Strategic responses to catch-up : the case of European solar PV manufacturers following the rise of China

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Master thesis

Strategic responses to catch-up.

The case of European solar PV manufacturers following the rise of China

Author

Karim Khalil

Student ID

10173080

1

st

supervisor

E. Dirksen, MSc.

2

nd

supervisor

F. Ciulli, MSc.

Date

August 2015

Study

MSc in Business Administration,

International management track

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Acknowledgements

I would like to thank everyone that has supported me during this project. Thesis supervisor Erik Dirksen was of great to help to me with his support during the process. Special thanks to my family who have believed in my capabilities and motivated me during this process and all the years before to reach graduating for this masters degree. Special thanks to Anna Visser, Nadiia Denhovska and Marjan van Tellingen. Also all interviewees who spent their valuable time to contribute to this thesis I want to thank. It was great to talk to the professionals in the field. Their cooperation is highly appreciated and I hope that some knowledge can be

transferred back to them in the form of this thesis or personal advice.

Writing this thesis has been a challenging intellectual activity. The complexity of the thesis topic contributed to this challenge, but also made it very interesting. The thesis topic is so interesting, because it involves many factors like government policy, innovation, competitive strategy and customer awareness. The market is extremely competitive and the conditions are changing rapidly. As one of the interviewees put it: “With standard textbook theories this is not easy to grasp.”

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Abstract

This thesis is about competition between European and Chinese manufacturers in the field of solar photovoltaic (PV). This study investigates the strategic responses that EU PV

manufacturers take to regain their competitive foothold after being passed up by Chinese competitors. The solar PV market is very complex in terms of competition, technological development, and formal and informal institutions. Catch-up theory is used to explain the influences on strategic reactions. Based on a review of the existing literature and a multiple case study analysis, the following conclusions are drawn. This research finds that EU PV manufacturers pursue various strategic reactions to low cost competition from China. These reactions entail differentiation, value chain integration and innovation. This research aims to contribute to academic research, helps predict future developments in solar PV competition, and assist politics and businesses in making more optimal decisions.

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Abbreviations

c-Si Crystalline Silicon

EPIA European Photovoltaic Industry Association EPS Earnings Per Share

EU European Union

FFF Foreign Frontier Firm IBV Institution Based View ILC Industry Life Cycle

ITC International Trade Commission LCF Latecomer Firm

LLL Linkage Leverage Learning M&A Merger and Acquisition MNE Multinational Enterprise NIS National Innovation System

OECD Organization for Economic Co-operation and Development OEM Original Equipment Manufacturing

PLC Product Life Cycle

PV Photovoltaic

R&D Research and Development RBV Resource Based View RES Renewable Energy Sources TC Technological Capabilities

TF Thin-film

TLC Technology Life Cycle

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7 Appendix 7: Figure 7 - The conceptual framework for understanding China’s wind energy innovation system ... 80 Appendix 8: Figure 8 - Dimensions of sectoral patterns of innovation and their interaction ... 80 Appendix 9: Figure 9 - New installed or decommissioned electricity generation capacity in Europe in 2013 ... 81 Appendix 10: Interview format ... 82 Appendix 11: Within results ... 84

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1. Introduction

Urged by the economic, military, political and environmental drivers, there has been growth in the production of solar photovoltaic (PV) energy ever since the first oil crisis in 1973 (Jacobsson, Johnson 2000). Since the year 2000, solar PV production increased with annual growth rates between 40% and 90%. Growth is expected to continue over the coming decades, where some estimations say that solar PV can account for as much as 50% of total world energy consumption by 2050 (Greenpeace 2012, EPIA 2012).

As a result of the first oil crisis in 1973, governments came to realize that a sudden change in energy supply and prices could cause severe damage to their national security (Biresselioglu, Zengin Karaibrahimoglu 2012). In the beginning, these concerns where related to economic and military affairs rather than with political issues (Spero 1973, Ullman 1983, Ebinger 1982) as it did only concern military defense, but also the economic strength that underlies military strength (Spero 1973).

Since the late 1990’s the environmental dimension was added. Currently, there is heavy dependence on polluting conventional energy sources like oil, natural gas and coal to satisfy energy demand. As a consequence, there is a global trend in developing energy policy that reduces dependence on conventional energy sources and increases energy efficiency in order to decrease environmental damage caused by energy consumption and production

(Biresselioglu 2011, Jäger-Waldau, Szabó et al. 2011).

A re-emergence of energy security concerns came in the aftermath of the 9/11 attacks and the US invasion in Iraq, given increasing oil prices and availability of adequate supplies. This era has a more politicized character on energy issues since there were increased considerations of how to use force to gain control over valuable supplies in a possible emergency (Deffeyes 2006).

The last decade has seen extremely high and volatile oil prices, ranging from $24.69 in 2003 to more than $120 in 2012. This price volatility is a self-reinforcing mechanism, since higher prices lead to resource nationalism which restricts access to energy resources and greater investment uncertainty. This results in even higher prices and volatility (Biresselioglu 2011). The most rapid growth of solar PV production took place in Asia, where China and Taiwan currently account for 65% of worldwide solar PV production (Figure 1 - World PV

Cell/Module Production from 2005 to 2013, appendix) (Jäger-Waldau 2014). China’s global share increased from less than 1% in 2003 to that of the world’s largest producer in 2008 (Fu, Zhang 2011). Europe and the US have been struggling to keep up with the pace of China, but failed to do so (The PEW Charitable trusts 2011).

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9 The dynamics between the solar photovoltaic and wind turbine generating systems (WTGS) from China differed substantially since they have shown divergent patterns of growth (Liu, Goldstein 2012). In 2010, about 93% of the Chinese Solar PV installations were exported, while all of the WTGS made in China were installed in China itself (The PEW Charitable trusts 2011).

The rationale behind this development was that Chinese solar PV producers successfully penetrated the upstream segment of the industry value chain which was characterized by lower entry barriers. This development fell together with heavy subsidizing in the EU in the mid-2000s that stimulated installation of renewable energy sources (RES). This greatly

boosted the demand for Chinese solar PV exports, at precisely the time that Chinese producers were expanding output and capacity. In the case of WTGS production in China, the focus was on in-country installation. This led China to become the number one in cumulative on-grid WTGS installed capacity by 2009 (Liu, Goldstein 2012).

Around 2009, Chinese government policy was directed to boost market share in the upstream segments of the solar technology market, which requires higher technological capabilities. Following dropping demand after the 2008 financial crisis, another 2009 policy shift was to reinstitute explicit export subsidies that had been dropped earlier (Yardley 2008).

