Maria Carvalho, PhD candidate at the LSE Grantham Research Institute on Climate Change and the Environment, argues that policy-makers striving to encourage green growth should consider which tactics are best suited for their nation’s economy to compete in global markets. Innovation-intensive economies are well-placed to invent new green technologies whilst building markets for domestic green tech consumption, rather than attempt to compete with industrialising nations for the manufacturing market.
Green growth: Silver bullets and technological races
I have spent the past three years pondering the concept of ‘green growth’. This isn’t a coincidence, as it is the central concept of my PhD research. Since the start of the 2008 economic crisis, terms such as ‘green stimulus packages’ and ‘green growth’ have dominated public policy. The term ‘green’ has become synonymous with any technological, organisational or behavioural intervention that would reduce environmental impacts. This includes innovating green technologies to replace conventional ones that are more resource-intensive, or produce more pollution or waste. The economic crisis presented a green opportunity to invest a significant proportion of fiscal spending on green innovation, technologies, markets, and jobs. The aspiration was to kick start a green industrial revolution that would generate long-waves of economic growth. Policies for green growth were thus seen as the silver bullet to solving both the economic and climate change crises.
However another interesting development happened in 2009. The Chinese supply of green technologies – such as solar photovoltaic (PV) technologies – flooded the global market. Global prices for these technologies plummeted. Leading solar PV suppliers in the USA and Europe suddenly found it increasingly difficult to compete. This prompted solar PV manufacturing firms in these economies to create coalitions to lobby their governments to impose import tariffs against Chinese solar PV products. The justification is that the Chinese solar PV industry has been over-subsidised. The Chinese government threatened to retaliate by imposing similar tariffs against the same economies.
The trade disputes of the solar PV industry highlight green growth’s nationalistic rhetoric, which is caused by policy-makers becoming increasingly aware of the globally competitive nature of green technologies. The best quote that captures the urgency to be globally competitive comes from President Barack Obama during his State of the Union address in 2010:
“Meanwhile China’s not waiting to revamp its economy. Germany’s not waiting. India’s not waiting. These nations are not standing still. These nations are not playing for second place. They’re putting more emphasis on math and science. They’re rebuilding their infrastructure. They are making serious investments in clean energy because they want those jobs. Well I do not accept second place for the United States of America.”
The increasingly nationalistic rhetoric surrounding green growth policies harks back to the days of other technological races, such as the space race. The globally competitive nature of technological races is to ensure that domestic technological industries can withstand global competition.
Policies involved with creating competitive technologies and industries frequently advocate early R&D efforts in order to win the technological race. This creates first-mover advantage for leading firms who can then go on to dominate global markets. However the sudden dominance of Chinese solar PV firms in undermining their American and European competitors has raised questions surrounding traditional green growth policy approaches:
Is it worth investing early in green R&D if it is so easy to transfer successful technologies to emerging economies with lower production costs? Have emerging economies become successful in green innovation to become technological leaders?
Ultimately does latecomer advantage prevail over first-mover advantage?
Should creating a green manufacturing base be the litmus test for green growth?
Over the past three years, the globally competitive dynamics of the solar PV industry have played themselves out. In trying to understand these questions, I have noticed there is some confusion in concepts. Whenever commentators discuss creating ‘competitive economies’, they actually tend to be alluding to creating competitive firms. Green growth policy focuses on spurring green innovation and developing domestic green markets. However the judgement of whether ‘green growth’ is a success is if innovation efforts and the creation of markets also translates into building domestic factories that create manufacturing jobs for local labour. Given the public outcry of the financial troubles over many solar PV firms that manufacture technologies, there seems to be much focus on linking the success of green growth with the success of a green manufacturing base.
I suppose that concepts such as ‘economy’, ‘innovation’, and ‘markets’ are much more abstract than ‘firm’, ‘factories’, and ‘manufacturing jobs’. The latter concepts are more concrete and easier to visualise and refer to. Whenever the American media refer to the failure of green stimulus packages, they immediately point to how US government bailout money could not prevent the bankruptcy of Solyndra, a US solar panel manufacturer that went bankrupt 2011. The high-profile bankruptcy of Chinese firm Suntech, formerly the largest solar PV firm in the world, also sent shockwaves in the Chinese media. However these firms are a few of the glaring examples. The electric vehicle (EV) company Tesla also received US federal loans in 2009, and is starting to make headway in the EV market.
