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Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop (2022)

Chapter: 6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies

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Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
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6

The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies

Paper Authors: Kavita Surana (University of Maryland), Claudia Doblinger (Technical University of Munich), Deyu Li (University of Cambridge), Nathan Hultman (University of Maryland), and Laura Diaz Anadon (Cambridge Centre for Environment, Energy and Natural Resource Governance, and Harvard Kennedy School)

Presenters: Kavita Surana (University of Maryland) and Claudia Doblinger
(Technical University of Munich)
Moderator: Eduardo Morales

Kavita Surana, assistant research professor at the Center for Global Sustainability in the School of Public Policy at the University of Maryland, and Claudia Doblinger, of the Technical University of Munich, presented their workshop paper, authored with Deyu Li, Nathan Hultman, and Laura Diaz Anadon. Unlike the papers already presented, Surana et al. uses global value chains (GVCs) to understand innovation in one particular technology: wind energy. Current predictions of global carbon dioxide emissions indicate that, in order to meet long-term decarbonization goals, a sizable increase in innovation in sustainable energy will be required. Technologies that are currently at the prototype or demonstration stage today are estimated to contribute 35 percent of the necessary reductions in 2070, and a further 40 percent will come from technologies that are currently at early adoption stages.

Surana stated that the direction of innovation in clean-energy technologies depends on the location of production centers in the GVC. She and her coauthors developed a temporal outlook for technology introduction and advances, focusing on when the final products will begin to go to market and when they will be needed. The production choices of multinational enterprises may change the direction of innovation; for example, manufacturing shifts to Asia may reduce U.S. and global innovation in the short and medium term, as was seen in automobiles and high-end optoelectronics (Fuchs, 2014). As documented in Binz and Truffer (2017) and Pietrobelli and Rabellotti (2011), production and innovation are dispersed globally through the GVC. This leads to a main research

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

question: How does the location of suppliers in the GVC impact the direction of innovation?

The authors focused on the wind-energy industry, in which technology innovation occurs at the component level, leading to larger and better wind turbines. The literature on the wind-energy GVC focuses on three dimensions:

  • First, on the turbine technology itself. For example, when turbines increase in size, they become more efficient.
  • Second, on the leading firms or the original equipment manufacturers (OEMs)—globally, there are 15.
  • Third, on the policies of countries, particularly the transition of innovation from the European Union and the United States, to China and India.

While all this work is important, Surana explained that a more subtle and in-depth review of wind turbines indicates a highly complex value chain with many innovative component suppliers.

CONTRIBUTIONS AND RESULTS

Surana stated that she and her coauthors have made several contributions, some of which are completed, and some of which are still in progress:

  • First, they mapped the GVC for wind-energy technologies.
  • Second, they analyzed the location of producers, both for supplying firms and the large-scale OEMs.
  • Third, they measured and analyzed the direction of innovation and the connection to long-term societal goals.
  • Lastly, the authors analyzed the relationship between location and innovation in the GVC.

Surana described these contributions in greater depth in the order above. To measure and map the wind-energy GVC, the authors took a bottom-up approach, as there were no available datasets to answer their questions. They looked at wind-energy reports published every 2 years by a private research firm, Navigant Research, analyzing the wind-energy supply chain. The authors have information on 389 suppliers of nine components representing more than 1,000 relationships with 13 OEMs between 2006 and 2016. This period is limited but does correspond with large amounts of innovation in the wind-energy industry. There are a few countries that supply a large majority of the turbine components. These facts were established by linking supplier firms to their location, size, founding year, and mergers and acquisitions, and to whether they specialize in the

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

wind-technology industry. Surana encouraged the interested reader to look at this work, which is already published (Surana et al., 2020).

Surana and her coauthors used turbine towers as an example to discuss how the location of producers—both suppliers and OEMs—impacts the wind-energy industry. They found that component suppliers are working increasingly with OEMs across international borders. In 2006, the suppliers were located in countries with large OEMs and large markets for wind energy. Between 2006 and 2016, suppliers emerged in new locations, especially in countries without an OEM. Over this period, the number of suppliers increased by a factor of 15, and countries with a supplier increased by a factor of 3. New suppliers, located in Africa, Latin America, and Asia Pacific, concentrate production on low-complexity parts, such as towers and generators. New suppliers of high-complexity parts, such as blades and gearboxes, are rare (see Figures 6-1 and 6-2).

