Green Innovation and Green Manufacturing: Links between Environmental Policies, Innovation and Production

This paper addresses the claim that environmental policies stimulate domestic economies. I parse the claim into two sequential parts: the effect of policies on innovation and the effect of that innovation on resulting manufacturing production. Each of these activities innovation and manufacturing can either take place at home or abroad, and where they take place determines the consequences for the domestic economy. The empirical evidence is based on measures of policy, patent activity, and trade in the renewable energy sector (solar, wind, geothermal, biomass and waste) of 27 OECD countries between 1988 and 2003. The results suggest that an additional policy promoting the development or use of renewable energies is associated with a significant rise in the adoption of existing foreign technologies, but few new inventions at home. These results are robust to different measures of policies. In turn, however, the increase in (mostly foreign) patent filings is associated with a significant growth in manufacturing production proxied by exports, suggesting that at least some portion of the inputs into renewable technologies are produced domestically. Therefore, there is evidence that renewable energy policies stimulate domestic economies through manufacturing, but less through innovation.