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International Journal of Emerging Markets

Emerald Article: Competitive advantage of German renewable energy firms in India and China: An empirical study based on Porter's diamond Corinna Dgl, Dirk Holtbrgge, Tassilo Schuster

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To cite this document: Corinna Dgl, Dirk Holtbrgge, Tassilo Schuster, (2012),"Competitive advantage of German renewable energy firms in India and China: An empirical study based on Porter's diamond", International Journal of Emerging Markets, Vol. 7 Iss: 2 pp. 191 - 214 Permanent link to this document: http://dx.doi.org/10.1108/17468801211209956 Downloaded on: 10-05-2012 References: This document contains references to 93 other documents To copy this document: permissions@emeraldinsight.com

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Competitive advantage of German renewable energy rms in India and China


An empirical study based on Porters diamond
Corinna Dogl, Dirk Holtbrugge and Tassilo Schuster
Department of International Management, University of Erlangen-Nuremberg, Nuremberg, Germany
Abstract
Purpose The purpose of this paper is to analyze the competitive advantage of German renewable energy rms in India and China. Porters diamond model is modied and specied for the renewable energy industry. Design/methodology/approach Based on Porters diamond model of competitiveness, the authors examine the demand for renewable energies in India and China and the ability of German rms to meet this demand. Findings While the overall demand for renewable energies in India and China is signicant, the study reveals remarkable differences in the elds of biomass, solar and wind energy. The ndings are meant to address managers in the renewable energy industry and to aid policy makers in environmental support and action. Research limitations/implications A major theoretical contribution of the study is the application of Porters diamond model to the renewable energy industry, as well as the identication and operationalization of the relevant causal and proxy variables. Practical implications The paper provides a detailed analysis of the factors on which the competitive advantage of German renewable energy technologies in India and China is based. This helps managers of renewable energy rms to focus on those areas where they have particular strengths and to introduce measures to overcome potential weaknesses. Originality/value The authors used a modied version of Porters diamond model and specied it for the renewable energy industry. The model was tested empirically in Germany and both emerging countries on the basis of secondary data. Keywords Germany, India, China, Renewable energy, Energy industry, Competitive advantage, Competitiveness, Asia, Porters diamond Paper type Research paper

German renewable energy rms 191


Received 16 September 2010 Accepted 23 November 2010

Introduction Indias and Chinas demand for renewable energy The global energy industry is on the brink of radical change. Carbon dioxide emissions threaten the world climate, while oil reserves are being depleted and the dependence on a few oil producing countries endangers the global oil supply (Petermann, 2008). There is an ongoing discussion among politicians, economists, and engineers about the sustainability of the present energy systems and their future development in the twenty-rst century (European Commission, 2002). This implies that new sustainable energy alternatives such as wind, biomass and solar energy are required sooner than later.

International Journal of Emerging Markets Vol. 7 No. 2, 2012 pp. 191-214 q Emerald Group Publishing Limited 1746-8809 DOI 10.1108/17468801211209956