Surana then shifted to a discussion of the long- and short-term trends in innovation activity. The authors measured the direction of innovation by studying the content of patents in the space. There are more than 12,000 patents from suppliers and OEMs in the dataset, which the authors clustered into component type, technology, and type of improvement they address. This is done by understanding the cooperative patent classification, sorting the patents into 40 categories by their type, and by studying the key terms in the text of the patent. The authors chose to use these assessment tools instead of looking at patent citations. The authors matched wind-energy needs identified by the International

Image
FIGURE 6-1 Measuring and mapping the wind-energy GVC.
NOTE: GVC = global value chain; M&A = mergers and acquisitions; MW = megawatts; OEM = original equipment manufacturers.
SOURCE: Presentation by Kavita Surana.
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Image
FIGURE 6-2 Analyzing the location of manufacturing: Component suppliers increasingly work with OEMs (e.g., tower suppliers) from other countries.
NOTE: GVC = global value chain; OEM = original equipment manufacturers.
SOURCE: Presentation by Kavita Surana.

Energy Agency (IEA) to the text of patents, allowing them to characterize the innovations as short term—dealing with installation, assembly, and adapting to environment conditions—or long-term, such as offshore wind technologies.

At this point, Claudia Doblinger, assistant professor for innovation and technology management at the Technical University of Munich, began presenting. Doblinger continued the discussion of the impact of suppliers and OEMs on the direction of innovation. The paper organizes results by producer type, by the stage of the host economy (either emerging or advanced), and on the temporal dimension. The temporal dimension (short, medium, and long term) was found by identifying needs from the reports on wind research and development (R&D) from the IEA and mapping them back to the patent content. For example, short-term patents include installation and assembly, while long-term patents relate to offshore wind technologies. Long-term innovation, both by component suppliers and OEMs, is concentrated in advanced economies; however, emerging economies, such as China, India, Brazil, and Mexico, are increasingly innovating in this dimension. Both OEM and component suppliers are innovating, with about 40 percent of new patents filed by component-supplying firms. Component suppliers have a similar proportion of short- and long-term patents across economy type, while OEMs in developed countries have a higher share of long-term innovation—about 50 percent across the sample—compared with OEMs in emerging economies, which had a share of about 25 percent in 2016.

Doblinger presented regression coefficients from analysis on shifts in market growth and production in emerging economies, primarily China. The authors found that shifts in GVC activity to emerging economies did not reduce long-term innovation activity, which is dependent on local market size and

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

growth. Local relationships are defined as an E.U. supplier collaborating with an E.U. OEM, or a Chinese supplier and a Chinese OEM. International relationships are defined as a non-E.U. supplier and an E.U. OEM, or vice versa, or a Chinese supplier and any non-Chinese OEM, or vice versa. The results are split between before and after 2012, which marks a significant shift in the production and market for wind-energy technology from the European Union and other developed countries to emerging economies, especially China. The results suggest that the increased globalization of GVCs in wind-energy technology did not decrease long-term innovation in the European Union after 2012, in contrast with the findings by Fuchs (2014) for automobiles and high-end optoelectronics. International relationships linked to market demand are more important than the origin country of the supplier for long-term innovation.

SUMMARY

A key takeaway, according to Doblinger, is the importance of the temporal dimension to innovation in this industry. Further, this work contributes to the literature by studying the entire wind-energy GVC at both the supplier and OEM levels, which is important for understanding policies that may increase innovation in this industry. The authors found that shifts in innovation from the global North to the global South did not decrease long-term innovation, which may be true for other industries. Doblinger said she and her coauthors hope to further refine their method of analysis and to implement formal hypothesis testing to further understand the direction of innovation in the future. They also hope to assess and understand the importance of regional demand for wind energy in China. Finally, they hope to trace innovation spillovers between OEM firms and supplying firms, as well as the impact these spillovers may have on long-term innovation.

DISCUSSION

Discussant: Kelley Sims Gallagher (Tufts University)

Kelley Sims Gallagher, professor of energy and environmental policy, director of the Climate Policy Lab, and codirector of the Center for International Environment and Resource Policy Institute in the Fletcher School at Tufts University, began her discussion by stating that she considered the authors’ findings interesting, and that the main motivation for her questions and comments is to understand why these patterns exist and what mechanisms may lead to these results. In her prior work, Gallagher examined how China has taken advantage of globalization to develop production and innovation capacity in clean-energy technologies, particularly in solar technology.

Gallagher suggested that a possible driver of China’s emergence in the clean-energy GVC is its export-oriented production strategy and its global perspective on markets. This is partly driven by the fact that Chinese students

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

study globally and notice market opportunities in other countries. China was also investing in infrastructure, both physical and human, which may best explain the findings in the workshop paper. In addition, trade liberalization and Chinese entry to the World Trade Organization in 2000 likely contribute to this effect.

