Developing Systems of
Environmental Innovation in
Emerging Economies
Challenging the Environmental Kuznets Curve
————————————————–
vorgelegt von Dipl.-Kfm. Jan Peuckert
aus Berlin
Von der Fakultät VII – Wirtschaft und Management der Technischen Universität Berlin
zur Erlangung des akademischen Grades Doktor der Wirtschaftswissenschaften
– Dr. rer. oec. – genehmigte Dissertation Promotionsausschuss:
Vorsitzender: J-Prof. Dr. iur. Stefan Müller, Technische Universität Berlin
Berichter: Prof. Dr. rer. pol. Knut Blind, Technische Universität Berlin
Berichter: Prof. Dr. Rainer Walz, Universität Karlsruhe
Tag der wissenschaftlichen Aussprache: 20. März 2013
Berlin 2013 D 83
Zusammenfassung
Angesichts wachsender Ansprüche und technologischer Möglichkeiten soge-nannter aufstrebender Schwellenländer, befasst sich die Arbeit mit der Frage, inwieweit sich ein fortgesetztes wirtschaftliches Wachstum mit dem Schutz globaler Allmendegüter vereinbaren lässt. Unter Anerkennung der Schlüssel-rolle von Innovationen werden mögliche entwicklungspolitische Maßnahmen zur Stärkung der für einen gerichteten technologischen Wandel notwendigen sozialen Fähigkeiten aufgezeigt.
Im ersten Teil wird das Potenzial einiger schnell wachsender Schwellenlän-der erhoben, Umweltinnovationen in ihren wirtschaftlichen Aufholprozess zu integrieren. Ein auf dem Konzept wesentlicher Systemfunktionen basierender methodologischer Rahmen wird entwickelt, der die Ermittlung von Stärken und Schwächen der Nationalen Innovationssysteme unabhängig von deren konkreter Organisationstruktur erlaubt.
Die Methodik wird auf die vergleichende Untersuchung unterschiedlich
definierter Innovationssysteme angewendet. Zunächst wird der urbane
Wassersektor in Brasilien, Indien, China und Südafrika betrachtet, bevor die Analyse auf den Vergleich von 16 verschiedenen Schwellenländern in Bezug auf ihre Innovationfähigkeiten und absorptiven Kapazitäten für
Nachhaltig-keitstechnologien im weitesten Sinne ausgedehnt wird. Daraus wird das
Konzept eines generischen Umweltinnovationssystems entworfen, das neben der Schaffung einer breiten Vielfalt technologischer Lösungen, die Notwendigkeit eines anspruchsvollen Selektionsumfelds betont.
Der zweite Teil der Arbeit untersucht die institutionellen Einflussfaktoren auf soziale Fähigkeiten für Umweltinnovationen. Inwieweit der Einfluss von Umweltregulierung auf die Wettbewerbsfähigkeit einer Nationalökonomie durch deren Ausgestaltung und durch nichtregulatorische
Rahmenbedingun-gen bestimmt wird, ist GeRahmenbedingun-genstand einer ökonometrischen Analyse. Der
Beitrag, den die Qualitätsinfrastruktur zur Erfüllung grundlegender Funktio-nen des Innovationssystems leistet, wird konzeptionell ausgearbeitet.
Aufgrund ihrer Wirkung auf Marktanreize und Regulierungsfähig-keiten bei gleichzeitiger Stärkung der Innovationsfähigkeit und eines anspruchsvollen Selektionsumfelds ist der Aufbau einer Umweltquali-tätsinfrastruktur eine vielversprechende Maßnahme zur Förderung eines wirtschaftlichen Wachstums durch gerichteten technologischen Wandel.
Summary
Against the background of growing aspirations and increasing technological capabilities in so-called emerging economies, this dissertation deals with the fea-sibility of combining economic development and environmental protection. Understanding innovation as the key to achieving sustainable growth, develop-ment policies that strengthen the necessary social capabilities for directed tech-nological change will be outlined.
In the first part, newly industrializing countries are assessed as to their po-tentials to integrate environmental innovation into their economic catching-up processes. Based on the concept of essential systemic functions, a methodologi-cal framework is developed which allows identifying the strengths and weak-nesses of national systems of environmental innovations independent of their organizational structure.
After applying it to the urban water and sanitation sectors of Brazil, India, China and South Africa we extent the analysis to evaluate 16 developing coun-tries as to their innovation capabilities and absorptive capacities for sustainable technologies in general. The resultant generic concept of systems of environmen-tal innovation stresses the importance of a sophisticated selection environment as fundamental requirement in addition to the general ability to create a broad variety of technological solutions.
The second part examines institutional factors that influence the social ca-pabilities for environmental innovation. We analyze econometrically how reg-ulatory design characteristics and non-regreg-ulatory framework conditions shape the effect of environmental regulation on competitiveness. The particular im-portance of a quality infrastructure for emerging innovation systems is concep-tualized with reference to the essential systemic functions.
Because of its effects on market incentives and regulatory capabilities by simultaneously strengthening both innovation capabilities and a sophisticated selection environment, the building-up of an environmental quality infrastructure appears as a promising policy instrument to foster economic growth through directed technological change.
Publication and Submission Record
This dissertation thesis joints five individual research papers that have been peer-reviewed and published, except for one that is currently at the stage of review. Papers have been adjusted to ensure the coherence of the collection.
Chapter 1 on page 23 is based on Peuckert (2012), a contribution to the volume Innovation Systems and Capabilities in Developing Regions: Concepts, Is-sues and Cases edited by Willie Siyanbola, Abiodun Egbetokun, Boladale Abi-ola Adebowale and Olumuyiwa Olamade, issused in 2012 by Gower Publish-ing, UK. Early versions of the research paper have been presented at the DIME Workshop on Globalization and Environmental Innovation in Newly Industrializing Countries, 5-7 May 2010, in Ettlingen, and at the 8th Globelics Conference Mak-ing Innovation Work for Society: LinkMak-ing, LeveragMak-ing and LearnMak-ing, 2-4 November 2010, in Kuala Lumpur.
Chapter 2 on page 67 is based on Peuckert (2011), an article published in the International Journal of Technology and Globalisation in 2011. Very early versions have been presented at the ESEE Conference, 5-8 June 2007, in Leipzig, at the 6th Globelics conference New insights for understanding innovation and competence building for sustainable development and social justice, 22-24 September 2008, in Mexico City, and at the Globelics Academy on Innovation and Economic Development, 2-12 November 2009, in Lisbon.
