Opening Green Windows of Opportunity

The green transition holds many opportunities for developing economies to upgrade their productive capabilities and narrow the gap with developed countries. However, countries must consider both the characteristics of targeted technologies and their domestic capabilities when defining strategies to open and seize green windows of opportunity.

Four scenarios

The quest to combat climate change and stay within planetary boundaries is driving fundamental changes in technologies, markets and institutional regimes across the world. These changes may open green windows of opportunity (GWOs) for countries in the Global South to engage in new markets and economic activities. However, these structural changes are not automatic;1 to promote these structural changes, countries must assess their sectoral systems of production and innovation – hereafter called “preconditions” – and implement adequate policies to respond to opportunities as they emerge. GWOs can be categorized into four scenarios (see table below) based on countries’ preconditions and responses.2

Scenario 1 (“realized opportunity”) combines strong preconditions with strong responses by firms and governments. An example of Scenario 1 is the Chinese solar photovoltaic (PV) sector, which built on national innovation capacity and economies of scale to achieve a global leadership position. The Chinese government has been active in responding to market changes since the 2008 financial crisis, stimulating domestic demand through subsidies, collaborating within the value chain and encouraging intensified technological innovation.3

In scenario 2 (“missed opportunity”) countries have strong preconditions, but their potential to promote industrial development can be hindered by weak responses. The Indian National Solar Mission, for example, prioritized low-cost energy deployment over developing a local industry, resulting in import dependency.4

In scenario 3 (“active effort”) latecomers proactively stimulate sectors despite a lack of initial capabilities. Thailand, for example, offered subsidies, tax incentives and mandatory purchasing of electricity generated from biogas.5 In Ethiopia, despite little initial experience with wind-powered energy, the government actively ensured the growth of the industry through major transformative projects.67

Scenario 4 (“distant opportunity”) has the lowest potential for capitalizing on GWOs, as it combines weak preconditions with an insufficient policy response. In Kenya, for instance, large-scale wind power development failed due to weak starting points and inadequate strategies to ensure local embeddedness and to encourage learning from projects.8

Tailoring the policy responses to technological specificities

When mobilizing to seize GWOs, it is important to consider the maturity and tradability levels of the technologies involved.

Patent maturity is one way to measure technological maturity.9 Applying patent maturity analysis to green technologies (see figure below) indicates that concentrated solar power (CSP) has a patent maturity of 1.6 years. This shows that development in the sector is still very dynamic. In comparison, solar PV has a patent maturity of almost 8 years, indicating a higher level of maturity than CSP.

More mature sectors, like biomass or solar PV, tend to have more established infrastructure, regulations, maintenance network and user practices.10 However, they also tend to present more competitive markets, which may create entry barriers for new firms from developing countries.

Immature technologies, like biofuels or CSP, have different requirements. Capitalizing on the technologies relies on the development of innovative capabilities and substantial investments in research and development (R&D), infrastructure and regulatory frameworks, which often face limitations in developing countries. On the other hand, they may also offer more opportunities to disrupt the industry, as dominant technologies and leaders are less established.

Tradability refers to the ease with which technological equipment can be transported and traded across localities. Solar PV panel technology highly tradable, whereas a CSP plant needs to be assembled on site.

Green technologies have different levels of maturity and tradability (see next table). If technologies are both mature and highly tradable, national firms may initially need some level of protection from competition. Solar PV panels combine exactly these features, and India did not manage to protect the local industry from Chinese imports. Conversely, Thailand did not have this worry because biogas plants are big and bulky, which means that outside competition depends on foreign direct investment.

Domestic capabilities

Having identified the salient characteristics of the technology, countries need to consider their domestic capabilities. Support measures – like local content requirements or tax incentives targeting specific technologies, production projects or companies – can promote the accumulation of local expertise.11 Furthermore, local knowledge – through public and private R&D – must be complemented by foreign expertise, for instance through collaboration with external partners. China’s success story with solar PV is due, in large part, to R&D investments at just the right time.12

Priorities for latecomers

Developing countries aiming for technological and market catch-up will need to identify areas with an enabling international economic environment. Moreover, governments will have to be proactive and incentivize green technologies through coherent environmental, energy, science, technology, innovation and industrial policies. Measures like renewable energy auctions or feed-in tariffs should be combined with local content requirements to enhance domestic production capabilities. Furthermore, investments, constant experimentation and steady improvements in more complex and greener sectors are critical for seizing GWOs as they arise.13