Multinational firms, green innovation and environmental policy, Joëlle Noailly

Multinational firms, green innovation and environmental policy

Joëlle Noailly

CIES

Graduate Institute, Geneva

Our Common Future Conference

Paris

July 9, 2015

dateTitle presentationAuthor

• Today, CO2 emissions produced by emerging and developing countries exceed emissions from the developed world

• The development and the diffusion of green technologies is critical to address this challenge

• Yet, green technologies are still owned by firms in the developed world

Motivation

Source: Dechezlepretre et al 2011

Multinational firms

• Key role of multinational corporations

(MNCs) for the diffusion of green

technologies

• Why?

› Key actors in R&D

› Important transfers of technologies to developing countries

• At the same time, critics of MNCs have often

accused them of exploiting pollution havens

› Transfer of polluting activities from home

to host countries with weak environmental

regulations

Research focus and outline

We investigate MNCs decisions to conduct green R&D abroad

1. Measurement of ‘green R&D offshoring’- Why is it important for technology transfers?

- What’s the empirical evidence?

2. Factors affecting MNCs decisions- What makes a host country attractive for MNCs?

- What are the policy implications?

3. MNCs innovation and pollution havens- How do pollution haven tendencies affect MNCs innovations decisions?

- What is the role of local environmental regulations?

1. MEASUREMENT OF GREEN R&D OFFSHORING

Why is it important for technology transfers?

What is the empirical evidence?

Green R&D offshoring

• The example of General Motors

› In November 2012, GM opened a new

R&D lab in Shanghai as part of its global

R&D network

› 300 scientists focus solely on electric

light-weight cars

› green innovation targeted to Chinese

market but not only

• MNCs are increasingly offshoring R&D

› Firms have R&D labs (inventors) in multiple countries

› In 2003, 44% of European MNCs R&D budget was spent outside Europe

› MNCs are increasingly opening R&D labs in emerging countries (UNCTAD, 2005)

MNCs R&D offshoring and technology transfers

• Host countries can highly benefit from green R&D investmentsfrom MNCs

• By opening an R&D lab in a host country, some of the MNCsknowledge will pass on to local firms

› Spillovers from R&D are largely local

› Geographic proximity and face-to-face interactions between scientists are essential for transfer of tacit knowledge

› Mobility of scientists

Empirical evidence

• Unique dataset on MNCs’ worldwide geographic distribution of green patenting activities

› Source: Orbis/Zephyr dataset linked to PATSTAT (2004-2009)

› 1,200 MNCs owning patents in 25 green technologies

› Extract inventor’s address to identify in which country the patent was invented

› Count of number of MNCs green patents invented outside the home country

Empirical evidence

• On average 17% of MNCs green patents portfolios have been invented abroad

• China, the US, and Germany are the top-destination countries

• China ranks first in Lights and Solar technologies. India is in top-10 in Wind technologies

2. FACTORS AFFECTING MNCs DECISIONS

- What makes a host country attractive for green R&D investments from

MNCs?

- What are the implications for designing policies to attract MNCs?

What are the motives of MNCs for offshoring R&D?

• General Motors - Why China?

K. Wale, CEO GM China

› Car market is booming

› Environmental concerns are rising

› China ranks 1st in number of PhD graduates

› Close to Asian firms working on battery research in Japan and Korea

• Literature (International Business and Management)

› Adaptive R&D: need for MNCs to adapt their products to specific local markets

› Technology-sourcing: to source local knowledge which is not available at home.

› Other factors: e.g. lower wages for scientists and engineers

Results

• Econometric estimation of the factors affecting the number of green patents invented by a foreign MNC in host country

Factors Data Estimated impact

Market size GDP (World Bank) +

Environmentalpolicy

Environmental Policy index (WEF) +

R&D intensity GERD (OECD)% Pop with tertiary education (OECD)Domestic stock of green patents

+++

Labour costs S&E wages differentials (UBS prices and earnings)

+

IPR IPR index (Ginarte and Park) +

Geography Distance (CEPII database)Common language

-+

conditional logit estimation

Policy implications

Attracting MNCs green patenting activities

• Need to create enabling local host country environment

• Host countries can design long-term policies aiming to enhance

› the market demand for green technologies (environmental regulations)

› the standing of the local scientific and educational base

› the context provided by the country's system of innovation for green technologies

3. MNCs INNOVATION AND POLLUTION HAVENS - How do pollution haven tendencies affect MNCs innovations decisions?

- What is the role of host countries’ local environmental regulations?

Pollution havens

• MNCs often accused of exploiting pollution havens

› Relocation of dirty industries to countries

with laxer environmental regulations

› What does it imply for MNCs’ innovation

activities?

• Recent economic literature emphasizes that pollution haven tendencies can lead to a self-reinforcing lock-in of innovation in dirty sectors (Hemous, 2012)

› developing countries with weak environmental regulations have a comparative advantage in dirty industries

› innovative activity concentrates in the exporting sector (dirty)

› this further reinforces the comparative advantage in dirty sectors

Empirical analysis

• Same dataset now disaggregated at sector level

› Pollution-intensity of various sectors (Levinson, 2008)

› Green patents per sector of use (Lybbert and Zolas, 2014)

› Relative comparative advantage per sector (Balassa index)

1. Pollution haven results.

- Less developed countries have a comparative advantage in dirty sectors and thereby lower levels of green innovation on average

- Stringent environmental regulations → reduce a country’s

comparative advantage in dirty sectors (shift to clean sectors)

2. Innovation results. Impact of stringent environmental

regulations on MNCs’ innovation per sector:

› Direct impact [80%] → stimulates green R&D by MNCs

› Indirect impact [20%] → induces a shift to clean sectors → more innovation into clean technologies [composition effect]

Conclusions

• MNCs are increasingly conducting green R&D abroad –also in emerging economies

› Host countries can benefit from MNCs R&D since R&D spilloversare largely local

› Yet, MNCs are most likely to conduct green innovation in host countries with:

◦ Good R&D infrastructure (supply of S&E)

◦ Rising market for environmental goods

• Stringent local environmental regulations play a pivotalrole:

› direct impact on MNCs level of green R&D

› induce a shift to cleaner sectors → avoid potential lock-in into

dirty innovation due to pollution haven effects

Thank you !

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