Chapter 3 on page 97 is based on a paper that has been submitted to the scientific journal Environmental Innovation and Social Transitions. Earlier ver-sions have been presented at the 2012 ZEW Summer Workshop for Young Economists on Trade and the Environment of the Centre of European Economic Research, 12-16 October 2012, in Mannheim, as well as at the 10th Globelics Conference Innovation and Development: Opportunities and Challenges in Global-isation, 9-11 November 2012, in Hangzhou. Some related work had already been presented at the Southern Conference of the International Schumpeter So-ciety, 2-5 July 2008, in Rio de Janeiro.
Finally, chapter 4 on page 131 is based on two different articles, Peuckert and Gonçalves (2011) and Gonçalves and Peuckert (2012), both co-authored on an equal basis with my colleague Jorge Gonçalves. The former has been pub-lished in a special issue of the African Journal of Sience, Technology, Innova-tion & Development on InnovaInnova-tion Systems Emergence to Take-off: What Prospects for Innovation-driven Development in the South?, edited by Abdelkader Djeflat. The latter was included as a chapter in the edited volume Innovation Systems
and Capabilities in Developing Regions: Concepts, Issues and Cases by Willie Siyan-bola, Abiodun Egbetokun, Boladale Abiola Adebowale and Olumuyiwa Ola-made. An early version of these papers has been presented at the 8th Globelics Conference Making Innovation Work for Society: Linking, Leveraging and Learning, 2-4 November 2010, Kuala Lumpur. Furthermore, both articles partly draw on joint working papers that have been published by ECLAC, the United Na-tions Economic Commission for Latin America and the Caribbean, (Gonçalves and Peuckert, 2011b), and by PTB, the German national metrology institute, (Gonçalves and Peuckert, 2011a).
References
Gonçalves, J., Peuckert, J., 2011a. Evaluación de los efectos de la infraestru-tura de la calidad: teoría, ensayos y métodos de medición. In: Göthner, K.-C., Rovira, S. (Eds.), Impacto de la infraestructura de la calidad en América Latina. UN, Santiago de Chile, pp. 27–59.
Gonçalves, J., Peuckert, J., 2011b. Measuring the impacts of quality infrastruc-ture: Impact theory, empirics and study design. Vol. 7 of Guide / Technische Zusammenarbeit. Physikalisch-Technische Bundesanstalt, Braunschweig. Gonçalves, J., Peuckert, J., 2012. The contributions of quality infrastructure to
national innovation systems: Implications for development policy. In: Siyan-bola, W. (Ed.), Innovation systems and capabilities in developing regions. Gower, Burlington VT, pp. 35–48.
Peuckert, J., 2011. Assessment of the social capabilities for catching-up through sustainability innovations. International Journal of Technology and Globali-sation 5 (3/4), 190–211.
Peuckert, J., 2012. Urban water innovation systems in newly industrialized countries: Case studies of Brazil, China, India and South Africa. In: Siyan-bola, W. (Ed.), Innovation systems and capabilities in developing regions. Gower, Burlington VT, pp. 119–149.
Peuckert, J., Gonçalves, J., 2011. National Quality Infrastructure in the Context of Emerging Innovation Systems. African Journal of Science, Technology, In-novation and Development 3 (2), 43–55.
Contents
Introduction
3
I
Analyzing Systems of Environmental Innovation
21
1 Urban Water Innovation Systems in Newly Industrializing Countries: Case Studies of Brazil, China, India, and South Africa 23
1.1 Introduction . . . 24
1.2 Related Literature . . . 25
1.3 Method . . . 27
1.4 Actors, Networks, and Institutions . . . 27
1.5 Innovation System Functions . . . 39
1.6 Conclusion . . . 60
2 Social Capabilities for Catching-Up through Sustainability Innova-tions 67 2.1 Introduction . . . 68
2.2 General Innovation Capabilities . . . 70
2.3 Sustainability Selection Environment . . . 82
2.4 Relation of Innovativeness and Sustainability . . . 86
II
Policy Options for Environmental Innovation
95
3 Competitiveness Effects of Environmental Regulation and the Role of
Non-Regulatory Framework Conditions 97
3.1 Introduction . . . 98
3.2 Related Empirical Literature . . . 102
3.3 Subjective Data Approach . . . 105
3.4 Hypotheses . . . 112
3.5 Estimation . . . 118
3.6 Conclusion . . . 124
4 The Contributions of Quality Infrastructure to National Innovation Systems: Implications for Development Policy 131 4.1 Introduction . . . 132
4.2 The Concept of Quality Infrastructure . . . 134
4.3 Contributions to Innovation Capability . . . 139
4.4 Quality Infrastructure as Development Strategy . . . 144
4.5 Public Policy for Emerging Innovation Systems . . . 149
4.6 Conclusion . . . 151
List of Tables
1.1 RESOURCE MOBILIZATION . . . 43
1.2 MARKETFORMATION . . . 55
1.3 Comparison of urban water and sanitation innovation systems . 61 2.1 Selected innovation system indicators . . . 73
2.2 Correlations of the ISI and other innovation indices . . . 78
2.3 Country group characteristics . . . 79
2.4 Selected sustainability indicators . . . 83
2.5 Correlations of the SusI and similar sustainability indices . . . . 85
2.6 Correlations of ISI, SusI, and per-capita income . . . 86
2.7 Correlations of the SusI and the innovation factors . . . 88
3.1 Descriptive Statistics . . . 107
3.2 Description of Variables . . . 108
3.3 Normality tests . . . 112
3.4 Correlations of regulation measures . . . 114
List of Figures
1 The indefinite shape of the Environmental Kuznets Curve . . . 8
2 Decomposition of the income effect, according to Panayotou (2003) 9 3 Tunneling through the Environmental Kuznets Curve, accord-ing to Munasaccord-inghe (1999) . . . 11
1.1 Definition of system boundaries . . . 26
1.2 Steps of an innovation system analysis . . . 28
1.3 Typical network of actor types in the BICS countries . . . 30
1.4 LEGITIMATION . . . 41
1.5 KNOWLEDGE DEVELOPMENT . . . 47
1.6 GUIDANCE OF SEARCH . . . 49
1.7 ENTREPRENEURIAL EXPERIMENTATION . . . 52
1.8 KNOWLEDGE DIFFUSION THROUGH NETWORKS. . . 59
2.1 Factor loadings for retained innovativeness factors . . . 74
2.2 Innovation System Index ranking . . . 76
2.3 Comparison of cluster performances . . . 80
2.4 Geographical distribution of clusters . . . 81
2.5 Sustainability Index ranking . . . 84
2.6 Relation of Innovativeness and Sustainability . . . 87
3.1 The influence of regulation on innovation, adapted from Blind (2012) . . . 101
3.2 The Porter Hypothesis causality chain, adapted from Lanoie et al. (2011) . . . 103
3.4 Distribution of effect variables . . . 113
3.5 Hypotheses . . . 116
4.1 User-producer perspective of a quality infrastructure . . . 136
How to Achieve Sustainable Development?
