Association for Public Policy Analysis & Management

Market demand has been emphasized as an important driver that can induce innovation. Many empirical studies also support the demand-induced innovation hypothesis. However, key questions regarding the ability of firms to identify demand and respond to it quickly and on the nature (incremental vs. non-incremental) of innovations engendered by demand linger. Furthermore, there is mixed evidence in the literature about whether the locus (local vs. non-local) of demand-pull policy matters. In order to fill these gaps, in this paper we use empirical evidence from the distributed solar photovoltaic (PV) market in China to address the following questions: (1) Is there evidence of demand-induced innovation? (2) Does the effect of local demand-pull policy differ from the effect of nonlocal demand-pull policy on demand-induced innovation?

Our empirical focus is PV balance of systems (BOS) in China. BOS refers to the non-module components of a PV system. Our empirical choice is guided by three drivers: first, due to rapid declines in module costs over the last five years, BOS represents the bulk (70-80%) of system costs; second, strong demand-pull policies, especially at the provincial level, have catapulted China into a leading PV demand market globally; and third, BOS is inherently closer to local factors such as grid features, building codes, customer preferences, and regulations, thereby providing a good opportunity to explore the linkage between the locus of policy and innovation.

We build a new database of PV BOS patents in distributed PV from State Intellectual Property Office of The People’s Republic of China (SIPO) website between 2005 and 2014. Specifically, we classify PV BOS into four categories, inverter, monitoring, mounting and site assessment, and use keywords-based Boolean search for each category to search the patent text in SIPO website. By reviewing the claims of every patent, we identify the patents that are relevant to PV BOS.

Our patent data of PV BOS in China reveals the trend of PV BOS innovation activities in China from 2005 to 2014. In general, there are only a few patents filed before 2008 across all provinces in China. However, substantial growth of PV BOS innovations is observed since 2011, largely driven by government support to expand domestic PV market. In general, growth in PV BOS patents and local demand is highly correlated. Focusing on provinces as the unit of analysis, we build regression models to test for evidence of demand-induced innovation as well as impact of local vs. non-local demand impact therein. Our results support the demand-induced innovation hypothesis and indicate that only local demand (for PV) significantly induces PV BOS innovations. The different effects of local demand and non-local demand indicate that local context, such as local knowledge and local experience, is a key element in the learning and innovation process for PV BOS.