Green product innovation in industrial networks: A theoretical model

Previous studies have modeled green technological change as innovations in the process of production (e.g., abatement technologies or energy sources). But greening the economy also requires changing products. The automotive industry, for example, needs to massively deploy alternative-fuel vehicles. Product manufacturing occurs within supply-chain networks, and developing new products typically requires complementary investments by suppliers. We study the incentives for green product innovation in industrial networks and how policies can affect them. We follow the industrial organization theory of product differentiation, and model green product innovations as upgrades in product quality where inputs from suppliers are essential for upgrading quality. We show that suppliers can be innovation bottlenecks and render policy instruments less effective. We provide an explicit mechanism for the role of institutions that help actors coordinate on the long-term direction of innovation. We discuss how our results help organize several findings from case studies in the automotive industry.