These policies have been characterized by Western countries as unfairly subsidizing Chinese firms to pursue world leadership in the export of RES technologies (Bradsher 2010). US solar panel and wind turbine makers have successfully charged the Chinese with subsidizing below-cost exports (Wald, Bradsher 2011). In November 2012, the US Department of Commerce and the International Trade Commission (ITC) determined that Chinese manufacturers are benefiting from government subsidies that led to selling their products below cost, a practice known as dumping. This is deemed unfair competition and inflicts severe damage to solar PV manufacturers in the US market (Neidlein 2013, Stearns 2013). This led to the imposition of import duties ranging from 24% to 250% on silicon PV cells and panels manufactured in China (Andrew 2013).

There has been similar scrutiny going on from the European commission following complaints of European solar PV manufacturers. In December 2013, the European

commission imposed anti-dumping and anti-subsidy measures on imports of solar panels from China. The duties average 47,7% and apply for two years as of 6 December 2013 (European Commission Press Release 2013).

The academic research on how businesses cope with competition from China is mainly from a viewpoint from market players from China. For example, by attempting to answer the

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10 question: “Why not greater catch-up by Chinese firms?” (Xiao, Tylecote et al. 2013). This while the European market seems to be overtaken by China in a sector like solar PV. There is limited research on competitive reactions that European manufacturers pursue in order to resist against heavy competitive pressures from China. This leads to the following research question:

What are the strategic responses EU solar PV manufacturers take to regain their competitive foothold after being caught up by Chinese competitors?

Hence, the theoretical contribution of this research will be to identify strategic responses that European solar PV manufacturers pursue as a reaction to catch-up from Chinese competitors. This thesis is structured as follows. Chapter 1 is the introduction. Chapter 2 contains the literature review which explains catch-up theory, business strategy and institutional frameworks. Chapter 3 contains the conceptual model and propositions development. Methodology and data are in chapter 4. Chapter 5 contains the results of the case study, whereas the conclusions will be presented in chapter 6.

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2. Theoretical framework

A study that fully addresses what strategic actions are pursued is that of Bastiaenen (2011). He conducted exploratory qualitative research on changes in business models that European solar PV manufacturers make to compete with Asian counterparts. The main theory he uses is industry life cycle theory (ILC), which aims to explain changes in technological development and industry structure over the period that the industry ages (Peltoniemi 2011). In the study of Bastiaenen, ILC is then supposed to explain what changes should be made in the business models in order to ensure competitive advantage in relation to Asian competitors.

There are some flaws when using ILC in relation with business model theory with respect to his research question. First, even though ILC theory is very useful in determining good strategies, it does not fundamentally address international competition. Second, business models embody nothing less than the organizational and financial ‘architecture’ of a business, but do not involve competitive strategy (Zott, Amit 2010, Teece 2010). So, when describing actions that solar PV manufacturers should undertake to be competitive in relation to

competitors, I argue that it is better to use some other constructs which do take the dimension of strategy formation into account.

A theory that is more widely regarded to explain the developments in the solar PV industry is catch-up theory. The catch-up hypothesis asserts that being backward in level of productivity carries a potential for rapid advance (Abramovitz 1986). A recent stream of research is using this catch-up theory to describe strategies that latecomer firms (LCFs) in emerging countries can pursue to more successfully catch-up in relation to foreign frontier firms (FFFs)(Xiao, Tylecote et al. 2013, Chen, Li-Hua 2011, Fu, Zhang 2011).

Given this recent focus on LCFs strategies, it becomes very relevant to contribute to theory that describes strategic responses which FFFs pursue in a reaction to technological- and market catch-up from LCFs. This is a theme which has rarely been described as far as my knowledge reaches. This thesis will therefore address this gap in the research and aim to further our understanding of strategic responses that FFFs pursue as a reaction to

technological and market catch-up from LCFs. This will be applied to the context of strategies that European solar PV manufacturers use in order to compete with counterparts from China. The goal of the theoretical framework is to identify the theories that most closely explain the current situation in the solar PV market. The theories that will be reviewed in the this section are the following. First, there is business strategy with particular interest to strategic

responses. Extreme price pressures following market- and technological catch-up from Chinese solar PV manufacturers instigate reactions from their European counterparts.

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12 Second, the institutional frameworks of the countries where the manufacturers under

examination operate in will be analyzed. Institutions play a dominant role in the energy market and more particularly in the solar PV market. During the life cycle of solar PV, policy interventions have had a dominant role in the shaping of the industry and the positions that the actors took in the industry. In addition, national innovation systems theory will be examined. This theory is an offshoot of institutional theory which brings forward a set of institutions that lead to the innovation of specific industries, products, or product categories.

Third, industry life cycle theory will be examined. Hence, competitive strategies are highly dependent on the stage of life cycle that the industry resides in. For example, normally the beginning stages of the ILC require product innovation strategies whereas the latter stages require process innovation strategies.

Fourth, market and technological catch-up theory will be described. This theory explains the process of catching up by latecomer firms (LCFs). This will enable us to better understand the process in which LCFs narrow the gap in relation to foreign frontier firms (FFFs). Hence, by better understanding the strategies that LCFs follow it will be easier to identify strategies pursued by (former) FFFs.

2.1 Solar PV market background

In order to understand the effects of the theories more clearly it is vital to understand the solar PV market to a certain extent.

2.1.1 Drivers behind increases in market share from China

Several studies have paid attention to the causes of the dramatic surge in market share of solar PV manufacturers from China. The factors that are most dominant are, first, Chinese

manufacturers capitalized on their enormous comparative advantage in labor costs. Second, they do relatively well in increasing their overall technological capabilities by profiting from knowledge from state funded R&D programs at Chinese universities. Third, they are able to transfer technology through several channels from FFFs.

Fu and Zhang (2011) conducted a case study analysis in order to analyze the solar PV industry in China and India. They found that China has successfully leapfrogged developed countries in the field of solar PV. The drivers of leapfrogging with regards to solar PV manufacturing in China were found to be a combination of indigenous innovation and international technology transfers. The Chinese government played a crucial role by funding R&D programs and the acquisition of foreign technology. Besides that, the government

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13 successfully created a set of coherent policies in finance, regulatory and industry that shaped an environment which motivates and reinforces radical change

Lema and Lema (2012) focused on technology transfer in the solar PV sector in China and made several conclusions. First, Chinese producers are managing the transition from simple production to innovation capability, which narrows the technological gap with advanced economies. Second, unconventional technology transfer mechanisms (joint R&D with MNE, overseas R&D lab and cross-border M&A) were most important in the catch-up phase of the largest solar PV manufacturers in China. Third, besides technology transfer, endogenous technology transfer was crucially important as a complement and an alternative to technology transfer.

