Channeled through trade: How foreign environmental regulations induce domestic renewable energy innovation

Abstract

Innovation and diffusion of renewable energy technologies is critical to meeting the demands of climate and environmental policies. An emerging body of literature shows that innovators respond to aggregate global demands for climate change mitigation technologies. Indeed, innovation and trade in renewable energy technologies has accelerated as countries throughout the globe have introduced more stringent environmental regulations to confront the climate crisis. Yet most of this research, while it does consider trade and competitiveness, fails to explicitly incorporate the foreign demand inducement effect—that is, foreign climate and environmental policies can induce innovation from innovators in other countries. In this study, we argue that trade acts as an important channel whereby foreign environmental regulatory stringency signals are conveyed to induce domestic renewable energy innovation. Based on a sample of 32 countries over 16 years, we find strong empirical evidence that foreign environmental regulations, weighted by bilateral trade, have significant innovation inducement effects across borders. Hence, our findings fill a critical gap in the literature by empirically exploring the interplay of green industrial policy, global political economy, trade, innovation, and development.