Environmental regulation and the Dynamics of Innovation: Emission standards as key drivers for innovation in heavy commercial vehicles

Publication Type:

Conference Paper


Gerpisa colloquium, Paris (2011)


emissions, heavy vehicles, innovation management, regulation


What makes firms risk the costs, efforts and uncertainties involved in prolonged R&D and innovation? According to a broad British survey (CBI, 2001), competition and customers are important factors, but even more important is government regulation. Regulation constitutes a particularly strong driving force for innovation directed at environmental sustainability in the automotive industry and its importance will, most likely, increase. For a long time, macro economists and policy students have studied the impact and design of regulation (e.g. Jaffe et al, 2002), but so far these studies have generally been framed in an American adversarial tradition. In particular, this has been the case in research on the impact of environmental regulation (see recent studies by e.g. Lee et al., 2010; Weber & Neuhoff, 2010; Hanemann, 2010). While these studies have shown that regulation does have a significant effect on innovation, they provide a rather simple picture of industry against legislators/regulators, which obscures important managerial activities and decisions (cf. Gerard & Lave, 2005).

Literature on innovation management, on the other hand, presents a considerably richer understanding of managerial processes. Still, this field has devoted little research to the implications of environmental regulation. In Utterback ́s famous work “Mastering the Dynamics of Innovation” (1996) regulation is not even an index entry. This tendency to disregard regulation as a driver for innovation also appears in contemporary firm-level studies of innovation management, which typically portray innovation as a competitive process aiming to fulfil customer and user demands (e.g. Lee & Colarelli-O’Connor, 2003; Christensen, 2006; Fuchs & Schreier, 2011). While customer orientation is considered key for successful innovation, regulation is considered a boundary condition which, in most cases, not even is included in the framework (Calantone et al, 2010).

From a management perspective, innovation in response to environmental regulation may appear as a simple question of “Do or die”. Manufacturers just have to comply with the demands; if they fail they will be pushed out of the market. A closer scrutiny, however, reveals that environmental innovation poses some specific challenges. In particular, it requires manufacturers to balance demands from two very different kinds of actors: policy makers and customers (Magnusson, 2003). Policy makers’ recent strives to include more actors in the regulatory process and to combine traditional command-and- control approaches with other instruments (market incentives, information, R&D subsidies etc.) serve to reinforce these challenges, making the process more complex and opening up several options for innovating firms (Hey et al. 2007). These options include political aspects – how and when to interact in the standard-setting process (to avoid that competitors gain privileges for their solutions and block others, for example). Furthermore, they include technological options – should the firm focus on one, or a menu of technological solutions; which new competencies should it acquire and should it do the R&D in-house or in partnership with external firms. Moreover, regulation may result in options in terms of market opportunities – could the firm gain competitive advantages and enjoy government incentives through extra R&D efforts, offering solutions before the implementation dates stipulated; are there special markets and brand issues to address before competitors, etc. In this respect, they may consider the cost issue differently. They may either try to develop standard solutions at the lowest possible cost or accept higher costs in order to attain differentiation advantages through early entry in special niche markets. Altogether, this means that regulation will influence a number of critical management activities and decisions.

The basic purpose of this paper is to extend the field of innovation management by investigating the technological, marketing and political challenges for automotive manufacturers facing increasingly stringent regulatory demands. The paper will outline a study of the management of innovation in the heavy vehicle industry and Europe’s 20-year long process of regulating noxious emissions, starting in the early 1990s and still ongoing (Bauner, 2008). In this process, authorities have tightened the standards with orders of magnitude several times. In 2007, for example, the vice president of R&D at Scania estimated 50% of the company’s R&D expenses to be directly related to EU ́s emissions regulation (Hasse Johansson, interview, 20070116). The paper will use an innovation management
framework to analyze the technological and marketing strategies which emerged during the process under study, and to compare them across firms. To analyze the more inclusive governance processes applied by EU authorities, compared to the regulation pattern in the US (see references above), the study will make use of Hey et al (2007) and their analysis of how firms may influence how emission standards are set, and how market-based instruments may open up for competitive advantages through “beyond-compliance” strategies. Here, the paper will take into account strategies to balance regulatory demands with demands from various market segments and key customers.

The paper will comprise an important practical and forward-looking perspective, providing managerial lessons for innovative responses to future European regulation. Recently EU has started to set standards for CO2 emissions from passenger cars and vans. This process is likely to proceed to cover also heavy vehicles (in addition to the very strict regulation of local pollutants HC, NOx, PM, discussed above). This may require firms to accelerate their modular innovations in existing components and systems, and/or may lead to the emergence of market niches for low-emitting vehicles based on new technical architectures, such as the hybrid-electric trucks and buses (Sushandoyo, 2010). These choices are related to technological and marketing issues, as well as strategic decisions regarding the appropriation of value in the automotive supply chain (by vehicle makers or by components specialists); all of them critical innovation management issues.


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