Interactions Between Manufacturers’ R&D Investment and Government Regulations: The Case of Transition to Alternative Fuel Vehicles

Abstract

Within the context of the transition from internal combustion engine vehicles to alternative fuel vehicles (AFVs), this article investigates the interactions between government regulations and the research and development (R&D) investment of car manufacturers in a green-sensitive and heterogeneous market. Given that an unjust transition is not sustainable, the triple bottom line of the said regulations and manufacturers’ policies is analyzed via a system dynamics simulation model with government data, thus acknowledging the trade-offs inherent in such a context. Policy makers should use regulatory instruments cautiously, depending on the pursued objective. Moderate levels of government intervention and manufacturers’ investment worked best, with both mild and aggressive policies compromising the sustainability of the transition. Furthermore, manufacturers’ profits were not adversely affected by cannibalization in the long term, mainly due to an increase in consumer environmental awareness and the enforcement of government standards. Moreover, maximizing profits and/or minimizing emissions resulted in lower quality and higher prices than when social factors were considered simultaneously with them via the developed sustainable transition indicator. This article offers indicators and insights to help manufacturers improve their strategic R&D decisions in line with regulatory frameworks, while ensuring just and sustainable transitions to AFVs.