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Emerging market countries are expected to account for 75 percent of the increase in emissions over the next decades, which will cause further environmental problems (ONeill and Lawson, 2007). Consequently, their unquenchable thirst for energy and the awareness of global warming are leading to a growing importance of renewable energy technologies in these markets (Goldman Sachs, 2007). With growing markets and a growing demand for energy, India and China are considered to be interesting target markets for investors in biomass, solar and wind energy technologies (Ramesh, 2009; Watts, 2009). Today, India is the sixth largest energy consumer, and Indias energy hunger is estimated to increase by 400 percent until 2032 as a result of strong economic growth and a fast growing middle-class (Knipp, 2008a). Due to the increasing energy demand, frequent power cuts and the growing awareness of climate change, the Indian Government has made great efforts to develop and promote renewable energy technologies. Thus, the use of renewable energies has become more visible over the last years (Malla, 2010; Misra, 2007) and India was the rst country that created a ministry dedicated exclusively to renewable energy (Business India Intelligence, 2009). As a tropical country the energy generation potential of biomass is remarkable and some of it is already used for domestic, commercial and industry applications (Ernst & Young, 2007). Solar resources are also abundant with the sunniest locations on the southeast coast (Meisen, 2008). Moreover, there is a huge potential for wind energy in the south/west of India and its 7,000-mile coastline also offers signicant potential for off-shore which is currently untapped (European Union (EU), 2006; Boyle et al., 2008). The vast potential of renewable energy technologies is signicant, but overall only 10 percent of it is utilized. However, the quota shall increase up to 25 percent by the year 2030 and investments of at least $10 billion are necessary to realize these plans, making the Indian Government dependent on foreign investments as it cannot afford the money on its own (Kiefer, 2008; Knipp, 2008b). Thus, the investment climate for renewable energy technologies is promising for foreign rms. China has become the worlds second largest energy consumer, and the rapid development of its economy further increases this demand. China meets this challenge by expanding electricity generation from renewable energies and its ambitions in this regard are huge (Lew, 2007). In 2006, China passed the Renewable Energy Law, which implements the further development of renewable energies (Yu et al., 2009). According to the Chinese National Development and Reform Commission, renewable energies are expected to account for 15 percent of Chinas total energy consumption by 2020 (Gu and Mayer, 2007). However, the actual implementation is low, and currently only 1-2 percent of biomass, solar and wind energy is used for electricity generation (Menshausen, 2007). Forest and agricultural remains hold a huge untapped biomass potential and the Chinese solar power and wind energy potential are vast as well. Nevertheless, China has only recently resolved internal barriers and started to expand its wind energy capacity. Especially in the wind energy and solar sector huge investments are expected during the next 15 years (Lew, 2007; Ying, 2007). Strong political efforts, ambitious renewable energy targets and the vast renewable energy potential have prompted the surge in investments in this sector (Hsu and Nauss, 2009; Yu et al., 2009), which offers an enormous potential for foreign companies (Menshausen, 2007).

The renewable energy sector in Germany In terms of the global transition from fossil fuels to renewable energy, German rms play a leading role as Germany is one of the worlds leading research hubs for environmental technologies. Moreover, German rms became the world leader in installing renewable energy technologies, particularly in solar, wind and biomass energies (Ernst & Young, 2008; Laird and Stefes, 2009). The strong market position provides German rms with the unique chance to supply the world market with its own green technologies and to create a long-term competitive advantage (Petermann, 2008), while ensuring a climate-compatible growth in emerging markets. In the past decade the share of renewable electricity has more than doubled (Wustenhagen and Bilharz, 2006). During this time many German rms advanced to be nationally and internationally competitive. They provide key components for biomass, solar and wind facilities (Kohler, 2008). A survey of 1,500 rms in the environmental industry conrmed that the renewable energy business is booming (Federal Ministry of Environment, Protection of Nature and Nuclear Safety, 2007). This fast development has propelled Germany into a lead market position in environmental technology. Lead markets link critical future challenges to technological innovations and are highly competitive (Manseld, 1968; Porter, 1990). German rms in the renewable energy sector are characterized by high R&D expenditures and a large number of patents, which is the basis of their technological leadership (Federal Environment Agency, 2007; Laird and Stefes, 2009). This makes German rms internationally competitive and helps them to build a strong market position in many countries (Lehr et al., 2008). For example, 75 percent of the German wind energy systems are exported (Busgen and Durrschmidt, 2009; Kohler, 2008). It is expected that this leading role will also help them to benet from the growing demand in the emerging markets in Asia (Federal Ministry of Environment, Protection of Nature and Nuclear Safety, 2007; Lehr et al., 2008). In light of the growing importance of renewable energy industries in India and China we will analyze the competitiveness of German rms in these two countries and to determine whether they have exploitable competitive advantages in biomass, solar and wind energy technologies. We elaborate Porters (1990) Diamond and argue that this concept is an appropriate framework because it suggests that the national home market (Germany) plays an important role in shaping the extent to which national rms are likely to achieve advantage in other countries (India and China). In the next section, Porters model is described and adapted to the renewable energy industries. Afterwards, propositions will be derived to determine the competitive advantage of German rms in India and China. Then the measures to empirically test the approach for the renewable energy industry will be explained. In the following section, the ndings will be presented and discussed. Finally, we will summarize the main contributions of this study, discuss its limitations and provide recommendations for further research. Theoretical framework and research propositions Competitive advantage and Porters diamond model During recent years, many researchers have discussed competitive advantage of nations, industries, and rms from various perspectives. One of the most prominent and frequently applied approaches is the framework of Porter (1980) which proposes an industry-based explanations for competitive advantage. In this study we focus on