Wu and Mathews (2012) investigate knowledge flows in the solar PV industry by using insights from patenting by the latecomer countries Taiwan, Korea and China. Doing this, they wish to identify the facts that enable a latecomer country to switch from external knowledge generation to internal knowledge generation. China’s patenting activity in solar PV started its surge in 2000, but it has overall about 20 to 30 times lower than patent counts from Korea and Taiwan during the measured time range. China’s main thrust in solar PVs is still in low-cost mass production of 1st generation solar cells. Chinese producers have been focusing more on process innovation, where the innovation activity is concerned with cost competition. Remarkably though, China emerges as a leader in terms of scientific linkage in 2nd and 3rd solar PV technologies. Wu and Mathews (2012) interpret these results by pointing out that China is pursuing a leapfrog strategy, accessing the most recent scientific literature in terms of patenting. Moreover, the internal knowledge sources for developing China’s solar PV

technologies are heavily reliant on the public sector, especially on universities. This is

confirmed by De La Tour, Glachant et al (2011), who add that the innovative performance of China is largely driven by government policies that support R&D in universities, rather than from the inventive dynamism of companies itself. Chinese producers spend less on R&D compared to competitors from Japan and Western countries.

Chinese producers of solar PV are particularly well established in the downstream segments of the value chain, which are cell production and module assembling. In this segments entry barriers are low and therefore the economic importance of these producers should not be overestimated (De La Tour, Glachant et al. 2011).

Chinese producers have built their capabilities for the production of modules and cells through two main ways, which are by purchasing manufacturing equipment on international markets, and by recruiting highly educated overseas Chinese entrepreneurs. Western countries

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14 continue to be leading in upstream markets, where entry barriers are higher because

technological capabilities need to be at a higher level (De La Tour, Glachant et al. 2011).

2.1.2 Solar PV Technologies and performance

Solar energy is the most clean and inexhaustible of all renewable energy resources. Photovoltaic cells directly convert solar energy into electricity. without any heat engine to interfere (Parida, Iniyan et al. 2011). The future of the solar PV industry heavily depends on continuous technological development in order to maintain its growth, increase its efficiency and to become cost-competitive with conventional fossil energy resources (Hoffmann 2006, International Energy Agency 2013).

All solar cells require a light absorbing material which is present within the cell structure to absorb photons and generate free electrons via the photovoltaic effect (Parida, Iniyan et al. 2011). Solar PV efficiency is a measure that gauges the percentage of solar (light) power reaching a module that is converted into electrical power. Conventional cells now range just under 20% efficiency. Theoretical and laboratory efficiency rates are much higher than rates from mass produced solar panels. Performances of the several photovoltaic applications are expected to improve over the coming decades (ETSAP 2013, EPIA 2012).

The solar PV industry currently consists of three generations of technologies. Market shares as a percentage of total electricity generation in solar PV, as well the technological

advancement in each specific generation of solar PV differ substantially. In order to further our understanding of the strategic processes where companies are involved in, it is vital to have a basic understanding of the technological advancement in every generation of solar PV. A summary of the different PV technologies is shown the table 1.

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Table 1 – Solar PV technologies

G en era ti o n W o rl dw ide ma rke t sha re i n ( % ) T ech n o lo g ies C el l ef fi ci en cy ( % ) A d van tage s D is ad van tage s L if e cy cl e s ta g e 1st generation: Wafer-based crystalline silicon (c-Si)

±90 Mono crystalline (mono-c-Si) / Multi crystalline (multi-c-Si) / Ribbon sheet grown silicon

±18 Silicon is abundant and relatively inexpensive Silicon is a very brittle material, requiring thick cells Maturity

Long history (thus experience) with silicon in other products

High reliability and long lifetimes 2nd generation: Thin-film (TF) designs

±10 Amorphous silicon (a-Si) /Amorphous and micromorph silicon multijunctions (a-Si-µc-Si) / Cadmium-Telluride (CdTe) / Copper-indium- [gallium]-[di]selenide-[di]sulphide (CI[G]S)

±12 Thin film is cheaper than crystalline

Significantly

lower efficiency Growth

They have short energy payback times

Prone to degradation Less developed technology 3rd generation: Emerging and novel PV technologies <1 Concentrating PV / Organic solar cells Introduc tion

Sources: (Shah, Torres et al. 1999, Parida, Iniyan et al. 2011)

The 1st generation of solar PV technology consists of wafer-based crystalline silicon technologies and has an approximated 90% market share. It uses silicon (which is heavily abundant in the earth’s crust) as its main material. Silicon has been used as a main material in the semiconductor industry since the 1960’s. For this reason, silicon based technologies currently reside in the maturity phase of the technology life cycle. Innovation takes place in the production process, where the focus is to decrease production cost of the solar panels. This may be achieved by learning-by-doing and reducing material use (ETSAP 2013).

The 2nd generation solar PV technology comprises several thin-film (TF) technologies and has about 10% market share. The TF technology is based on the deposition of a thin layer of active materials on large-area (m²-sized or long foils) substrates of materials such as steel, glass or plastic. In TF technology there is still much more room for product innovation, so

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16 there is room for businesses for which product innovation is their core competence (ETSAP 2013).

The 3rd generation of solar panels consists out of several novel and emerging solar PV concepts and currently comprises less than 1% of the market share. The life cycle currently resides in the embryonic stages, so most improvements in product innovation are to be made here, as compared to first and second generations of technologies (ETSAP 2013).

Most heavy growth in the solar PV market in the last decade has appeared in the 1st generation solar panels. The Chinese have since the 2000s been able to acquire the techniques to produce these panels in a high-end and highly cost competitive way and to flood the Western market with it. There has been a short period of a surge in market shares of 2nd generation of solar before the influx since 2007 of the Chinese solar panels led to a revival of high market shares for 1st generation solar panels (ETSAP 2013).

2.1.3 The solar PV value chain

Throughout the solar PV value chain (figure 2, appendix) there are many beneficiaries which have different interests argued from the perspective of the European players. For the upstream side of the value chain (production), the influx of low priced solar panels from China is catastrophic since it decreases demand for EU made products. For the distributors and installers this is the other way around since they can get higher margins on their sales to European customers. In the short run, the heavy price reductions are beneficial to the European end consumer. In the long run it may be detrimental for the European end

consumer, since a shakeout of European solar PV manufacturers may lead to higher market prices and higher dependency on Chinese manufacturers and their products (Corrinelin 2013). Overall, the objective of solar PV manufacturers is to reduce costs in all phases of the value chain on to move towards grid parity. Hence, it becomes commercially viable for end consumers to replace their conventional energy use by solar PV generated electricity. At the same time, the manufacturers are improving overall efficiency, driving innovation and reducing business risks (Deloitte 2009).