Globalization is an ongoing and irreversible process. People all over the world are more and more able - and increasingly also required - to communicate and interact, to exchange products, ideas and world views, to share information, to coordinate and cooperate on a global level. International integration by it-self creates mutual interdependencies, but it has simultaneously also raised the awareness of ecological linkages that make the well-being of people on one side of the planet dependent on the actions of people on the other side of the planet. It has pointed to the need of sustainably manage natural resources that can be called global environmental commons.
By the definition of sustainability, many global environmental commons are significantly overused, but establishing an effective governance structure to ensure their sustainable management has turned out to be extraordinary challenging.
Since the goal cannot be defined, therefore, there is no answer to questions such as ‘how do we achieve sustainable development?’ Scientists, even social scientists, should not expect to be taken se-riously if they go around asking unanswerable and meaningless questions. (Beckerman, 1992)
As far as he refers to ‘finite resources’, Beckerman (1992) has a strong point in calling “the aggregative concept of global ‘sustainability’ [. . . ] to be either morally indefensible or devoid of operational value”. Many natural resources have yet the ability to reproduce and replenish with the passage of time. The replenishment rate defines the maximum levels that can be harvested within a certain period without diminishing future yields. Respecting these natural limits, sustainable management of renewable resources can secure a perennial stream of valuable environmental services.
In the following, we will provide some explanation for the difficulties of the international community in setting-up a global regime that enforces stringent rules to protect common environmental resources worldwide. We will examine what role environmental innovation can play to overcome these fundamental difficulties, and we will look for institutions that can support technological change towards sustainability.
The Tragedy of the Commons
Historically, the overexploitation of many renewable resources has been pre-vented by limited demands or limited harvesting capacities. Industrialization over the last two centuries has not only led to previously unattained levels of material welfare, technological progress and the international diffusion of technological knowledge have also globally increased the capabilities and the demands to exploit natural resources.
The role of new technologies in creating the need for regulation on renew-able resources has been examined by Copeland and Taylor (2009). In their highly stylized model, the effect of changes in harvesting capabilities depends crucially on the ability of the regulator to unfailingly enforce resource man-agement rules. Institutions that reduce information asymmetries in the economy thus become more important with technical change. If regulation enforcement abilities are limited due to monitoring problems, continuous increases in the harvesting technology will lead to the commons dilemma situation.
Common goods are characterized by non-excludability and rivalrousness: Unlike private goods nobody can be excluded from taking advantage of them, but unlike pure public goods their use imposes negative externalities on oth-ers. These characteristics give rise to a fundamental microeconomic problem: Anticipating the overuse of the resource, self-interested economic agents will strive to appropriate as much rents of the resource as possible, thereby con-tributing to its overuse. This situation in which people withdraw resources to secure short-term gains without regard for the long-term consequences has become known as the ‘tragedy of the commons’ (Hardin, 1968).
Policy analysts and formal theoreticians have unanimously called for an external authority to impose institutional change upon individuals in order to solve the commons dilemma. However, policy prescriptions could have hardly been more diverse with regard to the recommended instruments. Both the ‘so-cialist’ state solution, based on stringent command-and-control regulation, and the ‘capitalist’ market solution, relying on property rights enforcement and the privatization of resources, have been vehemently advocated. A polycentric global setting, with extremely heterogeneous stakeholder groups and with-out any legitimate central authority to excert coercive pressure, requires novel multinational governance arrangements.
In 2009 Elinor Ostrom won the Nobel Prize in Economics for her work on self-governing institutions, which drew the attention to the variety of institu-tional options for addressing problems of environmental commons.
Ostrom (1990) empirically analyzes local institutional arrangements for col-lective action. Presenting several cases in which small communities of fisher-men or farmers have managed to self-regulate, she demonstrates that no ex-ternal authority is needed to sustainably manage environmental commons. In her framework, the external enforcer is rather agreed upon and financed by the participants in the dilemma situation to help them making binding com-mitments. The role of the arbitrator can either be played by public or private institutions. Indeed, real world arrangements usually represent varied mix-tures of both.
Of course, there are substantial differences between managing a small scale common pool resource or the global atmosphere. Variables that are known to have an influence on the outcome in social dilemma situations, as the high number of people involved, the high number of participants neces-sary to achieve the collective benefit, or the dissimilarity of interests, are not favourable for global cooperation. The design principles Ostrom identifies as success factors for self-regulated sustainable management, from ‘clear bound-aries and memberships’, over ‘collective choice arenas’, to ‘effective monitor-ing’, do not easily lend themselves to the context of global environmental com-mons.
Still, why shouldn’t international negotiators of climate agreements -knowledgeable people, such as political leaders, lawyers, economists, scien-tists - be able to design similar institutional arrangements on a global scale?
Limits to Growth?
The United Nations Environmental Programme (UNEP), that was founded at the World Economic Conference in Stockholm in 1972, has so far not be-come the expected anchor institution for the global environment. According to Ivanova (2005), the creation of the Global Environment Facility (GEF) in 1991 and of the Commission for Sustainable Development (CDS) in 1992 after the Earth Summitt in Rio weakened the role of UNEP. The French-German initia-tive in 2007 for a new and more powerful United Nations Environment Or-ganization (UNEO) was blocked by the United States and the BRIC countries (Brazil, Russia, India and China), the top five emitters of greenhouse gases. At the end of the Rio+20 Summitt in 2012, instead of creating an autonomous intergovernmental organization with its own independent legal basis and its own independent budget, negotiators only agreed to strengthen and upgrade the powers of the UNEP.