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the competitive advantage of a specic industry and therefore, follow Porters approach. According to Porter (1990), competitive advantage in a given industry is a combination of the ability to innovate, to improve processes and products as well as to compete. To determine national competitive advantage in different industries, Porter (1990) developed a conceptual framework which he labeled diamond that consists of four interrelated determinants. Factor conditions represent the factor endowment of a country and can be distinguished in basic factors and advanced factors. Natural resources, physical resources, unskilled labor as well as capital resources belong to the basic factors, whereas modern digital data communication infrastructure and highly educated personnel represent the advanced factors. Demand conditions describe the manner of domestic demand for products or services in a certain industry. Three broad attributes are signicant: the composition, the size and pattern of growth as well as the internationalization of domestic demand. Related and supporting industries are industries, in which rms can share activities intersectorally in the value chain, e.g. technology development, suppliers, distribution channels and marketing. Firm strategy, structure and rivalry describe the conditions of a country determining how rms are organized and run. Goals (i.e. rm goals, goals of individuals), domestic rivalry and new business formation determine this factor as well. Two exogenous factors, chance and government, may also affect competitive advantage. Chance contains events that cannot be inuenced by rms, e.g. acts of pure inventions, major technological discontinuities and surges of world or regional demand. Finally, the government can inuence each of the four determinants in a positive or negative way. Our adaption of Porters framework to the renewable energy industries in Germany, India and China is based on the suggestions and modications of several previous studies (Cartwright, 1993; Davies and Ellis, 2000; Dunning, 1993; Narula, 1993; Rugman and DCruz, 1993; Sledge, 2005). First, we applied Cartwrights (1993, p. 61) simplied quantitative model based on interval scales with the aim of faithfully interpreting Porters intentions. While Porter (1990) describes the diamond conditions in a narrative and qualitative way, this approach allows for a quantitative analysis. Thus, inuencing several subsequent empirical studies (Clarkson et al., 2007; Moon et al., 1998; Sledge, 2005; Stone and Ranchhod, 2006). Second, we excluded chance because this exogenous factor can barely be predicted (Cartwright, 1993; Porter, 1990) and replaced it with culture (O Shaughnessy, 1996; Steger et al., 2002). This is in line with Van den Bosch and Van Prooijen (1992) who criticize that the impact of national culture is given too little attention in Porters model and suggest combining Porters framework of competitive advantage with Hofstedes dimensions of national culture. They argue, for example, that uncertainty avoidance has a negative inuence on the diffusion of new technologies. Based on these considerations our research model consists of four determining factors and two exogenous factors which have been intensively discussed in previous studies. To analyze rivalry in the home market, we also integrated foreign multinational corporations as they have a decisive inuence on the competitiveness of a country. The exclusive focus on home country characteristics would neglect the inuence of multinational corporations on foreign markets (Dunning, 1993). In particular,