2.1.4 Market segments

The solar PV market is generally subdivided based on end-use sector into four market segments, which are residential, commercial, utility and off-grid (figure 3, appendix). The solar PV end user segment can also be divided in on-grid and off-grid installations. The grid refers to a national or international electricity grid, which is an interconnected network for delivering electricity from suppliers to consumers.

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17 The residential segment consists of consumers that generally place solar panels on their

rooftops in order to generate electricity for their household. Commercial use comprises businesses that generate solar electricity for the purpose of taking the environmental

path, contribute to generate profit or feed production activities (REC Group 2014). The utility segment refers to electric power companies that generate electricity on a large scale and deliver this electricity to their customers (residential, commercial, industrial). Utilities are often heavily regulated by their governments. The off-grid segment is a collection of solar PV installations that are not connected to the grid, most notably in remotely located industries and for rural electrification (Hoffmann 2006).

Residential use currently exists for about 60% of the total solar PV electricity generation. Until 2050, the major shift is expected to be from residential to larger-scale PV applications (ETSAP 2013). The rationale behind this development is that utility electricity companies will produce solar PV on a more massive and professional way stimulated by government

incentives.

2.2 Business strategy

In his study about competition between Chinese and European solar PV firms, Bastiaenen (2011) uses business models as the dependent variable. Business models aim to capture and create value by building a system of interdependent activities. Something that business model theory does not take into account, is how and to which extent business models create a

competitive advantage (Zott, Amit 2010, Teece 2010). Since the reactions against competitive pressures is a vital part to describe, constructs that do regard competitive advantage are more suited to use in relation to this research question.

Peng, Wang et al. (2008) propose that an institution-based view (IBV) of international strategy has emerged. This view is supposed to be positioned as the third leg of the “strategy tripod”. The other two legs are the industry based view that was introduced by the work of Porter (1979), and the resourced based view (RBV), exemplified by Barney (1991). Peng, Wang et al. (2008) argue that the RBV and the industry based view can be criticized for largely ignoring formal and informal institutions that provide the context of competition among industries and firms. This tendency is not surprising, since most research on

competition arises from the US, where there is a relatively stable market based institutional framework.

In the research setting of this thesis, all of these three legs of the strategy tripod seem to play an important role. The role of institutions is much more abundant in the solar PV industry

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18 than in another industry on average. These are in the form of formal institutions like

government policies, and informal institutions like consumer preferences and cultural awareness towards solar PV. As exemplified by the section above about LCF vs. FFF strategies, the formation of technological capabilities are of vital importance, which gives credence to the RBV. Then the industry factors are very important, as exemplified by ILC theory, where the ILC stage is a key determinant for the success of LCFs or FFFs.

There is extant literature that elaborates on first mover- and/or late-mover advantages (Lieberman, Montgomery 1988, Shankar, Carpenter et al. 1998). In this literature, it is explained which strategies either a late-mover or first-mover can pursue in order to capitalize on its market position. This literature is very helpful to understand the strategies and market positions that the players in this research setting have. Interestingly, the market positions of the players in this research setting have become somewhat blurred in relation to this theory; the Chinese manufacturers were latecomers initially and are now market leaders, whereas European solar PV manufacturers were market leaders and are now followers (in terms of market shares).

As stated in the introduction, there is a stream of research that explains catch-up theory and the strategies that LCFs can pursue to catch-up with FFFs, mostly through leapfrogging. There is lacking research on how FFFs can specifically respond to the LCF strategies. In order to better understand the FFF strategies that European solar PV manufacturers pursue, I will summarize the relevant research on LCF strategies. After all, one needs to know the strength, weaknesses and strategies of their competitors to successfully compete with them.

Mathews (2002) is among the first scholars to establish a connection between catch-up theory and the strategic management literature. He puts forward the linkage, leverage and learning (LLL) model. ‘Linkage’ entails that a LCFs connects with FFFs in various kinds of

contracting or licensing agreements. This enables the LCF to ‘leverage’ resources like knowledge, technology and market channels from such linkages. The LCF will go through several recurrences of this linkage and leverage process, enhancing their technological capabilities in a process that is best described as ‘learning’.

With regards to foreign technological capability (TC) building, Fu & Zhang (2011) put forward the two-leg forward strategy, which entails that LCFs should pursue a combination of external knowledge transfer as well as indigenous innovation in order to build up TC. The importance of each driver depends on the ILC stage and the general development in the developing country (Fu, Pietrobelli et al. 2011, Fu, Gong 2011).

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19 Based on a slightly adopted model of Freeman (1992), Xiao, Tylecote et al. (2013) put

forward four strategies that LCFs can use in order to increase their technological capabilities. These are the dependent strategy, imitative strategy, defensive strategy and offensive strategy. The first two strategies that a LCF can choose of are dependent and imitative. Once the LCFs reaches a certain level of TC, and hence, increased resistance from FFFs it can switch to a defensive or an offensive strategy.

An ‘imitative’ strategy entails that a LCF follows behind the leader in established technologies. It strives to minimize its dependence in relation to the FFF. A ‘dependent’ strategy, on the other hand, will typically involve renting or buying a bundle or package from a FFF, e.g. a production plant. This strategy provides the firm with static TC and little

dynamic TC, because the company does not do any of these things for itself (Xiao, Tylecote et al. 2013). This strategy was mostly followed by state favored firms in China during the 1990s (Liu, Tylecote 2009).

A ‘defensive’ strategy is used when a firm is seeking to develop new technology – albeit only incrementally - through internal R&D, and usually uses patents to protect it. In this way, the company defends against another company that follows an ‘offensive’ strategy, which entails that a firm makes breakthrough innovations from time to time (Xiao, Tylecote et al. 2013). The key questions regarding these strategies for the LCF seems to be the initial choice between the imitative or dependent strategy. The imitative strategy tends to lead to dynamic TC, since it follows a more reactive stance. Hence, the transition to a defensive strategy is likely to be more successful. This is less so with the dependent strategy, which tends to lead more to the development of static TC (Xiao, Tylecote et al. 2013, Liu, Tylecote 2009). As will be elaborated in the literature review about catch-up theory, a distinction is made between technological catch-up and market catch-up. The bottom line is that LCFs need to accumulate technological capabilities as a prerequisite to increase their market shares (Lee, Lim 2001). Technological knowledge will generally be contained within FFFs in advanced economies, so an essential issue is how this knowledge transfers from FFFs to LCFs. The other way for LCFs to retain technological knowhow is through indigenous innovation (Fu, Pietrobelli et al. 2011).

Overall, business strategies that European solar PV manufacturers currently follow are a reaction to the heavy competitive pressures from China. These pressures constitute such a powerful force that EU solar PV manufacturers cannot survive without having an adequate answer to it. Therefore, I will review the literature on strategic responses in the following section.

