Who Should Drive Green Technology Transitions in Developing Countries: State-Owned Enterprises versus Private Firms

Prudence Zowadan Dato, Frank Krysiak, Christian Nolde and Govinda R. Timilsina

No 10506, Policy Research Working Paper Series from The World Bank

Abstract: Green technologies, such as renewable energy, often require adaptation to local conditions, such as high humidity, high altitudes or the specifics of a country’s infrastructure, to achieve a maximal technical efficiency and a long lifetime of investments. This poses a problem for green technology transitions, as adaptations usually imply protected intellectual property rights and thus market imperfections that can lead to higher prices and thereby a lower uptake of the green technology. An alternative could be to use state-owned enterprises to adapt and promote green technologies, such as public utilities, which are more easily steered toward pursuing societal objectives. However, many empirical studies find state-owned enterprises to be less efficient. This theoretical contribution investigates the question whether a green technology transition that requires research and development is better driven by private firms or state-owned enterprises. The paper adapts a model to this setting, derives possible market outcomes from this model, investigates research and development and production decisions of private firms and a state-owned enterprise, and compares the welfare implications of the two options. The results show that there are cases where the cost inefficiency of the state-owned enterprise dominates (for example, if competition of directly importing firms reduces possible markups of private innovating firms), but also cases where a state-owned enterprise is the preferred choice (for example, if several private firms would adapt the technology, causing over-innovation). Most importantly, this is not solely a question of comparing costs, but rather of comparing market outcomes. For example, the use of a state-owned enterprise can avoid the often found problem of overinvestment in research and development by private firms and, in many cases, a state-owned enterprise will induce a wider diffusion of the green technology.

Date: 2023-06-27
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