Innovation in automotive emission control technologies: government actions and inventive activities

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ABSTRACT The primary aim of this investigation is to understand the impact of government regulations on innovation in the development of automotive emission control systems. Analysis of regulatory measures and a longitudinal study of patenting
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    INNOVATION IN AUTOMOTIVE EMISSION CONTROL TECHNOLOGIES:GOVERNMENT ACTIONS AND INVENTIVE ACTIVITIES  JAEGUL LEEDepartment of Engineering and Public PolicyCarnegie Mellon UnivPittsburgh, PA 15213FRANCISCO VELOSOCarnegie Mellon UnivDAVID A. HOUNSHELLCarnegie Mellon UnivEDWARD S. RUBINCarnegie Mellon Univ ABSTRACT The primary aim of this investigation is to understand the impact of governmentregulations on innovation in the development of automotive emission control systems. Analysisof regulatory measures and a longitudinal study of patenting indicate that governmental actionsin the form of “technology-forcing” standards have stimulated innovations. INTRODUCTION Innovation processes for automotive emission control technologies are particularlyinteresting since innovation took place under “technology-forcing” regulation, laws whichimpose emission standards above the technical capabilities of emission control devices at thetime that laws are passed. Effectiveness of environmental regulation on technological innovationis not clearly understood (Jaffe, Newell et al., 2002). Proponents of regulation claim that greater stringency of environmental regulation provides incentives for firms to develop new and lesscostly ways of reducing pollutants (Jaffe and Palmer, 1997). Yet, more systematic assessmentsof the impact of regulation on innovation necessitate more systematic empirical evidence.This research aims to contribute to the literatures in environmental policy andmanagement of innovation by providing empirical analyses of the effect of technology-forcing policy interventions on innovation using automotive emissions control technologies as a case.Prior studies on technology-forcing on automobile emission control technologies have typicallyrelied on qualitative judgments by examining relationships between the introduction of newtechnologies by industry and the onset of regulations by government (NESCAUM, 2000). Thisstudy extends prior work by analyzing quantitatively the automobile industry’s patenting behavior in emission control technologies. This study focuses on the period from 1968 to 1998.The technologies covered for this study include not only technologies related to catalysts, firstused in 1975, but also other technologies such as electronic controls, thermal managementsystems, and advanced engine controls with integrated catalytic converters that comprise modernautomotive emission control systems. cademy of Management Conference, Best Paper Proceedings, New Orleans, 2004  TECHNOLOGY-FORCING REGULATION AND INNOVATION The technology-forcing approach is generally believed to be a more efficient way to bring about technological innovation (McGarity, 1994; Kemp, 1997). Unlike a technology-basedstandard, which relies on existing technologies to bring about pollution reductions, technology-forcing standards essentially require innovation to meet the standards by setting performancelevels that are beyond known existing technical capabilities of the manufacturers, thus “forcing”technological innovation.Innovation in automotive emission control technologies provides a very interesting casefor understanding the impact of technology-forcing regulation on technological responses fromthe regulated industry primarily because automotive emission control technologies represent amore complex set of technologies than previously studied cases of CFC phase out or flue gasdesulfurization systems used for SO 2 control for electric power plants (Taylor, 2001). Theresearch question is whether technology-forcing government regulations have influenced innovative activities by the automobile manufacturers and their suppliers . And if so, the secondquestion is whether increasing stringencies of technology-forcing regulation have led to moreadvanced technologies . These research questions address whether technology-forcing regulationcould be an effective policy instrument in inducing technological innovation in environmentalcontrol. DATA AND MODEL SPECIFICATION I performed three analyses to investigate the impacts of government actions oninnovation in automotive emission control technologies: regulatory action analysis, patentanalysis, and econometric regression analysis. I used patenting activities in automotive emissiontechnologies as indicators of innovative activity and developed the relevant patent set using patent data from the U.S. Patent and Trademark Office (USPTO). I used both an abstract-basedkeyword search and a class-based search method. I also adopted citation-weighted patentcounting in addition to simple patent counting (SPC) to account for values Inset patent set haveon subsequent innovation. As for a citation-weighting scheme, I adopted a linear weightingscheme used by Trajtenberg (Trajtenberg, 1990). The relevant governmental regulationsconsidered are the 1970 Clean Air Act (1970CAA), 1977 Clean Air Act Amendments(1977CAAA), 1990 Clean Air Act Amendments (1990CAAA), and National Low EmissionVehicle Program (NLEV). To build robustness into the model, I adopted two control variables,total innovation activity in automotive technologies ( TOTAL_PATENT) and market share for cars (  MARKET_SHARE) by major contributing countries into the model. The logic in employingthese two control variables is as follows: patenting activities in emissions control technologiescould just as well reflect the portion of overall innovation activity in automotive technologies,and competitive pressures, especially from foreign makers, could have driven innovationactivities in emission controls.For regression, I employed a panel negative binomial regression model with fixed(country) effects. I incorporated the fixed effect into the model to account for factors that differ across countries but that are relatively stable over time. Such factors that may influence patenting activities include the propensity to patent and organizational cultures (Benner, 2001).In order to account for fixed effects, I disaggregated magnitudes of yearly patent counts by patenting activities of each contributing country: U.S., Japan, Germany, and other countries. cademy of Management Conference, Best Paper Proceedings, New Orleans, 2004  RESULTSHave Technology-Forcing Government Regulations Influenced Innovative Activities by theAutomobile Manufacturers and their Suppliers? The regression coefficients indicate that regulatory measures, especially the 1970CAAand the 1990CAAA, have significantly influenced innovation in automotive emissions controltechnologies. Moreover, impacts of regulations on innovative activities are found to be stronger one or two years prior to phase-in dates than innovation activities in the on-set year. Thisreflects firms’ higher propensity to innovate one or two years prior to the phase-in date. Theaverage lag between file and grant dates for patents related to automobile emissions control wasapproximately 2.0 years. Regression result also suggests that firms, once they realized thatCongress would probably pass the 1977CAAA, reduced the intensity of their innovativeactivities. Hence, we see reduced patenting activity from 1975 to 1981. Given that the1977CAAA was enacted to delay the imposition of the 90% emissions reduction requirements,this observation becomes hardly surprising. The industry probably had been developing three-way catalysts (TWC) technologies in the mid-1970s, before the passage of the 1977CAAA, but believed strongly that while a TWC system would ultimately meet the more stringent terms of the 1970CAA, it could not be perfected in time to meet the srcinal schedule.   The effect of the NLEV is found to be insignificant. This can be attributed to itsvoluntary nature. Manufacturers agreed to participate in the NLEV program in return for regulatory stability with California’s LEV program. Manufacturers who joined the program probably knew that they could comply with it without committing themselves to further R&Dinvestments. Have Increasing Stringencies of Technology-Forcing Regulation Led to More AdvancedTechnologies? This qualitative analysis compares the changes in magnitude of inventive activities withthe timing of the enactments of federal regulations. For this analysis, I compared magnitudes of  patenting activities with series of onset of automotive emission control regulations andcorresponding stringencies for each of three major pollutants. Figure 1 shows emissionstandards from 1970 to 2004 for HC, CO, and NO x . The standards became notably morestringent in 1975 and 1980, reflecting the 1970CAA and 1977CAAA. Standards remained stableuntil 1994 when Tier I standards set by the 1990CAAA are phased in. The standards tightenedagain in 2001 reflecting phasing in of Tier II standards in 2004.The phasing in of more stringent emission control standards drove innovation in emissioncontrol technologies: oxidation catalysts in 1975; three-way catalysts in 1980, and thermalmanagement and onboard diagnostic systems in 1994. Further, advanced catalysts technologies,such as high-density and hexagonal cell-structured catalyst support, and advanced engine controlsystems, such as electronic exhaust gas recirculation and fuel injectors with improved fuelatomization, are being developed to satisfy stringencies of the Tier II standards (Bertelsen, 2001).Insert Figure 1 about here cademy of Management Conference, Best Paper Proceedings, New Orleans, 2004  Analysis of emissions-control-related patenting activity and the stringencies of theautomotive emissions control standards indicates a close relationship between them (Figure 2).Each increase in stringency led to increased patenting activity. The phasing-in of the 1975intermediate emission standards and the 1980 emissions standards was followed by increased patenting in the early and mid 1970s. A similar phenomenon occurred in the late 1980s, when patenting activity rose steeply, coinciding with the phasing in of more stringent emissionstandards in 1994 as a result of the 1990CAAA. Interestingly, stable stringencies in the1980sresulted in decreased patenting activity from the late 1970s, providing further evidence of theclose relationship between