So, after more than 40 years of intensive struggle the international commu-nity has failed to establish an effective environmental regime. In fact, the at-tempts to regulate global environmental problems have resulted in a highly fragmented governance architecture (Biermann et al., 2010). It seems that, rather than a lacking ability to organize collective action, a serious conflict of interests concerning the valuation of economic growth over environment lies at the heart of this failure.
In the beginning of the 1970s concerns over the exhaustability of environ-mental resources and the implicit natural limits to economic growth have been prominently expressed by Meadows and Meadows (1972) in their report to The Club of Rome. The report was heavily attacked by many economists and initiated a still ongoing heated policy debate over whether economic growth should really be sacrificed for the protection of the environment.
In a period of post-colonialism, developing countries met the new ‘green agenda’ of the North with great suspicion. According to Beckerman (1992), countries such as Brazil and Algeria in 1972 clearly stated their intention to continue industrialization without concern for environmental problems. Many newly industrializing countries perceived the demands to strengthen environ-mental regulation as threats not only to their competitiveness, but to their legit-imate aspirations to grow and to ultlegit-imately achieve Western living standards. Countries such as China and India, that have vast cheap resources, would lose from policies aimed at reducing dependence on carbon-intensive fossil fuels.
Despite the influential Stern Review (Stern, 2007) which points to increas-ing risks of serious, irreversible impacts from climate change and stresses the benefits of strong, early action, the actual costs of environmental degradation are still highly uncertain. Although the report states that the impacts of cli-mate change will hit the poorest countries earliest and most, slowing down economic growth to protect the environment appears to many as a particular interest of more affluent groups in society and as an unjustifiable diversion from far more serious development problems, as for instance poverty reduc-tion and the securing of basic needs.
Starting with Inglehart’s theory of post-materialism (Inglehart, 1995), a large stream of empirical literature dealt with the question whether people in wealthier countries were indeed systematically more concerned with the en-vironment. Dunlap and Mertig (1997) and Dunlap and York (2008) oppose this view and argue that environmental awareness has become a global phe-nomenon that is not restricted to the most developed countries.
The major part of empirical studies however supports the so-called afflu-ence hypothesis that environmental attitudes are positively related to prosper-ity (Diekmann and Franzen, 1999; Franzen, 2003; Gelissen, 2007; Franzen and Meyer, 2010; Franzen and Vogl, 2010). Thus, as countries become richer, the willingness to pay for environmental quality is expected to rise.
The Environmental Kuznets Curve
Because rising incomes are expected to increase the demand for environmental quality and also to free up resources to improve the environment, it has been argued that economic growth would ultimately resolve environmental prob-lems. According to this view, environmental degradation could basically be regarded as a ‘growing-out’ problem.
The literature on the link between growth and environmental quality has become dominated by the concept of the Environmental Kuznets Curve (EKC) which postulates an inverse-U-shaped relationship between a country’s per capita income and its level of environmental quality. According to the EKC hypothesis, in the early stages of economic development environmental degra-dation increases, but after reaching a certain income level the trend is reversed, so that at high income levels economic growth is supposed to lead to environ-mental improvement.
The concept of the EKC appeared in the beginning of the 1990s, follow-ing empirical studies that analyzed the effect of income growth on different measures of environmental pollution. Among the most frequently citet con-tributions are Grossman and Krueger (1991) Steer and Summers (1992), Shafik and Bandyopadhyay (1992), Panayotou (1993), Selden and Song (1994), Gross-man and Krueger (1995), Holtz-Eakin and Selden (1995), Cole et al. (1997) and Torras and Boyce (1998).
Considering the available empirical evidence, the actual existence of a sys-tematic pattern between growth and the environment as suggested by the EKC hypothesis is highly questionable. A first critical overview of the empirical lit-erature has been given by Stern et al. (1996). Other litlit-erature surveys have followed (Ekins, 1997; Stern, 1998; Dasgupta, 2002; Dinda, 2004; Copeland and Taylor, 2004; Stern, 2004; Webber and Allen, 2010). Indeed, there appears to be a relationship between specific environmental measures and income per capita. However, the shape of the relationship is not uniform (see Figure 1), and turn-ing points, when they exist, differ significantly across pollutants (Webber and Allen, 2010).
(a) Grossman and Krueger (1991)
(b) Panayotou (1993)
(c) Cole et al. (1997)
Figure 2: Decomposition of the income effect, according to Panayotou (2003)
Decomposition of the Environmental Kuznets Curve
EKC models are purely descriptive and do not answer the question whether the observed reduction in environmental degradation is achieved by more am-bitious environmental policies or by autonomous structural and technological changes. As Panayotou (1997) points out, the income level is used as a catch-all surrogate variable for all the changes that take place with economic develop-ment. In order to understand how economic growth can be accommodated to the concept of sustainability, it is necessary to explore the causal mechanisms that underly the observed growth-environment relationship.
The decomposition of the EKC suggested by Panayotou (2003) distin-guishes between the scale, the composition and the abatement effect of growth on the environment (see Figure 2). Insofar as only the scale of activities is in-creased, economic growth will necessarily have a stronger environmental im-pact. A change in the structural composition of the economy can have varying effects. Supposedly, it increases pollution with the transition from agriculture to industry at lower levels of development and later decreases pollution with the shift from industry to services. Finally, changes in abatement activities, also called ‘technique effect’ by Copeland and Taylor (2004), are assumed to reduce the impact on the environment.
Sustainable growth, being environmentally-neutral according to a definition of Bruyn et al. (1998), would have to offset any scale expansion of economic ac-tivity either by structural change or by technical progress. Insofar as structural change in industrializing countries has been related to the dislocation of pollut-ing industries or changes in international trade in the past, this development pattern cannot be replicated indefinitely.
Abatement, or rather the adoption of more environment-friendly tech-nologies, is the remaining option to accommodate growth to sustainability. The EKC theory is however silent as to how this technical progress is sup-posed to happen. Technological innovation has either been completely om-mitted from EKC models or modeled as an exogenous factor. It therefore re-mains unclear wether abatement activities are supposed to directly result from demand-increasing growth in income, as suggested by the affluence hypoth-esis, whether the improvements are related to more stringent environmental regulation, or to the endogenous strengthening of certain public or private in-stitutions.
Tunneling through the Environmental Kuznets Curve
Although the EKC literature surely deserves its merits for raising important questions about how growth affects the environment and for providing con-vincing evidence of an income effect that improves environmental quality, the deficiencies of the theory have to be clearly pointed out. There is contention to whether all countries follow similar growth paths.