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2.3 Strategic responses of EU PV manufacturers

In this section strategic responses of European solar PV manufacturers in reaction to competitive pressure from China and to institutional frameworks will be elaborated.

According to Price Waterhouse Coopers (PwC 2012), PV manufactures respond strategically to heavy price competition from Chinese PV manufacturers. In their reactions, EU PV manufacturers share three strategic elements: vertical integration across the value chain, differentiated solution offerings and focus on improving the efficiency of their operations (PwC 2012). In addition, strategic responses to low cost competition are considered to clarify the actions taken by EU PV manufacturers. Oliver (1991) offers a typology of strategic

reactions to institutional processes under varying circumstances, which applies the convergent insights of institutional and resource dependence perspectives to the prediction of strategic responses to institutional processes. Company size and financial position of the EU PV manufacturer will be examined as firm characteristics that moderate the relations between the external pressures and strategic responses.

2.3.1 Vertical integration across the value chain

Michael Porter (1980) proposed the value chain as the main tool for identifying ways to create more customer value. The value chain is defined as a the entire collection of value-creating activities performed to design, produce, market, deliver and support the firm’s products (Porter 1980). Brown (1997) defines the value chain more succinctly. Namely, as a tool to disaggregate business into strategically relevant activities to enable identification of the source of competitive advantage by performing these activities more cheaply than its competitors.

Walter and Lancaster (2000) found that three perspectives emerge regarding the value chain. First, the emphasis on relationship management between activities or organizations. Second, the need for this relationship management to result in competitive advantage. The third is identification of the role of information to evaluate the nature of opportunities offered, to coordinate the activities towards successful strategic adaptations in the value chain (Walters, Lancaster 2000).

Businesses that pursue vertical integration of the value chain may have two goals. First, value may be added to the product in every step to the value chain in order to optimize profits. Second, producers get closer to the final customer and hereby increase customer satisfaction to build up a stronger reputation (Kotler, Armstrong 2010). These two goals may be achieved through intra-organizational process integration or through inter-organizational collaborative integration including strategic alliances and operational excellence (Morash, Clinton 1998).

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21 Hansen and Birkshaw (2007) put forward the innovation value chain which offers a

comprehensive framework for pinpointed internal weaknesses and tailor innovation best practices to address the deficiencies. The three steps in the innovation value entail idea generation, idea conversion and idea diffusion where it is necessary to implement these ideas optimally effective within the value chain.

In the solar PV value chain (figure 4, appendix), PV manufacturers can choose to increase their downstream activities by processing the materials (like silicon, cells and wafers) that are needed as an input to produce solar panels. On the upstream activities, PV manufacturers can choose to take over tasks that normally are executed by wholesalers, distributors and

installers (Deloitte 2009). Vertical integration in solar PV manufacturers may be spurred by decreasing profit margins due to low cost pressure from China. Consumer demand may motivate solar PV manufacturers to build their own solar plants and sell the generated energy. Also, PV manufacturers may expand their offering to increase convenience for the final consumer by selling peripheral products like inverters or mounting systems that are required to set up a solar system (Deloitte 2009).

2.3.2 Differentiated solution offerings

Porter (1980) describes differentiation as creating product or service offerings that are widely valued by buyers. Differentiation provides protection against rival competitors because it creates brand loyalty by customers which results in lower price-sensitivity. Higher prices increase margins and avoids the need for low cost competition. Differentiation requires a perception of exclusivity which is incompatible with high market share (Porter 1980). Solar PV manufacturers can differentiate on products, services, personnel, image and value positioning (Kotler, Armstrong 2010). In relation to Chinese PV manufacturers, EU PV manufacturers can differentiate in many more aspects and thus the gains of differentiation will be higher. Chinese PV manufacturers follow a low cost strategy based on mass-production and stand far away from the Western final consumer, physically and culturally. This limits the number of opportunities which are required to create competitive advantages through differentiation. On the contrary, EU PV manufacturers are much smaller and stand closer to the final European consumer. Their smaller size may give them less stability but more flexibility to adapt to a situation where the market or institutional frameworks demand a flexible strategic response (Trigeorgis 1996, Volberda 1996).

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2.3.3 Focus on improving the efficiency of operations

The focus strategy has two variants, which are cost focus and differentiation focus. The difference is that cost focus exploits differences in cost behaviors in some segments, while differentiation focus exploits the special needs of buyers in certain segments. The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively (Porter 2008). According to PwC (2012), PV manufacturers should follow a cost focus strategy to be successful because the PV market has, supposedly, arrived the maturity stage of the industry life cycle (ILC). ILC theory tells that the focus of R&D on innovation shifts from product innovation to process innovation in the maturity phase of an industry (Utterback, Abernathy 1975). Products in a mature industry will develop to a dominant design where differentiation on product development gets more difficult. Attention of businesses shift to make the

production process optimally efficient, so that maximum profit margins can be reached (Gort, Klepper 1982, Utterback, Abernathy 1975).

Solar PV manufacturers can pursue process innovation and thus optimize cost efficiency in different ways. First, they can acquire solar PV manufacturing machinery and equipment which is available in the market place (De La Tour, Glachant et al. 2011). Second, they can analyze optimum economies of scale levels for commercial side effects as well as technology side effects. Third, cost components like personnel and material costs can be closely

examined and be cost optimized accordingly (Goodrich, Powell et al. 2013).

2.3.4 Strategic responses to low-cost entry

Ito and Harumi (2003) analyzed the responses of incumbent carriers to low cost carrier entry on their routes. They found that highly aggressive incumbent reactions are more the exception rather than the rule. Typical price and capacity response by incumbent carriers has been fairly accommodating. While the incumbent often aligns its price to that of the entrant, it rarely undercuts the rates. They found no clear evidence that incumbents try to outpace or match the new entrants by capacity responses. It was also found that the reaction of the incumbent does not significantly influence the success of the new entrants.

Simon (2005) studied incumbent pricing responses to entry, using data on magazine subscription prices. The entry of new firms has important effects on incumbent firms and consumers. There are two main reasons why incumbents may cut prices following new entry: deterrence of entry and current profit maximization. This study found that incumbents with stronger incentives are more likely to react to new entry. There was no support for the first hypothesis: ‘Incumbent prices are negatively related to entry’. Suggesting that, on average,

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23 incumbent magazines do not cut prices in the face of entry. What Simon (2005) found,

however, is that newer incumbents cut prices more in response to entry.

