Decarbonizing innovation investment strategy in competing supply chains considering technology spillovers and environmental regulation

Abstract

Decarbonizing innovation plays a significant role in curbing carbon emissions, allowing a firm to meet governmental environmental regulations and gain a competitive edge. However, innovation uncertainty and technology spillovers deter a firm from doing so. This paper studies the issue of firms’ decarbonizing innovation investment in a competing market under carbon emission regulation. We construct game-theoretic models of two competing supply chains, each consisting of a manufacturer and a retailer. Either manufacturer has the opportunity to invest in decarbonizing innovation, but she may fail in the end. According to the manufacturers’ innovation investment decisions, several subcases with no investment, unilateral decarbonizing investment, and bilateral decarbonizing investment are explored. The results show that when both manufacturers have a strong absorbing capacity, neither invests in decarbonizing innovation; when they are weak in absorbing external technology, bilateral decarbonizing investment exists. The findings also reveal that unilateral decarboning investment dominates when the probability of innovation success is moderate. There is a case in which both manufacturers do not conduct decarbonizing investment, although the probability of innovation success is high. In addition, we also find that a retailer can make more profit if his upstream manufacturer invests in decarbonizing innovation than in the no-investment scenario. However, he is harmed by bilateral decarbonizing investment if his upstream manufacturer is weak in absorbing external knowledge relative to the case of unilateral decarbonizing investment. Our results elucidated how technology spillovers and the stochastic nature of innovation affect a manufacturer’s decarbonizing innovation investment strategy in a competitive environment.