The overly simplistic income-environment relationship implied by the con-ventional EKC hypothesis lends itself to easy misinterpretation and is based on the somewhat out-dated ‘developmentalist’ assumption that there are simi-lar stages to development for all countries and that there is a linear movement from traditional or primitive to modern or industrialized stages.
Developing countries could learn from the experiences of industri-alized nations, and restructure growth and development to ‘tunnel’ through any potential EKC - thereby avoiding going through the same stages of growth that involve relatively high (and even irre-versible) levels of environmental harm. (Munasinghe, 1999)
Based on Munasinghe’s conceptualization of alternative growth patterns, there is little reason to expect that there will be a simple relationship between environmental degradation and income. According to Dasgupta (2002), be-cause of growing concern and research knowledge about environmental qual-ity and regulation, countries may be able to experience an EKC that is lower and flatter than the conventional measures would suggest. Indeed, Stern (2004) affirms that “developing countries are addressing environmental issues, times adopting developed countries standards with a short time lag and some-times performing better than some wealthy countries”.
Figure 3: Tunneling through the Environmental Kuznets Curve, according to Munasinghe (1999)
Aiming to explain these differences, in this dissertation particular attention will be given to national framework conditions that improve the potential for indigenous environmental innovation and strengthen the absorptive capacity for environmental technologies.
Contributions of the Dissertation
The idea of tunneling through the environmetal Kuznets curve is a common thread that runs through the different parts of the thesis, although, nota bene, not with the exact meaning of its original statement. The metaphor is rather borrowed to illustrate the fact that endogenous technological change can significantly alter the presuppositions of the EKC. By relaxing the fundamental trade-off between growth and the environment, innovation can potentially play an important role for the feasibility of sustainable growth.
To ensure sustainable development, newly industrializing countries would need to base their growth on technological change towards less material-intensive and energy-consuming production. Induced environmental innova-tion is thus the key issue that enables emerging countries to reconcile their legitimate aspirations for economic growth with concerns about the
protec-tion of the global environment. The necessary technological change may be achieved either through local invention and the exploration of completely new ways of doing things or through imitation and the exploitation of technolog-ical knowledge transfer from advanced economies, which the original notion of catching-up is based on.
In a novel approach, this dissertation links the economics of sustainable de-velopment to recent innovation theory on the appropriate institutional frame-work for technological change. It contributes methodologically, conceptually and empirically to the important question of how sustainable growth can be achieved under consideration of an accelatered technological development and knowledge transfer.
Taking the EKC as the starting point of the analysis, our central concern is: How can it become lower and flatter in times of the ‘knowledge economy’? Ironically, hypothesizing a ‘tunnel’ through the predicted pattern at the same time ‘undermines’ the general validity of the EKC theory.
Analyzing Systems of Environmental Innovations
The increasing importance of knowledge development and innovation for catching-up processes has been emphasized by many recent studies (Freeman and Soete, 1997; Fagerberg and Godinho, 2005; Fagerberg and Shrolec, 2008). After investigating the reasons behind the large differences in economic devel-opment, Fagerberg and Shrolec (2008) come to the conclusion that innovation systems and governance are of particular importance.
The questions that arise are whether the framework conditions in emerg-ing economies, as Brazil, India, China and South Africa, are conducive to sus-tainable growth and how the necessary capacities may be built-up. The social capabilities required for the development and diffusion of new environmen-tal technologies within a national economy need first to be identified in order to evaluate emerging countries as to their potential for catching-up through directed technological change.
The first chapter presents a comparative framework for the analysis of in-novation potentials in developing countries and applies it to the case of sus-tainable urban water technologies, as a field of pressing need for technological change and a resulting ‘window-of-opportunity’ for innovation. Based on an extensive literature review complemented by an expert survey, Brazil, India, China and South Africa are assessed as to their potentials for integrating
sus-tainable water technologies into their economic catching-up processes.
The systems of innovation approach (Lundvall, 1992; Nelson, 1993; Lundvall et al., 2002; Carlsson et al., 2002; Edquist, 2005; Lundvall et al., 2009) assumes that successful innovation depends on the performance of a variety of institu-tions as well as on how they interact as a system, when determining the so-cial capabilities that are required for successful innovation activities. Increased significance is given to soft context factors such as communication patterns, user-producer linkages and regulation designs.
The concept of innovation systems functions, that has originally been de-veloped by Hekkert et al. (2007) and Bergek et al. (2008) to describe the dy-namics of technological innovation systems, serves here to structure the cross-sectional analysis of nationally bounded innovation systems and to concep-tualize the influence of institutional factors on innovation capability. Starting from the assumption of essential innovation system functions, social capabili-ties required to achieve an accelerated diffusion of environmental technologies are pointed out, and how these capabilities can be measured in developing countries. Translating the system functions approach to this novel field of ap-plication contributes to the much needed methodological consolidation of in-novation systems analysis.
The second chapter widens the perspective examining the potential of emerging countries to accomodate growth and sustainability in the broadest sense. The comparison of innovation potentials across different countries is operationalized by regressing to a multitude of subjective data on the general functioning of the national innovation system as well as the sustainability se-lection environment. As a result, we are able to characterize 16 emerging coun-tries as to their potentials for environmental innovations and to describe the strengths and weaknesses of their national innovation systems.
The concept of systems of environmental innovation is developed, which adds the requirement of directedness to the conventional set of essential innovation system functions. The analysis of national framework conditions for directed technological change reveals a strong link between the overall potential for en-vironmental innovation and the average per capita income of a country. The empirical evidence further indicates that general innovation capabilities and a sophisticated selection environment are interlinked through the prevalence of certain institutions. Identifying these common driving factors could therefore inform policy makers about how to foster sustainable growth by simultane-ously improving competitiveness and environmental performance.
Policy Options for Environmental Innovation
The second part of the dissertation aims to disentangle the institutional factors that can be deliberately influenced to foster environmental innovation from purely growth-induced developments. The institutions that may bring about technological change towards sustainability are still inadequately understood, particularly with regard to less developed countries. ‘Learning and education’, as well as ‘good governance’ have been usually pointed out as recommended areas of public intervention.