The study of Steenkamp, Nijs et al. (2005) found that the dominant short-run reaction form is ‘no reaction’. The simple reaction patterns tend to be retaliatory, but multiple reactions are as often retaliatory as accommodating. Retaliations to price-promotion attacks are stronger than those to advertising attacks. Reactions are stronger in the short run than in the long run. Managers in competitive settings are typically short-run oriented and their short-run reactions have little effect on their long run marketing spending strategy.

2.3.5 Strategic responses to institutional processes

In this research, strategic responses that solar PV manufacturers have to institutional processes will be analyzed. The typology of Oliver (1991) will be followed given its dominance in the academic literature. When analyzing strategic responses to institutional processes, Oliver (1991) demonstrates how organizational behavior varies from passive conformity to active resistance in, depending on the nature of the pressure itself. The typology consists of five types of strategic responses: acquiescence, compromise, avoidance, defiance and manipulation. These types vary from passivity to increasing active resistance.

Acquiescence refers to adherence to institutional processes by imitation and compliance.

Particularly when institutional norms are perceived as a social fact and may preclude to respond strategically because of unawareness of the institutional influences. Compromise entails balancing the expectations and negotiating with institutional stakeholders.

Organizations often follow this strategy when they consider unqualified conformity

unpalatable or unworkable. Avoidance is defined as the organizational attempt to preclude the necessity of conformity. This is done by concealing in disguising nonconformity, loosening institutional attachment or to escape by changing goals, activities or domains. Defiance is a more active form of resistance to institutional processes and can be pursued through three tactics: dismissal, challenge and attack. One of these options is often chosen when the potential for enforcement of institutional rules is perceived to be low or when internal objectives diverge or conflict with institutional rules or requirements. Manipulation is intended to actively change or exert power over the content of the expectations or the

institutional actors that seek to express or enforce them. This may be done through co-opting by importing influential constituents or by exerting influence by shaping values and criteria (Oliver 1991).

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2.3.6 Influence of business size on strategic responses

Chen and Hambrick (1995) investigated how small firms differ from large firms in their competitive behavior in the US airline industry. Small airlines were found to have a greater propensity for action, faster execution speed and less action visibility than their larger rivals. On the other hand, small airlines were less responsive to competitive attacks and responded more slowly to announcements of actions than larger firms. So there were significant differences between small and large firms in terms of their strategic responses.

Ito and Lee (2003) analyzed the responses of incumbent carriers to low cost carrier entry on their routes. They found that highly aggressive incumbent reactions are more the exception rather than the rule. Typical price and capacity response by incumbent carriers has been fairly accommodating. While the incumbent often aligns its price to that of the entrant, it rarely undercuts the rates. They found no clear evidence that incumbents try to outpace or match the new entrants by capacity responses.

2.3.7 Influence of financial strength on strategic responses

Khanna and Tice (2000) studied the US discount department store industry, where Wal-Mart entered a large number of markets in a short period of time. They examined how certain firm- and market-specific characteristics like the effect of ownership structure, capital structure and market focus, affect incumbent firms’ responses to new entry into their local markets. They found that larger and more profitable incumbents respond more aggressively to Wal-Mart’s entry, while more highly levered incumbents respond less aggressively. This study found evidence that managers fight harder to rescue their business when their job is at risk. High managerial ownership reduces the intensity of the aggression (Khanna, Tice 2000).

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2.4 Competitive pressures from Chinese PV manufacturers

Competitive pressure from China is a is a result of a complex competition game. Chinese PV manufacturers capitalized on their backward position in order to catch-up and surpass EU PV manufacturers (Chen, Li-Hua 2011, Fu, Gong 2011). This process of catching-up is clearly described in catch-up theory (Perez, Soete 1988, Abramovitz 1986, Brezis, Krugman et al. 1993). The current academic literature does not clearly describe what strategic responses Western firms can take when they are confronted with market or technological catch-up from China. This is a gap in the academic literature and this research aims to fill up this gap. Therefore, it is necessary to clearly understand the processes that explain the underlying processes that strengthened Chinese PV manufacturers.

Catch-up theory forms a strong basis for understanding competitive pressure (Young, Huang et al. 1996) from Chinese PV manufacturers and elucidates the competitive dynamics between EU and Chinese PV manufacturers (Xiao, Tylecote et al. 2013). Hence, options of strategic reactions EU PV against Chinese counterparts will have a stronger theoretical grounding.

2.4.1 Catch-up theory

In the literature there are two main definitions that attempt to explain the concept of catching-up. According to Abramovitz (1986), the catch-up hypothesis asserts that being backward in level of productivity carries a potential for rapid advance. Perez and Soete (1988) define catching-up as a question of relative speed in a race along a fixed track, and technology is understood as a cumulative unidirectional process.

The bottom line is that developing countries hold an advantage over developed countries since they can avoid mistakes that their forerunners made, imitate technology from them and profit from its comparative advantage in lower labor costs (Brezis, Krugman et al. 1993). So, the larger the technological and, therefore, the productivity gap between leader and follower, the stronger the follower’s potential for growth in productivity and the faster one expects the follower’s growth rate to be. Followers tend to catch up faster if they are initially more backward (Abramovitz 1986). This view is contrary to theories of dependency, which hold that there is a structural gap between developing and developed countries that remains and widens to the benefit of the developed countries (Perez, Soete 1988).

The most important prerequisite for catching-up is the acquisition and use of technological know-how. Perez and Soete (1988) state that a real catch-up process can only be achieved through acquiring the capacity for participating in the generation and improvement of

technologies as opposed to the simple ‘use’ of them. This means being able to either enter as an early imitator or as an innovator of new products and processes.

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26 A related stream of research is approaching catch-up theory from a firm level perspective rather than from a national perspective. It has acquired an extensive toolbox of concepts involving the development by firms of technological capabilities, technological effort and industrial upgrading (Hobday 1995, Lall 2000, Mathews 2002).

The overall challenge confronting the latecomer firm (LCF) is how to devise and implement corporate strategies which enables it to overcome initial market and technological barriers to entry and to systematically build internal capabilities and to increase export sales. LCFs began with incremental improvements to manufacturing processes which led on to minor product innovations (Hobday 1995).

According to Lall (2000), the process of technological change in developing countries is one of acquiring and improving on technological capabilities rather than on innovating on frontiers of knowledge. Well-constructed national innovation systems – which consist of the common set of rules, factor markets, incentives and institutions – have a significant positive impact on the degree to which latecomers are able to catch-up in technological capabilities. Mathews (2002) elaborates on the previous works of Hobday (1995) and Lall (2000) in an attempt to connect LCF theory with the rich literature on strategic management. He took a first tentative step to explore the extent to which these conceptual frameworks overlap. In other words: how can advantages of the LCF be translated into successful catch-up strategies? This results in a strategic theory of overcoming competitive disadvantages through linkage, resource leverage and learning which was elaborated on in the business strategy section. Based on findings from several Korean industries, Lee and Lim (2001) argue that catching-up can be measured in terms of “technological capabilities (TC)” and “market shares”. Catching-up in technology and markets are highly related concepts, since technological catch-Catching-up is a prerequisite for market catch-up. Sustained long-term increase in market shares is difficult to achieve if it is not accompanied by increases in technological capabilities. If these firms do not increase their technological capabilities, they will find it increasingly difficult and expensive to buy the technologies needed for higher level market shares.

