Does Economic Growth Matter? Technology-Push, Demand-Pull and Endogenous Drivers of Innovation in the Renewable Energy Industry

Abstract

This paper aims to contribute to the longstanding technology-push vs. demand-pull debate and to the literature on renewable energy policy assessment. We argue that in addition to the traditional push-pull dichotomy, the drivers of technological change must be differentiated by whether they are exogenous or endogenous to the economic system and must be assessed with respect to their contribution to both the creation and the diffusion of innovation. We apply this perspective to study innovation in the renewable energy (RE) industry in 15 European Union countries from 1990 to 2012. Using different panel data estimators, we find that public R&D investments, policies supporting RE and per capita income all have a positive effect on either innovation creation or diffusion, whereas the variability of policy support has a negative impact on diffusion. However, impacts are heterogeneous and differ depending on the innovation dimension considered. Most importantly, we find that economic growth is a stronger driver of RE diffusion than technology-push or exogenous demand-pull mechanisms, whereas it is relatively ineffective at stimulating innovation creation. The effect of economic growth on RE diffusion exhibits a nonlinear, U-shaped pattern that resonates with the Environmental Kuznets Curve hypothesis. RE penetration remains negligible at low levels of growth whereas it increases sharply only after income per capita has reached a given threshold. This effect has both a direct cause (with increased affluence demand for environmental quality rises) and an indirect cause (with increased affluence expensive RE policies become more affordable and get implemented more extensively). Our findings have implications for policy making. They suggest that for RE diffusion to increase, innovation policies should be carefully balanced. Government action should be directed not only at shielding renewables from competition with fossil fuel technologies, but also at stimulating aggregated demand and economic growth.

Factors That Influence Renewable Energy Technological Innovation in China: A Dynamic Panel Approach

“…Technology-push policies advocates increasing the incentives to supply new knowledge. This dichotomy has gained support from literature in recent decades [29,30].…”

“…They argue that this investment helps to realize a virtuous cycle between technological innovation, price reduction, market growth, and supplementary industry R&D spending [36]. If R&D investment is regarded as an exogenous technology-push mechanism, it was tested to exert a driving effect on renewable energy diffusion together with renewable energy support policies (an exogenous demand-pull measures) and per capita income (an endogenous demand-pull measure), whereas economic growth is a stronger driver since it is endogenous element [30]. According to the interaction effect with other policy instruments in different country and region, Klaassen et al (2005) [37] examined the effect of public R&D investment on cost reduction innovation for wind turbine farms in Denmark, Germany and the United Kingdom(UK) and concluded that R&D support policy, in conjunction with investment subsidies, were most successful in Denmark in driving innovation, and capacity promoting subsidies were most effective in motivating innovation in Denmark and Germany.…”

What Is the Relationship between Technological Innovation and Energy Consumption? Empirical Analysis Based on Provincial Panel Data from China

“…Compared with the direct combustion of fossil fuels, electricity use is able to support environmental improvement as renewable energy is more environmentally friendly. Irandoust [17] suggested that technological innovation Granger-causes renewable energy, and Aflaki et al [18] argued that technological innovation positively affects renewable energy diffusion.…”

“…Some scholars [17][18][19][20][21]23] have argued that foreign direct investment (FDI), which accumulates human capital, plays a vital role in a country's level of technological innovation.…”

Time series properties of the renewable energy diffusion process: Implications for energy policy design and assessment

“…Third, and more fundamentally, the production of RE is increasing over time as a result of income growth, population growth and urbanization. In a companion paper (Aflaki et al, 2014), we show empirically that economic growth as a major catalyst of innovation and diffusion in the RE industry. This is to be expected since sustained income growth, for example, induces the population to demand environmental quality as a luxury good due to its effect on quality of life and wellbeing.…”