The innovation system perspective draws attention to more market-oriented instruments. Lundvall (1988) and Fagerberg (1995) present theoret-ical and empirtheoret-ical evidence that stable relationships between domestic users and producers have a positive impact on technological progress. In their anal-ysis of the historical lessons for successful catching-up, Fagerberg and Godinho (2005) stress the need for ‘institutional instruments’ that help domestic firms to improve the ‘links to the technology frontier’, the ‘links to the markets and so-phisticated users’, the ‘supply of needed skills, services and other inputs’, and ‘the local innovation system/network’.
Porter (1990) claimed that stringent environmental regulation may have positive effects on competitiveness through the inducement of technological change. Considering the findings of the first part, it is yet highly questionable whether less developed economies indeed possess the necessary framework conditions to profit from strengthened innovation incentives.
The third chapter econometrically analyzes how certain regulation design characteristics and non-regulatory framework conditions influence the com-petitiveness effect of environmental regulation. As one result, the existence of an environmental quality infrastructure is found to be conducive to the long-term effects of environmental regulation in lower income countries.
Against this background, the development of a national quality infrastructure can be understood as a strategic policy option to address typical weaknesses of emerging innovation systems. In the fourth chapter, we argue that by investing in this area of public concern, governments may promote inter-sectoral link-ages, the building-up of necessary interface units, and foster different modes of learning. The supportive role of quality infrastructure services for innova-tion capability is conceptualized by illustrating its manifold contribuinnova-tions to the essential functions of the national innovation system.
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Part I
Analyzing Systems of
Environmental Innovation
1 | Urban Water Innovation Systems in Newly
Industrializing Countries: Case Studies of
Brazil, China, India, and South Africa
Abstract
This chapter aims to complement previous literature on sectoral in-novation systems and catching-up, adding insights to a sector of upmost socio-political and environmental relevance and very particular struc-tural characteristics: the urban water supply and sanitation sector. During the transition between technological paradigms possibilities are high to successfully enter rapidly growing technology markets at an early stage. Sustainability transitions thus constitute windows-of-opportunity for developing countries to combine their economic catching-up efforts
with the building-up of forefront technological capabilities. Against
this background, Brazil, China, India and South Africa are analyzed as to their potentials for integrating sustainable water technologies into their economic catching-up processes. Based on the concept of essential systemic functions a comparative framework is developed and applied to the analysis of these sectoral innovation systems. Data derive from an extensive literature review complemented by an expert survey. The re-sults of the analysis indicate that in general the political determination is growing and the respective indigenous knowledge is starting to expand. Brazil and China show great innovation potentials for sustainable water technologies, while the Indian and South African innovation systems reveal severe weaknesses. The study demonstrates the interdependences of the systemic functions and the consequent complexity of establishing a functioning sectoral innovation system.
1.1
Introduction
The urban water sector owes its extraordinary importance to the fact that wa-ter is essential for human life, and there are high environmental and public health externalities that derive from the use or the lack of access to water and sanitation, especially in urban areas. The moral imperative to universalize ac-cess to improved drinking water and sanitation has been globally recognized. Many newly industrialized countries (NICs), including Brazil, China, India and South Africa (the BICS countries), have internationally committed to the UN Millennium Development Goals, which prescribe the halving of the 1990 share of population without access to improved drinking water and sanitation by 2015.
In these countries, the social, environmental and economic pressures for change are particularly high, as recent demographic, economic and political dynamics have drastically increased the quantitative and qualitative demand for urban water and sanitation services. Their rapid economic growth has seri-ously aggravated already existing problems related to water scarcity and water pollution, which are increasingly perceived as potential constraints to further development. Continuous urbanization trends further intensify the pressure to solve these immediate problems. The expansion and modernization of the ur-ban water infrastructures will therefore require heavy investments in the next decades to ensure a safe and sustainable provision of water and sanitation to everybody.
Being highly capital-intensive with long investment cycles and a monopo-listic structure, the water sector has been typically a less innovative sector with relatively low research and development expenditures; technological change used to be rather slow and incremental rather than radical in nature. But since traditional water technologies have reached and exceeded the limit of sustainable water provision in many places, a technological paradigm shift is inevitable.
While the traditional water resource planning approach relied on physical supply-side solutions, the technological paths to be explored under the new paradigm are efficiency improvements, options for demand management and water reallocation among users to reduce the projected gaps and to meet future demands. Besides the technical aspect, this implies the adoption of a variety of institutional and organizational innovations. The changing paradigm has many components, including a shift away from the primary reliance on finding
new sources of water supply to address perceived new demands, a growing emphasis on incorporating ecological values into water policy, a re-emphasis on human needs for water services and efforts to uncouple economic growth and water use.
New technologies often face mismatches with the established socio-institutional framework (Freeman and Perez, 1988). A change towards the new paradigm therefore involves a transition in the socio-technical configu-ration (Geels, 2002, 2004). In NICs, the economic and political transitions and the growing social and environmental pressures at the socio-technical land-scape level may help to destabilize the unsustainable technological regime and establish sustainable niche technologies. The critical water situation poses a window-of-opportunity for an early entry into the internationally emerg-ing market of environmentally benign water and sanitation technologies. By proactively forming lead markets for sustainable water technologies, NICs may build up technological competences that further reinforce their economic development processes (Walz, 2010; Peuckert, 2011).
This study aims to assess how far current constellations of the urban water supply and sanitation sector in four of these countries, namely Brazil, China, India and South Africa, promise to induce new environmentally sustainable technologies to be developed, diffused and integrated into their economic catching-up processes. A comparative framework based on the concept of in-novation system (IS) functions is developed that allows identifying strengths and weaknesses of each sectoral innovation system (SIS) and giving an overall evaluation of the innovation performance potential.
1.2
Related Literature
The heuristic of the IS, which more recent innovation research calls on to ex-plain innovative activity (Lundvall, 1992; Nelson, 1993; Lundvall et al., 2002; Carlsson et al., 2002; Edquist, 2005), has gained relevance for the analysis of economic development processes. Consequently, the building-up of indige-nous innovation capabilities has become a centerpiece of national catching-up strategies. Within the theoretical framework of IS, the generation and diffusion of new technological solutions are assumed to depend on social interactions of various agents in the innovation process. IS scholars stress the interactive and non-linear character of the innovation process, which is influenced by many complexly interlinked economic, social and political institutions. Increased
Figure 1.1: Definition of system boundaries
significance is being attached to soft context factors such as communication patterns, user-producer linkages and regulation patterns.