stringency of government regulations and innovative activity inautomotive emissions control technologies. CONCLUSIONS AND FUTURE RESEARCH The analyses presented here show that technology-forcing regulations imposed uponautomotive manufacturers have stimulated innovation by automobile manufacturers and their suppliers. The results from both regulatory action and patenting analysis support a view of thestrong relationship between regulatory actions through technology-forcing standards andinnovation in environmental technologies.There are several policy implications of this research. First, the stringency of regulationsappears to have driven the direction of innovative activities. Manufacturers had to redirect their emission control efforts from engine modification technologies such as transmission controlledspark and a thermovacuum switch to add-in catalytic converter systems to meet the stringencyrequirements. Moreover, as stringencies increased, notably in early the 1980s and 1990s, theautomotive industry had to innovate--closed-loop control systems with sensors in the 1980s andadvanced on-board monitoring systems and thermal management systems in 1990s, respectively--to satisfy the more exacting requirements. This result parallels what Taylor (2001) found interms of SO 2 control technologies.Moreover, technology-forcing regulations in automobile emissions control led toinnovation and diffusion of emissions control technologies for automobiles. In the 1970s,industry executives asserted that the 90% emissions reduction requirement “could preventcontinued production of automobiles” and “do irreparable damage to the American economy”(Weisskopf, 1990). However, after 30 years of regulatory actions, new cars today are equippedwith emission control devices capable of reducing CO, HC, and NO x.  by more than 90%.I am expanding this research to identifying major innovators and sources of innovation inautomobile emission control technologies by analyzing patent citations. Sources of innovationfor automotive emission control technologies are not clearly understood. Ashford et al. (1985)claimed that the regulated industry and the pollution-control industry are the types of industrialsectors that respond to environmental regulations. It is expected that both regulated firms suchas automotive manufacturers and components suppliers specializing in manufacturing pollution-control devices contributed a major portion of the total innovation. However, the degree towhich firms from the regulated industry and pollution-control industry contribute to the totalinnovation is not clear. Further, the knowledge necessary for innovation could have srcinatedInsert Figure 2 about here cademy of Management Conference, Best Paper Proceedings, New Orleans, 2004  from other institutions such as private and government-funded research institutions, as well asuniversities.Prior studies that rely on industry-level data are constrained by their aggregate nature of the data. Thus, firm-level analyses in focused industry studies such as studies of automotiveemission control should provide a better understanding of the nature of the relationship betweenregulation and innovation. It is expected that characterization of historical development of emission control technologies under regulations, identification of sources of innovation and their technological capability as revealed by their patent portfolio will contribute to the literatures inmanagement of innovation by providing a better understanding of how firms under heavilyregulated industry respond to regulations. REFERENCES Benner, M. J. 2001. Process Management and Organizational Adaptation to TechnologicalChange. Proceedings of the Academy of Management , Academy of Management.Bertelsen, B. I. 2001. Future US Motor Vehicle Emission Standards and the Role of AdvancedEmission Control Technology in Meeting Those Standards.   Topics in Catalysis ,16/17(1-4): 15-22.Jaffe, A. B., R. G. Newell and R. N. Stavins 2002. Environmental Policy and TechnologicalChange.   Environmental and Resource Economics , 22: 41.Jaffe, A. B. and K. Palmer 1997. Environmental Regulation and Innovation: A Panel Data Study.   The Review of Economics and Statistics , 79(4): 610-619.Kemp, R. 1997. Environmental Policy and Technical Change . Brookfield, VT, Edward Elgar Publishing Company.McGarity, T. O. 1994. Radical Technology-Forcing in Environmental Regulation.   Loyola of LosAngeles law review , 27(3): 947-958. NESCAUM 2000. Environmental Regulation and Technology Innovation: ControllingMercury Emissions from Coal-Fired Boilers , Northeast States for Coordinated Air UseManagement.Taylor, M. R. 2001. The Influence of Governmental Actions on Innovative Activities in theDevelopment of Environmental Technologies to Control Sulfur Dioxide Emissions fromStationary Sources.Doctoral dissertation,Pittsburgh, Carnegie Mellon University.Trajtenberg, M. 1990. A Penny for Your Quotes: Patent Citations and the Value of Innovations.   RAND Journal of Economics , 21(1): 172-187.USPTO United State Patent and Trade Office,www.uspto.gov.Weisskopf, M. 1990. Auto Pollution Debate has Ring of the Past. Washington Post. cademy of Management Conference, Best Paper Proceedings, New Orleans, 2004
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