Who Should Drive Green Technology Transitions in Developing Countries : State-OwnedEnterprises versus Private Firms

Green technologies, such as renewable energy, often require adaptation to local conditions, suchas high humidity, high altitudes or the specifics of a country’s infrastructure, to achieve a maximal technicalefficiency and a long lifetime of investments. This poses a problem for green technology transitions, as adaptationsusually imply protected intellectual property rights and thus market imperfections that can lead to higher prices andthereby a lower uptake of the green technology. An alternative could be to use state-owned enterprises to adaptand promote green technologies, such as public utilities, which are more easily steered toward pursuing societalobjectives. However, many empirical studies find state-owned enterprises to be less efficient. This theoreticalcontribution investigates the question whether a green technology transition that requires research and developmentis better driven by private firms or state-owned enterprises. The paper adapts a model to this setting,derives possible market outcomes from this model, investigates research and development and productiondecisions of private firms and a state-owned enterprise, and compares the welfare implications of the two options. Theresults show that there are cases where the cost inefficiency of the state-owned enterprise dominates (forexample, if competition of directly importing firms reduces possible markups of private innovating firms), but alsocases where a state-owned enterprise is the preferred choice (for example, if several private firms would adapt thetechnology, causing over-innovation). Most importantly, this is not solely a question of comparing costs, but rather ofcomparing market outcomes. For example, the use of a state-owned enterprise can avoid the often found problem ofoverinvestment in research and development by private firms and, in many cases, a state-owned enterprise will induce awider diffusion of the green technology.