However it is misleading to measure the success of green growth in terms of the competitiveness of firms, and the existence of factories and manufacturing jobs. Economic growth refers to economic value that is captured by the local economy that is above the costs of investment. It goes beyond just building factories but also into successfully innovating and building markets. In the long run, there is more value-added to the economy from innovation and market creation than there is in manufacturing. A good example is when looking at the global value chain of iPods. Though iPods are largely manufactured in China, the actual economic profits are captured in the US due to design and retail marketing rights.
Studying the global value chains of companies is thus important in seeing which economies capture the most value within the same global value chain. It is interesting to observe how many multinational corporations (MNCs) ensure that they control R&D, design and marketing rights. They are willing to offshore manufacturing to firms in economies with low costs. These MNCs retain innovation, design and marketing because they recognise these activities yield the highest economic value. Manufacturing, on the other hand, eventually has diminishing returns to investment. This is because once many firms and economies begin to manufacture the same technologies, competition intensifies, which decreases profits.
Moving away from macho manufacturing to brainy innovation and green markets
By taking these lessons, we can start to see how in any industrial policy – including green growth policy – placing undue emphasis on manufacturing activities is risky. In an open, globally competitive economy, it is more likely that manufacturing will eventually shift to countries with lower production costs. Innovative technologies do eventually mature, and the knowledge that underlies these technologies will be transferred to economies that can create the economies-of-scale to bring technology costs down.
This is not necessarily a bad thing. Cheaper technologies mean that more consumers can buy these green technologies – thus building green markets. Lower prices are especially important for green technologies that are trying to compete against conventional technologies. The decreased costs of Chinese solar PV technologies have now made residential solar PV affordable in economies that have high electricity prices. Thus economies such as Germany, Spain, Denmark, and Italy do not even need to subsidise residential solar PV markets anymore because of high electricity prices.
The increased consumption of green technologies builds out markets – thus creating market-related jobs. Markets as a whole create jobs in installation, operation, investment, consultant, marketing, financing jobs. The sum of these ‘market-related’ jobs outnumbers those purely in manufacturing. For example, the global automobile industry employs about 8 million people in manufacturing, but around 20 million in the sale and servicing of vehicles. Another important advantage of market-related jobs is that labour largely has to be sourced from the local economy. Manufacturing jobs, on the other hand, are vulnerable to global competition.
Innovation-intensive economies also stand to benefit from innovating early and then continuously innovating. However, many industrialising economies struggle to compete in terms of innovation, as the fast pace of the development of new generations of technology makes it challenging to create innovation hubs that can keep up with the competition. Instead, it is comparatively easier for industrialising economies to catch up technologically with innovation-intensive economies by learning from knowledge that already exists
Few places are successful at pushing knowledge and technological barriers. Though many places continue to try, no one has managed to recreate Silicon Valley. The magic of Silicon Valley is not that it has become dominant in one industry, or that it is a manufacturing hub. The resilience and beauty of Silicon Valley’s economy is that it continuously re-invents itself – launching new technologies, businesses and industries.
This lesson is especially important for knowledge-intensive economies. Stop trying to compete on manufacturing technologies that can be produced in low cost regions. Start playing to your strengths to use your knowledge and resources to innovate.
Thus to encourage green growth, policy-makers need to consider how well its domestic economy is placed in order to participate in the development of a new green technology. If certain green technologies show technological promise, it may be beneficial to learn to innovate early. Though there is a risk that these green technologies can fail, the lessons learnt are invaluable to spawning other green technologies.
However if green technologies have already become globally competitive, it may be better to take advantage of these existing cheap technologies to build out domestic markets. For economies that have the comparative advantage in manufacturing, highly sophisticated technologies are well positioned to manufacture more mature technologies.
In the end, every economy in the world can potentially benefit from green growth. Policy-makers just have to understand the global dynamics of specific green technologies, and where the local economy is placed in capturing green growth.