we do not only look solely at the Indian and Chinese diamond of competitive advantage, but combine them with the German one. This construction of double diamonds (Cartwright, 1993; Rugman and DCruz, 1993) allows us to analyze the competitive position of German renewable energy rms in India and China. Propositions Factor conditions, which are divided into basic factors and advanced factors, represent a countrys factor endowment. Although competitive advantage can be generated by both, basic factors have a lower potential (Dunning, 1993). For the renewable energy industry, natural resources such as biomass, wind or solar irradiation can be considered as basic factors (Vestergaard et al., 2004), while the infrastructure as well as the scientic and engineering institutions represent advanced factors. The stronger the advanced factors in an industry, the more competitive the rms in this industry are (Porter, 1990). Without appropriate advanced factor conditions, rms would have to expend their own resources to provide such structures for commerce. For example, the quality of employees is crucial for the renewable energy industry because of its high-tech character (especially solar resources and critical products for wind energy). The larger the pool of qualied employees in the manufacturing industry in a country is, the more qualied employees are available also for foreign rms. Foreign rms also hire local employees and benet from their number and qualication. Thus, we assume that differences in factor conditions are a main source of competitive advantage and propose: P1a. The larger the differences in factor conditions with regard to renewable energies between Germany and India/China, the higher the competitive advantage of German rms in India/China. Demand conditions describe the nature of domestic demand for products or services in an industry. The quality of home demand is more important than its quantity. Porter argues that demanding customers expect innovations and pressure rms to develop more sophisticated products or services. Therefore, domestic demand can be considered as a primary source of competitiveness. This would mean that a high level of demand for renewable energies in a country drives rms in this industry to become innovative and internationally competitive. Based on those considerations we assume that rms in the renewable energy sector which are highly innovative are able to customize their products better to the conditions in other countries. Therefore, we propose: P1b. The larger the differences in demand conditions with regard to renewable energies between Germany and India/China, the higher the competitive advantage of German rms in India/China. Related and supporting industries include rms that directly or indirectly affect a given industry. Porter (1990) argues that focal industry national success is likely if the country has a competitive advantage in related and supporting industries. The existence of successful related and supporting industries in the home market provides opportunities for communication and technical exchange. Additionally, focal industry international success can also generate demand for complementary products. For renewable energies it can be argued that particularly high-tech industries are relevant. Spillover effects of these industries may enhance the innovativeness of technologies in the biomass,

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wind and solar industry and thus the competitive advantage of rms operating in these sectors. Therefore, the following proposition can be derived: P1c. The larger the differences in related and supporting industries with regard to renewable energies between Germany and India/China, the higher the competitive advantage of German rms in India/China.

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The factor rm structure, strategy and rivalry includes country conditions that inuence domestic rivalry as well as how rms are organized and run (Porter, 1990). The more rms exist in a sector, the ercer the competition and the stronger the pressure for innovative rm strategies and structures. Declining industries, on the other hand, are often characterized by a low degree of rivalry as well as less innovative rm strategies and structures. The same applies to industries which are dominated by monopolistic rms. We assume that this applies to the renewable energy industries as well where innovativeness and the adaptation of new technologies are key sources of competitive advantage. On the basis of this argument we can derive the following proposition: P1d. The larger the differences in rm strategy, structure and rivalry with regard to renewable energies between Germany and India/China, the higher the competitive advantage of German rms in India/China. Porter (1990) argues that a large diamond represents high competitiveness and a small diamond represents low competitiveness. Since the four determining factors inuence each other, their relationship is better characterized by a multiplicative than by an additive combination. A country in which all four determining factors show a medium value is more competitive than a country where two values are high and two are low. Thus, we propose: P2. The larger the diamond surface area of the German diamond compared to the respective Indian/Chinese diamond, the higher the competitive advantage of German rms in India/China.

Methodology Data collection Previous research in the area of national competitiveness has often been survey-based (Papanastassou and Pearce, 1999). While surveys have particular advantages, they are also often characterized by small sample sizes, subjectivity and self-reporting bias. In attempt to avoid these disadvantages, this study is based on secondary data. An extensive set of ofcial and semi-ofcial international sources (e.g. World Bank, EU, UN, Organization for Economic Co-operation and Development (OECD), IEA, UNEP & SEFI, World Economic Forum) as well as publications of non-governmental organizations (such as the World Wind Energy Association (WWEA) and chambers of industry and commerce) have been screened and whenever possible we relied on those ofcial or semi-ofcial sources. They are highly reliable and allow for comparisons between the three countries in our study because they are based on standardized denitions. In cases were ofcial sources were not available, we analyzed company reports, business databases (e.g. Ebsco Host, Science Direct) and other internet resources. The use of secondary data sources for empirical studies based on Porters

Diamond is also consistent with previous research (Nair et al., 2007; Sledge, 2005; Stone and Ranchhod, 2006; Vestergaard et al., 2004). Method To determine the competitive advantage of German renewable energy industries in India and China, we calculated two separate diamonds and compared them in form of a double diamond as proposed by Dunning (1993) and Rugman and DCruz (1993). The four dimensions of the diamond were specied for the renewable energy industry and calculated with a simplied quantitative model based on interval scales (Cartwright, 1993). Thereby, each variable was determined by a composite score of two causal variables, which were itemized by different proxy variables for the renewable energy industry. Table I lists all causal and proxy variables that we used to determine the competitive advantage of Germany, India and China. For the purpose of constructing and interpreting the double diamonds with regard to the size of the axes and the surface area, we added the two causal variables market
Interval scale