SIS and their implications for the catching-up of NICs have encountered increasing interest within the innovation research community. The SIS con-cept emphasizes the systemic differences that derive from the characteristics of the knowledge bases and sector structures (Malerba, 2002). Within the catch-up project on sectoral systems (Malerba and Nelson, 2011), a number of in-ternational comparative studies have been conducted to analyze the interplay between national innovation systems (NIS) and SIS for as different sectors as pharmaceutics (Ramani and Guennif, 2012), automotive (Quadros et al., 2010), semiconductors (Rasiah et al., 2012), telecommunications (Lee et al., 2007), agro-food (Gu et al., 2012), and software (Niosi et al., 2012). Additional stud-ies on SIS in developing countrstud-ies have been published by Malerba and Mani (2009). This study aims to complement the previous literature by adding in-sights to another sector of upmost socio-political and environmental relevance and very particular structural characteristics: the urban water supply and san-itation sector.
Cozzens and Catalán (2008) have studied the water and sanitation sector from an IS perspective, suggesting the concept of global innovation systems for its analysis. In order to be able to include non-commercial goals, as for instance the expansion of service coverage or environmental protection, they suggest a more generally defined IS with broader actor categories referring to problem-solving organizations rather than firms, to knowledge and informa-tion organizainforma-tions rather than research organizainforma-tions and governance rather than government. These suggestions have been regarded as they better adapt to the conditions found in the urban water and sanitation sector. But in
con-trast the sector is analyzed within national boundaries and compared across countries (see Figure 1.1), relating this research to the SIS literature mentioned before.
1.3
Method
In this study, we apply the analysis scheme suggested by Bergek et al. (2008) as a comparative framework (Figure 1.2). First, we will describe the IS compo-nents: the main actors of the urban water and sanitation sector, their relations and the institutional framework. In a second step, we try to assess the main IS
functions: LEGITIMATION,RESOURCE MOBILIZATION,KNOWLEDGE DEVELOP
-MENT,GUIDANCE OF SEARCH, ENTREPRENEURIAL EXPERIMENTATION,MAR
-KET FORMATIONandKNOWLEDGE DIFFUSION THROUGH NETWORKS.
The concept of IS functions has originally been developed to describe the dynamics of technological innovation systems. We do however believe that it can also be employed to structure a cross-country analysis for a certain sector. By referring to the same categories we aim at contributing to a methodological consolidation within the IS research.
The analysis is based on a survey that was conducted in 2009 among 40 national experts of the water sector, complemented by an extensive review of available sector studies from international organizations as the World Bank, the Asian Development Bank and the United Nations, articles from scientific journals as for instance Utilities Policy or Water Policy, as well as governmental publications.
1.4
Actors, Networks, and Institutions
The institutional framework is decisive for the direction of technological change within the sector. The right changes in the socio-technical environment may create the possibilities for sustainable niche markets to become techno-logical regimes. Therefore institutions that incentivize the protection of water resources and the rationalization of water use, as for instance regulations that implement high standards for water and wastewater quality, consumption-dependent and increasing water tariffs, participation of stakeholders in de-cision making, holistic thinking and integrated water resource management, create conditions that make the development and diffusion of environmentally sustainable technologies more likely.
Figur e 1.2: Steps of an innovation system analysis
We will therefore begin each case study by describing the main actors, net-works and institutions that build the SIS. In order to accommodate the model to the specificities of the water and sanitation sector, Cozzens and Catalán (2008) suggested a more generalized IS. Following this approach, we will look at three generic types of system elements in each country, when analysing the urban water and sanitation sector:
Problem-solving organizations (PSOs). These are private or public urban wa-ter infrastructure operators, suppliers of technical equipment and wawa-ter users.
Knowledge and information organizations (KIOs). These are universities and public laboratories but also social and environmental organizations. Governance and rules of the game. Here we look at standard-setting
organi-zations, regulatory agencies, public planners and project developers, cap-ital providers and financial institutions.
PSOs are the locus of experimentation and the centre of the innovation pro-cess, trying new options in technologies and approaches. In the urban water and sanitation sector the PSOs will usually be found in urban water and sani-tation utilities. KIOs are the locus of creation and exchange of different kinds of knowledge. These are generally universities, research institutes and public laboratories, but in the urban water and sanitation sector non-government or-ganizations (NGOs) or industry oror-ganizations are also included. Furthermore, standard-setting organizations, regulatory agencies and public planners pro-vide governance and institutions as participatory water councils can propro-vide a forum for communication among stakeholders and establish user-producer linkages through which market information is diffused.
In order to get an idea about the strength of linkages and the existence of networks within the IS, we asked the sector experts to assess the extent of inter-action between actor types within their country. The average results (Figures 1.3 and 1.8) are depicted using multidimensional scaling, giving an intuition about the typical structure of the IS of the urban water and sanitation sector. The closer two actor types are positioned on the picture the more intensive is their interaction in the perception of the experts. Lines depict high- and dashed lines medium-intensity interactions.
Typically, there seem to be three clusters of actors within the urban water sector in the BICS countries: (1) the water industry composed of the infrastruc-ture operators and their financial and technical suppliers; (2) the demand side
constituted by water users together with social and environmental organiza-tions; and (3) intermediary institutions as regulators, standard-setting organi-zations and universities as a third group. Public planners and project develop-ers take a special position in the centre between the three groups, but interact more intensively with the infrastructure operators.
In conjunction with broader political and economic changes, all four coun-tries have embarked on institutional reforms towards the implementation of the new technological paradigm of sustainable water provision. Restructur-ings have been more disruptive and intense in South Africa, where institutions have changed most profoundly after the end of apartheid. Changes in China related to the general economic reforms have also been profound but more pro-gressively developed over a longer period of time, while in Brazil and India changes happened rather incrementally. Comparing the institutional frame-works of the four countries we observe diversity in the degrees to which in-stitutions that promote innovations in the sustainable urban water sector have been successfully implemented.
1.4.1
Brazil
The main features of the current sector structure in Brazil were laid during the 1970s, through the implementation of the National Basic Sanitation Plan (PLANASA) by the military regime. It consisted of an administrative cen-tralization process that effectively assigned water operation and management to the state level. Although the legal responsibility for water and sanitation services provision remained with the municipalities, the role of local govern-ments was reduced to signing long-term concession contracts to the newly es-tablished large state-owned companies. After an initial success with a rapid expansion of service coverage, the PLANASA scheme eventually failed by the end of the 1980s.