TC can be subdivided in static TC en dynamic TC. Static TC can be defined as “the ability to use specific existing technologies for production in one point of time, and dynamic

capabilities can be used throughout several settings and points in time” (Xiao, Tylecote et al. 2013).

Firms can only catch-up in market shares and TC if the benefits of international technology diffusion run parallel to indigenous innovation efforts and the presence of modern

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27 this combination of factors, foreign technology is likely to remain static technology embedded in machines which will never turn into real indigenous technological capability (Fu,

Pietrobelli et al. 2011).

There are several modes of catching-up. These modes are separated based on the path of development a LCF takes throughout a catch-up process. Studying examples from the Korean industries, three different patterns of catching-up were identified. They are defined in

comparison with the paths taken by foreign frontier firms (FFF) in the advanced countries. The patterns include path-creating catching-up, path-skipping catching-up and path-following catching-up. The first two cases of catching-up may be considered as leapfrogging and the latter may be considered as linear catch-up (Lee, Lim 2001).

Fu and Zhang (2011) conducted a case study analysis of the solar PV industry in China and India. They found that China has successfully leapfrogged developed countries in the field of solar PV. The drivers of leapfrogging with regard to solar PV manufacturing in China were found to be a combination of indigenous innovation and international technology transfers (Fu, Zhang 2011).

2.4.2 Leapfrogging

Leapfrogging is a way for emerging economies to catch up with developed economies, which refers to a non-continuous advancing mode, in the course of which some phases or steps are skipped. The first pattern is a stage-skipping catching-up, which means that the latecomer follows the path of the frontier only partly, and thus saves time. The second pattern of leapfrogging is path-creating catching-up, which means that the LCF explores its own or partly own path of technological development (Lee, Lim 2001). The idea of leapfrogging is that some latecomers may be able to leapfrog older vintages of technology, bypass heavy investment in previous technology systems, and catch-up with advanced countries (Hobday 1995). In fact, this mechanism has been repeated over time throughout history.

A frontier economy will be a high-wage nation and therefore new technologies or industries that are initially less productive than the old are not profitable. This opens doors for the lagging nations, were the old technology is less developed and the wages are low. Hence, the new technology is more attractive for the lagging nation to develop and thereby to leapfrog the frontier in an industry (Brezis, Krugman et al. 1993).

An example of technological leapfrogging in China in relation to developed countries is the surge in use of cellular telephones. In the case of rural areas, cellular telephony was the first technology used in telecommunications. Developed countries usually started with wired

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28 telephone systems before switching to cellular systems. In this case, leapfrogging could occur because cellular technology is cost competitive in relation to expensive wiring (Mu, Lee 2005, Goldemberg 1998, Davison, Vogel et al. 2000).

The extent to which energy leapfrogging actually occurs may be limited in some cases. Leapfrogging through international technology transfer is especially problematic because often developing countries lack the technological capabilities to produce or integrate the advanced technologies themselves. Until the time they have acquired the capabilities to do this, most developing countries buy their technologies from industrialized countries (Gallagher 2004).

Based on evidence of a study from the study from the Chinese auto industry, three main limiting factors were identified. First, un-strategic and inconsistent policies. Second, weak domestic technological capabilities, and third, unwillingness of more advanced multinational auto firms to transfer cleaner and more efficient technologies beyond those simply required by standards. It is vital to acknowledge these limits of the energy leapfrogging concept in order to realize conducive strategies (Gallagher 2004).

2.5 Industry life cycle theory

Industry life cycle (ILC) theory aims to explain changes in technological development and industry structure over the period that the industry ages (Peltoniemi 2011). ILC finds its origin in product life cycle (PLC) theory, which describes the ‘life’ of a product rather than an entire industry (Klepper 1997). In its most classic form, the ILC consists of three stages: the

emergence stage, the growth stage and the maturity stage.

In the emergence stage, a technological opportunity encourages the entry of a large number of firms and the introduction of various product innovations (Klepper 1996). A technological opportunity arises when there is a need for change in a competence needed to produce the product, a change in the physical product or an increase in the price/performance ratio of a product (Ehrnberg 1995). This phase is characterized by the important role of information, because the new entrants with innovative product designs are competing for market

dominance (Gort, Klepper 1982). Market shares tend to change rapidly and firms offer many different variations of the primitive product (Klepper 1996).

In the stage of market growth, the market experiences rapid growth, which is characterized by high output growth, occurrence of a few dominant product designs, slowdown of entry and a shakeout of producers, while competition intensifies on product innovation. The intensity of

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29 the shakeout of producers varies throughout different industries (Klepper 1996, Klepper 1997).

In the last stage, the maturity stage, a saturated and mature market has emerged. Production growth is leveling off, entry declines further, market share becomes more stable, product innovations less salient, while the main focus shifts to downstream value chain processes like sales and marketing. A dominant design emerges, which makes it difficult to differentiate for businesses and therefore they will be competing on price. This will squeeze out profit margins (Klepper 1997, Gort, Klepper 1982).

A vital development that occurs throughout the ILC is the focus of R&D on innovation. In the early stages of the ILC, the R&D will be directed at product innovation. Competition will revolve around the superiority of a firm’s products within the industry. In the later stages of the ILC, the focus will steadily shift to process innovation. At this point, the product has reached or is closed to its optimal form. Therefore the providers within the industry will aim to make the production process optimally efficient, so that maximum profit margins can be reached (Utterback, Abernathy 1975).

The question in which phase of the ILC the solar PV industry currently resides is not uniformly answered in the literature. In a comparable study conducted in 2011, Bastiaenen hypothesizes that the industry is still in the growth stage, but will approach maturity soon. His rationale is that solar PV is approaching the grid parity level, which means that the price of solar PV is at the same level as conventional energy. Approaching the grid level will coincide with approaching maturity.

However, experts in the field who were interviewed by Bastiaenen (2011) argue that the industry has just come out of the emergence stage. Therefore the industry should now reside in the growth stage. Given prognoses of institutions like Greenpeace (2012), growth could continue for several more decades which implies that the maturity stage is not in sight yet.

