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The role of multinational firms in the diffusion of green technologies to developing countries

Final Report Summary - GREENSPILL (The role of multinational firms in the diffusion of green technologies to developing countries)

The GREENSPILL project focuses on the role of multinational firms in the diffusion of green technologies to developing countries. One of the main challenges of a future international climate change agreement under the United Nations Framework Convention on Climate Change will be to curb greenhouse gas emissions from developing countries. The development and diffusion of green technologies, such as renewable energy or pollution-control technologies, will be critical to address this new challenge, as these technologies will greatly help to reduce the carbon intensity of production processes in developing countries. Yet, most of the technical know-how on green technologies still resides in the hands of firms in the developed world. Hence, multinational corporations (MNCs) , i.e. firms that own and control production activities in multiple countries, play a key role in the transfer of green technologies to the developing world.

A major result of GREENSPILL is to provide novel empirical evidence on the ‘internationalization’ of green R&D. For a long time, the dominant view in economics was that multinationals keep their R&D and innovation close to home, as part of their headquarters operations. Over the last decades, however, MNCs have been increasingly opening R&D labs outside their home country, and recently also in emerging and developing economies. Building an extensive dataset linking patent data to MNC activities, the project focuses on a set of 1,200 MNCs conducting green innovation, and finds that 17% of the firms’ green patents portfolio has been developed by inventors located abroad. As shown in Figure 1 attached, China is one of the major destination countries of MNC green R&D activities, in particular in the field of energy-efficient lightings, solar and wind technologies. For the rest, most of the top-20 destinations of foreign green R&D activities by MNCs are composed of OECD countries, with India and Taiwan entering in the last positions.

So, why do MNCs conduct green R&D activities overseas? And if attracting MNCs green R&D is important for technology transfers and green growth, what can policymakers do about it? The GREENSPILL project finds that two main motives are important: technology-sourcing (to source local knowledge which is not available at home) and 2) adaptive R&D (i.e. the need to adapt products to specific markets to support local sales). The empirical analysis finds that MNCs are attracted by a good supply of scientists and engineers, stringent IPRs and strong technological capabilities in the host country, implying an important role for technology policy in enhancing the local R&D infrastructure. In addition, the project also emphasizes the importance of access to new markets. MNCs tend to conduct green patenting activities in countries where they can expect higher sales - due in particular to a larger market size or a higher cultural or geographic proximity. Costs of R&D also matters as MNCs R&D investments are also attracted by lower wages for R&D workers. Most importantly, the results show the pivotal role of stringent local environmental policy in attracting foreign green R&D investments - both to develop specific local technological capacities and to create a market for green products.

A second set of results of GREENSPILL looks at the trade-off between green innovation and pollution haven effects in the developing world. Indeed, an additional obstacle to green transfers is the fact that due to their weak environmental regulations developing countries have developed a comparative advantage in polluting industries. Empirical evidence from GREENSPILL shows that MNCs firms tend to concentrate their most dirty activities in developing countries. Yet, the analysis finds that by setting stringent environmental regulations, developing countries can both increase the level of green innovation and thereby clean up the production processes of the dirtiest sectors and at the same time shift their production structure towards cleaner sectors (a ‘composition’ effect). In the debate about how to address global emissions reductions, results from GREENSPILL give thus ground to the ‘technology optimists’ - who argue that the international diffusion of green technologies can act as a counterweight to the pollution haven tendencies thanks to technology transfers by MNC firms. This provides useful input for discussion in the next round of climate change negotiations.

GREENSPILL also provides additional results that help to better understand the potential impact of MNCs and that are relevant to design climate change policies.

*An additional set of results looks at the impact of green technologies on the energy intensity of production processes. This is important to estimate whether MNCs green innovation would actually have an impact on cleaning up the local countries’ production processes. Due to data availability, this analysis was conducted for a set of 17 OECD countries in 14 industrial sectors. The project finds that green technologies contributed to improve the average energy intensity of most industrial sectors over the 1970-2010 period. A 1% increase in the stock of green patents leads to a decrease of 0.06% in energy intensity on average across all sectors. Foreign technology has a greater impact, probably because it is of higher quality than domestic patents only.

*Finally, the GREENSPILL dataset developed during the project also made it possible to investigate the central differences between small and large innovating firms in driving technological transitions. This subproject investigated the specific case of the electricity generating sector and finds that an energy transition away from fossil-fuels towards renewable energy mainly occurs via the entry of small innovating firms, which are more responsive to price and market factors. Large firms, instead, seem to be hindered by path-dependency in innovation. Due to their long history of innovation in fossil-fuel technologies, they find it less profitable to switch to clean technologies. Hence, the project highlights the key role of small ‘cleantech’ firms to move away from the current technological lock-in into fossil-fuel energy innovations.

Contact details:
Dr. Joelle Noailly