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Innovation and Spillover Effects of Energy Demand Shocks in Belt and Road Economies

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  • King Yoong Lim
  • Diego Morris

Abstract

The induced innovation hypothesis, initially proposed by Sir John Hicks, posits that as the cost of energy rises compared to other input factors, firms are motivated to engage in innovative practices to counteract the increased expenses related to energy consumption. This innovation can manifest through the development and implementation of technologies, processes, or methodologies that enhance energy efficiency or diminish overall energy dependency. In this study, we empirically examine and validate this hypothesis. By theoretically modeling how innovation responds to elevated energy costs, we exploit China’s substantial surge in energy demand as an external shock to global demand, to empirically test the predictions associated with our theoretical framework. We test these predictions using firm level data in Belt and Road Initiative (BRI) countries. Our findings strongly support the induced innovation hypothesis, revealing that, on average, a 1 percent rise in the relative cost of energy corresponds to a 2.1 to 5.1 percent increase in the likelihood of innovation in energy-exporting countries and a 0.5 to 3.6 percent increase in non-energy-exporting countries. These results are robust to various methodological variations and data restriction exercises. JEL Classification: D22, D24, O13, O14

Suggested Citation

  • King Yoong Lim & Diego Morris, 2024. "Innovation and Spillover Effects of Energy Demand Shocks in Belt and Road Economies," The Energy Journal, , vol. 45(5), pages 167-189, September.
  • Handle: RePEc:sae:enejou:v:45:y:2024:i:5:p:167-189
    DOI: 10.1177/01956574241266969
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    References listed on IDEAS

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    More about this item

    Keywords

    energy; energy cost; energy trade; innovation; competition;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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