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Determinants Factor conditions Basic Advanced

Causal variable

Proxy variable Available potential of renewable energy resources Quality of math and science education Renewable energy infrastructure Patent applications eld under the PCT for renewable technologies Currently installed capacity in MW Market growth (% p.a.) New investment by region (VC/PE) 2007 in million USD Education index Share of medium & high-tech value added in total manufacturing Gross domestic expenditure on R&D Competition intensity Corporate M&A by country of target Capacity of innovation Table I. Operationalization of Porters diamond for the renewable energy industry

(max. 20) (1-10) Natural Resources (1-10) Scientists, Infrastructure & Innovation

Demand conditions Market volume Sophistication Related and supporting industries Related companies Support

(max. 20) (1-10) Market Size & Growth (1-10) (max. 20) (1-10) (1-10) Related & Supporting rms R&D investments R&D Investments & Sophistication

Firm strategy, structure (max. 20) and rivalry Rivalry (1-10) Competition in Home Product Market Structure/strategy (1-10) M&A Innovative Drive Government and culture (max. 4) Government (-2-2) Culture (-2-2)

Government Support

Financial support systems and environmental regulations Impact of national culture Hofstede: Values for Masculinity and Uncertainty Avoidance

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volume and structure/strategy of Porters (1990) original study, which were not included in the quantitative approach of Cartwright (1993). For the measurement of the proxy variables we computed an interval scale with a minimum of zero and a maximum of ten. If a causal variable was determined by more than one proxy variable, the arithmetical average was calculated. This resulted in one score with values between 0 and 10. For government and culture, we adopted a three-point scale from Cartwright (1993). For example, an interventionist policy with a negative impact on the diamond was evaluated with 22, a policy that has no inuence on the diamond with 0 and a government that facilitates the diamond process with 2. We summed up the scores of both factors and obtained scores between 2 4 and 4. Thereby, every score point represents 10 percent. Hence, a score of 4 extends the axes of the diamond to 140 percent of its initial value and a score of 2 4 reduces the axes to 60 percent. Depending on the type of raw data we used two different conversation and standardization modes. All quantitative and survey data were converted into a scale between 0 and 10. We logarithmized the data in the cases of patent applications led under the PCT for renewable energy technologies and currently installed capacity in MW. Qualitative data which were extracted from major business databases (e.g. Ebsco Host, Science Direct) and from international and national ofcial and semi-ofcial resources were evaluated by the authors. Afterwards, there subjective evaluations were discussed with industry experts. Measures Factor conditions. To determinate basic and advanced factors, we adopted measures used in several previous studies. Basic factors were measured by the amount of natural resources (Clarkson et al., 2007; Vestergaard et al., 2004) and advanced factors by the number of scientic and engineering institutions (Nair et al., 2007), infrastructure (Sledge, 2005), and patent applications (Clarkson et al., 2007; Sledge, 2005). Natural resources are crucial for the renewable energy industry because without biomass, sun-light or wind, renewable energy could not be generated. The natural resources could also be regarded as an inuencing factor on the national level as they are available for all industries in the same way. In this case, the natural resources are input factors for generating renewable energy and, therefore, regarded as an industry level factor. To analyze natural renewable energy resources, their potential in Germany as well as India and China was examined and approximated in terms of megawatts with reference to the most recent predictions (Ernst & Young, 2007; Federal Ministry of Environment, Protection of Nature and Nuclear Safety, 2008; World Energy Council, 2007). Scientic and engineering institutions are considered to be knowledge resources that increase the advanced factor endowments in knowledge-intensive industries, such as the renewable energy industry (Porter, 1990). In our study we measured the scientic and engineering institutions with the index Quality of math and science education taken from the Global Competitiveness Report, 2007/2008 (Porter et al., 2007). We measured infrastructure by using the Renewables Infrastructure Index, which is one element of the Ernst & Young Renewable Energy Country Attractiveness Index and offers specialized and current information for this industry (Ernst & Young, 2008). Beise and Cleff (2004, p. 479) argue that:

[. . .] the country-specic attributes that increase the international competitiveness of a locally adopted innovation are more important for the international success of a rms innovation than other advantages a country can have as the rst to market.