Since the 1990s, as a part of the economic liberalization policy of the Car-doso administration and as a means of overcoming fiscal restrictions and to compensate increasingly lacking public investments, Brazil opened the urban water and sanitation sector to private participation. This policy was supported by international financial organizations as the World Bank and justified by the need to foster operation efficiency (Sabbioni, 2008). The Public Concession Act of 1995 challenged the state monopoly particularly in metropolitan areas. Henceforth, Brazilian states took many different approaches for financing wa-ter and sanitation operations, including concessions to private investors.
Since 2003 the Ministry of Cities (MC) is entrusted with the responsibility to guide and monitor the urban water supply and sanitation sector. Thereby the notion of ’water supply and sanitation’ was progressively replaced by the concept of ’basic sanitation’, which also integrates the collection, treatment and disposal of solid wastes, storm-water drainage and the control of vectors of transmittable diseases.
The 2007 National Sanitation Law has implemented fundamental principles of modern water and sanitation management, setting the universalization of access to water and sanitation, transparency and social control, security, qual-ity and regularqual-ity in service provision as ultimate policy objectives. For the first time the Law makes the adoption of national guidelines for public policy and management in the basic sanitation sector possible. It establishes criteria for municipalities and states to access federal financing and determines the con-stitution of councils with the participation of civil society. These councils have leverage to influence the municipalities’ decisions regarding tariff setting and termination of service due to lack of payment.
This participatory decision-making approach is also reflected in the con-stellation of the network analysis (see Figure 1.8). Water users take a relatively central position. Brazilian public planners seem to intensely interact with wa-ter users and social and environmental organizations, indicating that sustain-ability concerns are already raised at the stage of project design. The most central actors of the Brazilian urban water IS are the operators of the water infrastructure. They have the closest links with their financial and technical suppliers, but also hold intensive relations with regulating agencies and, most importantly, with water users, which indicates that user-producer linkages are relatively well developed.
The typical PSO in the Brazilian urban water and sanitation IS continues to be a large quasi-public company that jointly provides water and sanitation ser-vices to various municipalities within the state. For instance, the two Brazilian megacities São Paulo and Rio de Janeiro are served by SABESP and CEDAE respectively, which are mixed public-private companies with majority share of the state Government. Both companies can be considered outcomes of the PLANASA scheme. CEDAE was created in 1975 when the State of Rio de Janeiro fused with the State of Guanabara. SABESP was created in 1973 as a result of a fusion of companies and autarchies that until then had managed the water service and sewage collection in the cities of the state.
linked to water users and standard-setting organizations, but hold no intense contact with the water industry. Although in general the interaction of all actor types within the IS seems to be strong, the relatively weak university-industry link could have important consequences for the functioning of the SIS by hin-dering the industrial application of knowledge that was created in the research sector. In fact, Furtado et al. (2009) diagnosed a lack of formal mechanisms of knowledge transfer and the need to strengthen the ties between the academic and industrial spheres, when evaluating the impacts of the Brazilian Program for Research in Basic Sanitation (PROSAB).
1.4.2
China
China has a centralized political system with considerable decentralization of power across the four layers of government at the national, provincial, prefec-tural, county levels. Legislative and regulatory powers as well as planning and development responsibilities are with the national government. The provincial government has historically played an advisory and oversight role, while lo-cal governments play the dominant role in infrastructure service provision and financing of their public utilities. The Chinese fiscal system is relatively decen-tralized, with most of the tax revenues collected and spent at the local level.
The typical PSO in China is a relatively small municipally-owned water company. But, as one of the Chinese experts pointed out, the differences are large between the big cities (that is, Beijing, Shanghai, Wuhan), operated by state-owned companies, and small towns, often operated by domestic private firms with concessions by the local government. Urban water supply and san-itation is the responsibility of cities under complex arrangements that differ substantially from one city to another. Local governments are responsible for urban water services, including tariff setting, subsidies, utility management, and definition of scale and scope. Most cities independently provide water ser-vices within their boundaries regardless of their size, since inter-jurisdictional cooperation is difficult due to the high degree of decentralization.
According to Cosier and Shen (2009), certain areas of the urban water re-source management framework may benefit from greater levels of coordina-tion. There is obviously a common thread between water abstraction, wa-ter supply, wawa-ter use (including efficiency measures, quality protection and wastewater disposal), yet the management system adopted for each of these aspects are not well integrated in practice. Other than in the actor type model, water and wastewater companies are usually separate from each other, and in
larger cities services are even further unbundled. Many cities have also sepa-rated the responsibility for wastewater between government drainage depart-ments and wastewater treatment companies.
Accordingly, the Chinese experts that were surveyed identified the lack of an integrated management as the most important need for improvement of the Chinese urban water IS. The conflict between the Ministry of Water Re-sources (MWR) and the Ministry of Housing and Rural-Urban Development (MHURD) seems to be a major concern in urban water management. This problem is further amplified as the institutional division of responsibilities at the national level is reflected in equivalent line agencies at each of the lower levels of government. Each agency reports to both their political leader at the same level, as well as the agencies above them. And each agency monitors agencies below them. Many cities have established Water Affairs Bureaus that report to the MWR and are mandated to provide integrated water manage-ment and supervise urban water utilities, yet the MHURD still issues most of the policy guidance related to urban water utilities. The various water compa-nies may have the same parent bureau, which may be the construction or the water bureau, or they report to different bureaus.
The network analysis shows an extremely intense interaction of the vari-ous actor types within the IS (see Figure 1.8), but it is especially strong among universities, public planners, regulating agencies and standard-setting organi-zations, which may be explained by the high formal coordination and report-ing requirements of the public administration system. The Ministry of Health is responsible for drinking water quality and together with the Standard Ad-ministration issues the respective national standards that must be met by ur-ban suppliers. The National Development and Reform Commission (NDRC) provides overall development policy and financial supervision to the urban water and sanitation sector and administers the most important concessionary finance program.
Although the overall intensity of interaction in the system seems to be very high, the relatively isolated positions of water users and environmental and social organizations hint at their weak integration. This conjecture is supported by the comment of a Chinese expert: “Generally speaking, the stakeholders are getting more and more interactive together. However, how to integrate the concerns of the users of water needs to be improved largely.” Although basic institutions for river basin management are in place, there is no legal definition and no institutional arrangement that could guarantee the effective
