Lead Markets of Environmental Innovations: A Framework for Innovation and Environmental Economics

Abstract

Environmental regulations often want to stimulate the generation and adoption of ecoefficient innovations. An important argument in the public debate is also the creation of new markets for environmentally benign products, processes and services that other countries adopt and therefore generate export opportunities for the pioneering country. The research so far concentrated on the question on how national environmental regulation can induce innovations. The question addressed in this paper is whether environmental regulations can create lead markets, enabling local firms to export innovations that are induced by local market conditions and national regulations. We identify relevant factors for lead markets of environmental innovations. So far, the lead market concept in innovation economics has only been applied to innovations in general. We extend the lead market model to environmentally friendly innovations, considering their peculiarities, in particular the public good character of environmental benefits and the role of regulations. The approach is applied to two case studies: fuel-efficient passenger cars and wind energy. In both cases, one country adopted the innovation first. Later, other countries followed the same innovation design favoured by the lead market. The lead market became a large exporter in the wind generation and car industry respectively. We discuss the regulations employed and the reasons for the international success of the innovations induced by them. We find that strict regulation has created lead markets when it was supported by a global demand or regulatory trend.

Keywords: Lead markets, technological progress, environmental innovation, wind energy, fuel-efficiency