The renewable energy industry is highly innovative and innovations are generally generated through R&D. Patents are an indicator for innovation and provide information about specic technological areas ( Johnstone et al., 2008). In our study, we used the actual number of patents in each renewable energy technology as a measure for innovative strength. Therefore, initially, the relevant IPC codes for renewable energy technologies were established (OECD, 2008a) and the latest available data (2005) of all relevant patents in biomass, solar and wind energy were extracted from the OECD (2008b) patent database. Before the linear transformation of the data into scores between 0 and 10 we log-transformed the original quantitative data because of the large gaps between the country values. Demand conditions. We measured this factor by combining consumer sophistication with size and growth of home market demand (Brouthers and Brouthers, 1997; Moon et al., 1998; Sledge, 2005). The market volume of the home market is determined by the current market size and the future market growth for a technology. Market size has been used in recent studies, however, with different methods of measurement. Nachum (1998), who investigates the Swedish engineering consulting industry, measures the size of home demand in terms of total annual investment in engineering consulting within a country, and Sledge (2005) uses the automotive competitor revenues within the home country as a percentage of the total global automotive industry. In this study, we used the total capacity in megawatts installed until the end of 2007 to determine the market size (Boyle et al., 2008; Federal Ministry of Environment, Protection of Nature and Nuclear Safety, 2008; WWEA, 2008). We also log-transformed this data before the linear transformation. Market growth is as important as the absolute size of the market and indicates a future trend. A fast growing domestic market inspires the rms in a country to adopt new technologies and leads them away from the belief that such technologies would make existing investments redundant (Porter, 1990, p. 94). We derived the data for this item from the alternative policy scenario of the World Energy Outlook 2006 for biomass and wind energy (2004-2015). In this report, values for Germany are not available, so we used the data published in a report of the German Federal Ministry of Environment, Protection of Nature and Nuclear Safety (2009) instead. For solar energy, values of the European Photovoltaic Industry Association (2008) Global Market Outlook for Photovoltaics Until 2012 were used. The market growth for solar energy was determined from 2007 to 2012. To determinate sophistication of home demand, most recent studies use R&D investments (Boyle et al., 2008; Vestergaard et al., 2004) as well as sophisticated and demanding buyers (Moon et al., 1998; Sledge, 2005) as proxy variables. We measured R&D investments in the renewable energy industry by using the venture capital and private equity (VC/PE) investments in 2007 for each technology. VC/PE investments describe all money invested by VC/PE funds as equity in the rms developing renewable energy technology (Boyle et al., 2008). The relevant data was obtained by combining the VC/PE new investments in technology in 2007 and the VC/PE transactions by country in 2007 (UNEP and SEFI, 2008).

