Lead markets and regulation: a framework for analyzing the international diffusion of environmental innovations

Abstract

Environmental regulations are often intended to stimulate the generation and adoption of eco-efficient innovations. An important argument in the public debate is also the creation of new markets for environmentally benign products, processes and services in other countries and the generation, as a result, of export opportunities for the pioneering country (lead markets). Research on lead markets has not, however, focused on environmental innovations to date. We therefore extend the lead market model to environmental innovations and take particular account of the peculiarities of such innovations, in particular, the public good character of environmental benefits and the role of regulations. This approach is applied to two case studies: wind energy and fuel-efficient passenger cars. In both cases, the innovation was initially adopted in one country. Other countries subsequently adopted the same innovation design favored by the lead market which, in turn, developed into a large exporter in the wind generation and car industries, respectively. We discuss the regulations employed and the reasons for the international success of the innovations induced by them. Our findings demonstrate that when supported by global demand or regulatory trends, strict regulation results in the creation of lead markets. Finally, we provide recommendations on how our model could be used for further research and in the development of a coordinated environmental and innovation policy.