Local Demand-Pull Policy and Energy Innovation: Evidence from the Solar Photovoltaic Market in China

Abstract

Market demand is an important driver for inducing innovation, with many empirical studies supporting the demand-induced innovation hypothesis. Critiques of such studies, however, emphasize that new empirical evidence under clear policy context is needed. Furthermore, existing literature disagrees about whether the locus of demand-pull policy matters. In this paper, we use empirical evidence from the distributed solar photovoltaic (PV) market in China to address the following questions: (1) Is there evidence of demand-induced innovation? (2) Does the effect of local demand-pull policy differ from the effect of non-local demand-pull policy on demand-induced innovation? To address these questions, we develop and analyze a new database of PV balance-of-system (BOS) patents in the distributed PV market filed between 2005 and 2014 in China. We build regression models to test for evidence of demand-induced innovation as well as for the impact of local vs. non-local demand on innovative activity. Our results support the demand-induced innovation hypothesis and suggest that only local demand significantly induces PV balance-of-system innovations in the distributed PV market in China. The different effects of local demand and non-local demand emphasize the importance of local markets and local policies.