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Firms can also gain competitive advantage if domestic buyers are sophisticated and demanding with regard to products or services (Porter, 1990). Moon et al. (1998) and Sledge (2005) consider that demand sophistication will increase with the level of education. Therefore, we used the education index of the United Nations Development Programme (UNDP) to measure this item (UNDP, 2008). This measurement was similar to Moon et al. (1998) who determine the consumers sophistication for the automotive industry by using the percentage of the population with higher education in the home market. Related and supporting industries. Although the related and supporting industries can differ for each renewable energy technology, they all belong to the medium and high-tech industry. Examples for these are the high-tech companies Conergy and M W Zander FE GmbH which are suppliers of rms in the biomass, solar, and wind energy sector at the same time (Conergy, 2008; M W Zander, 2008). Based on these considerations we measured the strength of related industries by the share of medium and high-tech value added in total manufacturing in a country (United Nation Industrial Development Organization, 2008). The renewable energy industries and their related and supporting industries are considered to be very innovative. Therefore, we used gross domestic expenditure on R&D as a measure for the level of development of the supporting industry (Nachum, 1998; Maxoulis et al., 2007). The data was extracted of the OECD Factbook, 2008, which provides a global overview of the major economic, social and environment indicators (Factbook, 2008c). Firm structure, strategy and rivalry. This determinant is separated into the two causal variables rivalry as well as structure and strategy. We measured rivalry through the competition in the home product market. Structure and strategy were determined by corporate mergers and acquisitions (M&A) in a country and the capacity of innovation. To measure the competition in the home product market, we used a qualitative description similar to the method applied by Nair et al. (2007). Therefore, we examined the total turnover in a country, amount of rms, rm size and the number of employees (Boyle et al., 2008; Federal Ministry of Environment, Protection of Nature and Nuclear Safety, 2007; Li and Gao, 2007). We measured structure and strategy with the amount of M&A activities (Sledge, 2005) and the innovation drive (Clarkson et al., 2007). Continuing M&A activities in the renewable energy industry represent a consolidation that tends to create tighter market conditions (Boyle et al., 2008). Additionally, backward vertical integration up to the level of component making can be expected across all renewable energy technologies (Haag et al., 2008). We used corporate M&A volume by country of target in our study as proxy variable to represent rm strategy and structure (Sledge, 2005). To determine M&A activity in the renewable energy industry, corporate M&A by country of target in 2007 was utilized. We obtained the data from the Global Trends in Sustainable Energy Investment, 2008 report of UNEP and SEFI (Boyle et al., 2008). Another element of rm strategy and structure is the rms innovative drive, which is extremely important for the renewable energy industry. We measured innovative drive with the capacity of innovation that describes how rms obtain technology (Clarkson et al., 2007). The data was derived from the Global Competitiveness Report, 2007/2008 (Porter et al., 2007). Government and culture. We measured government with governmental support for renewable energy technologies (Vestergaard et al., 2004). Government is a decisive factor

for the renewable energy sector, because without public support there would be no market for renewable energy technologies (Beise and Rennings, 2005). The main governmental inuence on the international competitiveness of renewable energy stenhagen and technologies lies in the nancial support in the form of feed-in tariffs (Wu Bilharz, 2006). By 2007, 37 countries had already adopted feed-in policies and more than half of these countries passed these policies in recent years (Renewable Energy Policy Network for the twenty-rst century (REN21), 2007a). In addition to feed-in tariffs, many other important promotion policies exist. Further nancial support instruments are direct investment support, soft loans and tax allowances (Grotz, 2005). Another important factor is the stringency of environmental regulations, which represents a critical factor for comparative advantage (Costantini and Crespi, 2008; Porter and Van der Linde, 1995). In the short run, rms can also benet from fairly crafted environmental regulations that are stricter or are introduced earlier than those faced by their competitors in other countries. Consequently, stringent environmental regulations stimulate innovation and enhance competitiveness (Porter and Van der Linde, 1995). In this study, we examined all information about nancial support systems for renewable energy technologies as well as environmental regulations with a qualitative measure used by Vestergaard et al. (2004), and calculated a score between 2 2 and 2. To measure the impact of culture on the renewable energy industry, two of Hofstedes cultural dimensions, uncertainty avoidance and masculinity are utilized. Concerning the latter, Kedia and Bhagat (1988) argue that masculine countries are generally more effective in new technologies than feminine countries and support this argument with the successful technological diffusion in the highly masculine countries Japan, Singapore, Hong Kong and Taiwan. Uncertainty avoidance has an important impact on the internationalization of home demand. The more uncertainty is avoided in a culture, the less it is open to foreign inuences. Also the openness to new ideas is strongly negatively correlated with uncertainty avoidance (Hofstede, 2001; Van den Bosch and Van Prooijen, 1992). Hofstede (2001) measured uncertainty avoidance on a scale between 0 and 100, with 0 representing low uncertainty avoidance and 100 representing high uncertainty avoidance. Masculinity was measured in a similar way. We calculated the arithmetical average of both items and linearly transformed it into a score between (22) and (2). Findings and discussion In the following, we report the main ndings by comparing the diamonds of Germany with India and China for the renewable energy industry. We distinguish between biomass, wind and solar energy and report the ndings related to the individual dimensions of the diamond rst. Afterwards, we analyze the diamond surface areas for the three technologies. Diamond axes Table II shows all determinants for Germany, India and China and as government and culture inuence all other determinants in size they are presented rst. As presented in Table II, governmental and cultural inuences have a positive impact on biomass, solar and wind industries in all three countries. One explanation for this nding is that all three countries have remarkable renewable energy promotion policies. During the recent years the promotion of wind energy has been

