Demand-side policy for emergence and diffusion of eco-innovation: The mediating role of production

Abstract

There might not be enough market demand to foster continuous technological development of eco-innovation in its initial stage due to its low-cost competitiveness. Therefore, demand induced by policy can play an important role for eco-innovation. Existing studies indicate that demand-side policy significantly impacts the development and diffusion of new technologies. However, the mechanism of how demand-side policy facilitates innovation is unclear. This study hypothesizes that policy-induced demand affects production activities, and verifies that these production activities promote innovative output. We analyze the solar photovoltaic sector of 14 major countries from 1999 to 2016. The estimations are conducted using panel fixed-effects regression and three-stage least squares (3SLS). The results confirm the mechanism by which policy-induced demand positively impacts production activities and the expansion of production contributes to innovation performance. This helps us to understand the importance of demand-side policy for eco-innovation. Furthermore, our study, by unpacking the mediating mechanisms of production that transmit the effects of demand-side policy, offers pragmatic reasons for the need for policy-makers pursuing eco-innovation to engage in encouraging production activity.