not only inter-dependent but also highly complementary in enabling the development of the sector. While developments in German were crucial drivers of the rapid expansion of demand, the Chinese system of innovation and production represented a key to global supply-side expansion and the resulting cost reductions. It was this combination of inter-related developments, which enabled the dynamic development of the sector during the time period under consideration. These empirical findings validate the proposed concept of co-evolving country-level TIS and provide the basis for revising the previous lead-lag market assumption. Although the chosen case study can only describe one alternative development pathway to the previous lead-lag market model, it offers a first entry-point for exploring different types of global development trajectories. Paper #3: Towards an integrated approach to promoting environmental innovation and national competitiveness Paper #3 explores the more focused question of how governments can promote environmental technologies while sustaining national competitiveness. The paper provides a review of the existing literature on innovation-oriented environmental policy, exploring neoclassical approaches and approaches rooted in evolutionary theories of economic development and technological change. These approaches are then contrasted with current debates in the literature on economic development and growth. Key finding of the paper is that recent advances in the latter literature are making its policy implications increasingly compatible with those from evolutionary approaches to innovation-oriented environmental policy. Both acknowledge that innovation and technological change are highly country- specific processes, which require adaptive policy mixes tailored to the particular innovation system. Moreover, designing and implementing such a policy mix – whether to promote economic competitiveness or more environmentally friendly technologies – requires the same basic set of governance mechanisms. These findings suggest increasing scope for integrating policies for the promotion of environmental innovation and economic competitiveness. To develop such an approach in practice requires an explicit consideration of the dynamics of international competition and technological change. Drawing on examples from the German wind and solar sectors, the paper argues that pioneering environmental policies do offer opportunities for building longer term competitive advantage. However, the particular outcome depends on additional factors, like the domestic endowment structure and the ability of domestic firms to compete in particular segments of the supply chain. An integrated approach to promoting environmental innovation and national competitiveness, the paper concludes, should combine policies to enable environmental innovation with targeted supply-side measures to support the most promising segments of the emerging supply chain. Finally, competition in markets for environmentally-friendly products and technologies is not only a matter of economic competition but depends also on the diffusion of the related standards and regulatory solutions. Hence, a further element of an integrated approach to environmental innovation and national competitiveness is captured in the concept of an “environmental foreign policy” (Jacob & Bär 2014). An active promotion of the transfer of domestic regulatory frameworks can serve as a vehicle for encouraging related technology exports. Paper #4: Assessing policy strategies for the promotion of environmental technologies: A review of India’s National Solar Mission Building on the perspective developed in paper #3, paper #4 then develops a framework for assessing policies for the promotion of environmental technologies. The paper begins with a critical review of the literature on policy mixes and related approaches for their assessment. It finds that the existing literature has defined a number of generic concepts for assessing the suitability of policy mixes, which are unrelated to any particular policy field. Rayner and Howlett (2009) state that so-called “optimal integrated policies” require a policy design “in which multiple policy goals can be coherently pursued at the same time, and second, policy instrument mixes are consistent in the sense of being mutually supportive in the pursuit of policy goals” (p.100). The paper challenges the concept of an optimal policy mix and its emphasis on coherence and consistency as central assessment criteria. Instead it highlights the normative dimension of policy making and the need to balance inherent policy trade-offs within a given policy mix. On this basis, the concept of a policy strategy is proposed as an alternative to the existing policy mix concept. Drawing on existing literature as well advisory work conducted for the German Ministry of the Environment by the Policy Assessment Group at the Environmental Policy Research Centre (Jacob et al. 2012), a policy strategy is defined as the combination of the following three elements: • Strategy content, composed of policy objectives and the measures designed to achieve them; • Strategy process, encompassing the process of policy development, implementation and adaptation; • Strategic capacity, including the capacities need for policy development, implementation and learning as well as the engagement of stakeholders. This generic strategy concept represents the basis for the subsequent development of a framework for the assessment of strategies for promoting environmental technologies. Building on a co-evolutionary perspective on environmental innovation and technological change, detailed assessment criteria for each of the elements are derived from the literature. Finally, the assessment framework is applied in an exemplary fashion to India’s Jawaharlal Nehru National Solar Mission (JNNSM). A key result of the assessment is that unresolved trade-offs between demand- and supply-side objectives are hampering implementation of the strategy. Furthermore, strong market support has come at the expense of measures to support other important system functions, such as the mobilization of resources and knowledge development and diffusion. To tackle both issues, the paper highlights the importance of process and capacity considerations. In particular, the paper identifies the need for a more active engagement of stakeholders in the policy process and the development of capacities for implementing effective supply- side measures. The paper concludes with a discussion of possible future applications as well as remaining weaknesses of the assessment framework. A key weakness of the framework - as well as the underlying literature - is the lack of more nuanced criteria for considering the political dimension of policy trade-offs. The development of criteria and analytical tools for incorporating political factors in policy strategies for promoting environmental technologies represents an important avenue for future research. One important step in this direction might be the systematic cross-country comparison of policy strategies and how these are embedded and shaped by country-specific governance mechanisms and political conditions. The proposed strategy concept offers an analytical framework for conducting such comparative analyses. In a further step, such an analysis might address the interplay between different country-level strategies, an issue of increasing importance within the context of emerging technology fields.