The political economy of creating early mover advantages on green industries: A conceptual framework and case study of electric buses

Ambitious environmental regulations involve compliance costs for firms in the respective jurisdiction, but they also incentivise greener technologies and business models, which may turn into competitive advantages, especially when other countries adopt similarly stringent regulations with a time lag. At the same time, product cycle theory shows that costs decrease as technologies become mature and economies of scale kick in. Early movers thus face additional compliance costs plus the high production costs associated with new technologies. These early investments may or may not pay off in the future. In any case, early movers will try to create entry barriers to protect their innovation rents, using patents, brand reputation or capturing distribution channels. Late adopters may avoid the costs and risks involved in experimenting with new solutions, they may start using the new technologies only when costs have come down, and they may use old polluting technologies as long as they are allowed to; but they may miss the moment when they can still get a foothold in the newly developing clean technology markets. Policymakers and firms thus face a strategic dilemma; they need to make ex-ante assessments about costs and benefits of applying stringent environmental regulations either early or late. These decisions need to be taken under uncertainty about key parameters (technology cycles, behaviour of regulators in other jurisdictions, speed of cost digression etc.).Moreover, they need to design public-private industry deals that differ substantially depending on whether an early or late adopter strategy is chosen. This paper revisits existing theories on early mover advantages from a new angle. First, it takes specific constellations into account that are specific to environmental innovations, as these depend on politically negotiated regulatory framework, thereby adding a n additional layer of political uncertainty to the uncertainties of market-based innovation processes. Second, it considers the public-private negotiation of innovation strategies to either reap early mover or late mover advantages. This analytical framework is then applied to the case of electric buses. The e-bus market is politically created using mandatory emission standards, purchase subsidies and public procurement. This way, China developed the electric bus market since 2009, ten years ahead of the European Clean Vehicles Directive and related national and city-level policies. As a result, China accounts for 95% of the world market for electric buses and is winning almost all big international tenders. European bus manufacturers are trying to catch up, as China is reducing its initial level of subsidies and Europe is stepping up its support. European bus manufacturers and city governments are trying to tap into localisation-specific designs to gain a foothold in rapidly growing industry.