Gallagher noted that in Figure 6-1, China and Germany appear to be the only countries with firms supplying all nine components. She wondered why these countries are succeeding compared with other countries, despite market share changes over time, and whether there are implications for industrial policy. A possible reason may be that China and Germany are more interventionist in industrial policy relative to other countries.

Gallagher added that in Figure 6-2, which displays the temporal dimension of suppliers in the market for wind turbine towers, there is an increase in suppliers from emerging economies. She wondered whether the authors have considered this shift in suppliers responsible for any cost reductions resulting from increases in competition. Another policy question is the importance of local content requirements in driving the fragmentation of the GVC over the decade between 2006 and 2016.

Gallagher found interesting the results on short- and long-term innovation by suppliers and OEMs differentiated by emerging or developed economies. She referred to the investment and industrial policy of China as a leading hypothesis for the uptick in long-term innovation by the emerging economies and wondered whether the authors can offer any ideas for why there is a peak in patenting behavior, for both short- and long-term innovation in 2010. Lastly, she asked if the authors have considered whether China’s industrial policy may be preventing a decrease in long-term innovation, despite the fragmentation of the GVC.

Surana agreed with Gallagher that Chinese industrial policy may be preventing a decrease in innovation, but also offered another factor. Domestic Chinese demand for clean-energy technology likely plays an important role in the direction of innovation. The authors presented the splits pre-2012 and post-2012 to offer some evidence of this trend. They are working on integrating domestic industrial policy, among other policy decisions, into their paper.

Addressing questions on why China and Germany seem to dominate the market share of supplying firms in the clean-energy GVC, Surana referenced Surana et al. (2020), in which she and her coauthors attempted to answer this question. Part of the deviation can be explained by the complexity of the component.

Doblinger addressed the questions about the role of Chinese industrial policy preventing a decrease in long-term innovation. The breakdown of local and international relationships indicate that this is not the entire story.

Although the authors have not done a large amount of work on the 2010 peak in patenting behavior, Doblinger believed it is an interesting path for future work. Deyu Li, research associate at the Centre for Environment, Energy, and Natural Resource Governance at the University of Cambridge and a coauthor of the presented work, added that the decline in patenting after 2010 may be driven

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

by the low number of countries active in the industry. The authors did not study the number of active firms in the industry, but literature suggests that, over time, the number of firms innovating in both solar and wind technologies has decreased. International firms also benefited from their connection to Chinese firms, and their long-term innovation increased after connecting with a Chinese firm.

Surana agreed that looking at the cost side of the fragmentation in the GVC is interesting.

During the panel question-and-answer period, a question from the audience focused on the competitiveness of the market at global and domestic levels and what is the typical consumer. Surana offered that the market is becoming more competitive with time, and the typical consumer is a private firm establishing a wind-energy farm. A second question concerned the trends in long-term innovation, particularly on whether China’s entry into wind-energy markets increased or decreased long-term innovation in the United States. Doblinger responded that this was the main motivation for the project. They did not find a decrease in long-term innovation in the wind-energy sector, but offer no evidence for other industries.

Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×

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Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
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Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
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Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Page 41
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Page 42
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Page 43
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Page 44
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
Page 45
Suggested Citation:"6 The Nature and Direction of Innovation in Global Value Chains for Wind-Energy Technologies." National Academies of Sciences, Engineering, and Medicine. 2022. Innovation, Global Value Chains, and Globalization Measurement: Proceedings of a Workshop. Washington, DC: The National Academies Press. doi: 10.17226/26477.
×
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In recent decades, production processes of intermediate and final products have been increasingly fragmented across countries in what are called global value chains (GVCs). GVCs may involve companies in one country outsourcing stages of production to unrelated entities in other countries, multinational enterprises (MNEs) offshoring stages of production to units of the MNE overseas, or both. GVCs can also involve completely independent companies merely sourcing their parts from whichever upstream company may be the most competitive, with no control arrangement necessarily involved. The changing global trade environment and the changes in firms' behavior have raised new and more complicated issues for policy makers and have made it difficult for them to understand the extent and operations of GVCs and their spillover effects on national and local economies.

To improve the understanding, measurement, and valuation of GVCs, the Innovation Policy Forum at the National Academies of Sciences, Engineering, and Medicine convened a workshop, "Innovation, Global Value Chains, and Globalization Measurement" May 5-7, 2021. This proceedings has been prepared by the workshop rapporteurs as a factual summary of what occurred at the workshop.

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