2.6 Relation between catch-up theory and life cycle theory

Several authors attempt to demonstrate the relation between catch-up theory and life cycle theories (Wells 1983, Perez, Soete 1988, Xiao, Tylecote et al. 2013).Industries in developed countries have a clear advantage in the emergence stage of the life cycle stage, since their research and innovative capabilities are better developed than in emerging countries. This advantage will shift during the growth stage where the focus shifts to process innovation and thus efficiency. An emerging country like China often has a competitive edge here since it can produce much more efficiently due to immensely lower labor costs (Perez, Soete 1988).

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30 Perez and Soete (1988) explain technological catch-up in relation to technology life cycle (TLC) theory. They define the TLC as a once-and-for-all static technology which is submitted to incremental improvements in quality, performance , reliability or whatever other aspect and follows a certain technological trajectory. The TLC (Figure 5 - The life cycle of a technology, appendix) is more or less similar to the ILC for the exception that is has four stages:

introduction stage; early growth stage; late growth stage and the maturity stage. Phase two and three of the TLC are ‘early growth’ and ‘late growth’ respectively, whereas in the PLC there is only one growth stage.

Wells (1983) explains the development of catch-up by third world multinationals from the perspective of the PLC model. It consists of a chain of events, which starts with innovation in an advanced country, leading to technology transfer and diffusion to firms in developing countries. This leads to local innovation followed by export flows from the developing to the developed country. Only a very limited amount of innovation by the third world MNEs is assumed.

A very recent stream of research is trying to explain the interplay between the ILC and technological catch-up. Xiao, Tylecote et al. (2013) do this by researching the impact of technology intensity and corporate governance on technological catch-up in companies that operate in different sectors in China. Technology intensity is regarded by Xiao, Tylecote et al. (2013) as a part of the ILC since technology intensity is highest in the first stage of the ILC.

2.7 Institutional frameworks

Institutions are humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints like sanctions, taboos, customs, traditions, codes of conduct, and formal rules like constitutions, laws and property rights (North 1991). Williamson (2000) elaborates on the work of North (1991) by classifying institutions in four levels, based on the speed that these institutions can be adapted. Governments aim to create an institutional framework that stimulates the emergence,

development and protection of their respective solar PV industries. There is a huge amount of government policy involved in the solar PV industry, which comes in the form of legislation, subsidies and import tariffs. These frameworks have a substantial impact on the industry and therefore it is vital to consider its influence and effect in order to answer the research

question.

There are numerous drivers that led to the constitution of these institutional frameworks. First, many countries have signed international agreements that oblige them to reduce CO2

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31 emissions and to work systemically on environmental protection. These agreements set

binding targets over a specified period of time. A well-known example is the Kyoto Protocol (OECD 1999). Second, economically speaking, a prosperous solar PV sector is contributing to the economy because abundant electricity can be sold to other countries. Third, there is a geostrategic benefit since more electricity sources make a country less dependent from electricity imports (Jacobsson, Johnson 2000).

These motivations led governments to create an environment in which businesses involved in solar PV are encouraged and protected against uncertainty for investment in R&D, production and exploitation. This support is especially trivial in the emergence stage of an industry since heavy investment in product innovation focused R&D is high and there is huge uncertainty of payback of the investment (Perrot 2011).

2.7.1 National innovation systems

Since the role of institutions and development in technological capabilities were found to be so important in relation to catch-up in the solar PV industry (Fu, Zhang 2011), I will explain the national innovation systems (NIS) approach in more detail. It is necessary to have a supportive NIS, formed by market-driven private firms, all levels of government agencies, research and training institutions, financial intermediaries, and the linkages and interactions between these actors (Balzat, Hanusch 2004).

The concept of the innovation system has been developed to capture and understand the relations between producers, users, institutions and governments (Klagge, Liu et al. 2012, Lundvall 1992). According to the Organization for Economic Co-operation and Development (OECD 1999), an innovation system can be loosely defined as a set of actors and institutions and their interactions including the flow of information, knowledge and resources, as well as market transactions. Or as Hekkert, Suurs et al. (2007) put it: an innovation system is an heuristic attempt, developed to analyze all societal subsystems, actors and institutions contributing to the emergence or production of an innovation. An important difference between the latter definition and the first two, is that the latter includes the word ‘innovation’ in its definition. This implies that innovation is the key element in the NIS concept.

Fu and Zhang (2011) divide NIS in industry-university linkage and the interplay among governmental bodies and resulting institutions. In order to construct China’s innovation system in the field of wind energy, Klagge et al. (2012) divide the concept in three

dimensions (Figure 7 - The conceptual framework for understanding China’s wind energy innovation system, appendix), which are: actor constellations and their interactions beyond

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32 firms, the role and impact of institutions, and technology. In a study that attempts to explain the developments of limited innovation in energy efficiency in the built environment in The Netherlands, Faber and Hoppe (2013) divide the sectoral NIS in four dimensions (Figure 8 - Dimensions of sectoral patterns of innovation and their interaction, appendix), which are: agents, interactions and networks; institutional framing; technological regime; and market demand.

When considering the current research question of this thesis, the NIS approach is very much directed at the aspect of innovation. It is assumable - but not given - that innovation is the key factor that enables the European FFFs to regain their market shares in relation to Chinese LCFs. In addition, it does not directly address the issue of competition. However, it does contain very relevant dimensions that are expected to impact the relation between catch-up from China and strategic responses from EU solar PV manufacturers.

2.8 Government policies regarding renewable energy

Government policies play the most important role in the institutional frameworks solar PV industry. Political bodies have a strong foothold in energy policy due to reason that were explained before in the introduction. These policies strongly determine the success of solar PV manufacturers in the countries they operate in (Alagappan, Orans et al. 2011). Therefore a basic summary of government policy in China, government policy in Europe and China-EU relations is given in the next sections.

2.8.1 Government policy in EU-28 regarding renewable energy

There are very similar drivers for the EU-28 compared to China in advancing in RES. One problem is the increased dependency of foreign energy resources. This is caused by increased energy consumption as well as depletion of indigenous energy resources (Jäger-Waldau, Szabó et al. 2011).

Until 2007, the development of renewable energy was driven by a loose legislative framework, which set non-binding targets. The year 2007 was a turning point for the

European Union’s climate and energy policy, where the council endorsed a binding minimum target of 20% share of RES in the overall energy consumption by 2020, and a 10% minimum by all member states for the share of biofuels in overall EU transport petrol and diesel

consumption. The main instruments the EU uses to enforce these targets to their members are the directives to promote RES (Jäger-Waldau, Szabó et al. 2011).

The EU expects to increase its RES production between 2010 and 2020 by about 90%. This growth will mainly be filled by solar, wind and biomass energy. Solar will increase by about

Strategic responses to catch-up : the case of European solar PV manufacturers following the rise of China

Master thesis