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Biomass Government and culture Germany Government Culture Sum India Government Culture Sum China Government Culture Sum Difference (Germany 2 India) Difference (Germany 2 China) Factor conditions Germany Basic Advanced Sum India Basic Advanced Sum China Basic Advanced Sum Difference (Germany 2 India) Difference (Germany China) Demand conditions Germany Market volume Sophistication Sum India Market volume Sophistication Sum China Market volume Sophistication Sum Difference (Germany India) Difference (Germany China) Related and supporting industries Germany Related companies Support Sum India Related companies Support Sum China Related companies Support Sum Difference (Germany India) Difference (Germany China) Firm strategy, structure and rivalry Germany Strategy, structure Rivarlry 2 0 2 1 0 1 1 1 2 1 0 3.6 9.2 12.8 6.6 6.6 13.2 12 8 20 20.4 27.2 10.8 12 22.8 9.4 5.5 14.9 10.2 7.2 17.4 7.9 5.4 9.6 8.4 18 3.3 2.2 5.5 7.2 4.8 12 12.5 6 11.4 10.8

Solar 2 0 2 2 0 2 1 1 2 0 0 3.6 9.2 12.8 10.8 7.2 18 12 8 20 25.2 27.2 8.4 12 20.4 6.6 6 12.6 7.2 7.2 14.4 7.8 6 10.8 8.4 19.2 6 2.4 8.4 8.4 4.8 13.2 10.8 6 11.4 12

Wind 2 0 2 2 0 2 2 1 3 0 21 7.2 9.2 16.4 7.2 6.8 14 13 8.7 21.7 2.4 2 5.3 7.2 12 19.2 7.2 6 13.2 9.8 7.8 17.6 6 1.6 10.8 8.4 19.2 7 2.2 9.2 10.4 5.2 15.6 10.0 3.6 11.4 10.8 (continued)

202

Table II. Descriptive results and differences

Biomass India China Sum Strategy, structure Rivarlry Sum Strategy, structure Rivarlry Sum Difference (Germany India) Difference (Germany China) 22.2 6.6 2.8 9.4 8.4 3.6 12 12.8 10.2

Solar 23.4 10.8 3.6 14.4 10.8 3.6 14.4 9 9

Wind 22.2 9.6 4.2 13.8 11.7 3.9 15.6 8.4 6.6

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Table II.

especially signicant in China (Li and Gao, 2007; REN21, 2007b), even stronger than in Germany. This can be explained by the fact that wind energy already is a relatively mature technology in Germany and the governmental support has been reduced during the last years. By comparing the two emerging markets, culture has a slightly higher inuence in China than in India. The Chinese culture is more masculine than India which means that the likelihood of adapting and implementing innovative renewable energy technologies is slightly higher in China than in India. Germany is a more masculine culture as well, and innovative technologies for energy saving and renewable energies are very common in this country. The results demonstrate that German renewable energy rms have no considerable competitive advantage in India and China with regard to the determinant Government and Culture. There are signicant differences between the three countries in terms of factor conditions. In Germany, this is mainly a result of the excellent advanced factor conditions. The quality of math and science education as well as the renewable energy infrastructure in this country is much better than in India and China. On the contrary, Germany has disadvantages in terms of basic factor conditions in comparison to both emerging countries. While the conditions for biomass and solar energy are less favorable in Germany because of the relative small numbers of sun hours and the limited natural biomass resources that can be used for energy generation, the wind conditions are good. The positive inuence of basic factor conditions is especially signicant for solar energy in India and for wind energy in China. The overall excellent renewable energy prerequisites in China are mainly a result of its large size and its tropical climate (Central Intelligence Agency, 2008). These positive basic factor conditions are also signicant for India and have already started to push the advanced factor conditions of rms in both countries, as they gain more experience through international investments in renewable energy technologies. Thus, in contrast to Proposition 1a, German renewable energy rms solely have a competitive advantage in India with regard to wind energy. With regard to the other renewable energy technologies, German rms have no competitive advantage in India and China with regard to factor conditions. In terms of demand conditions, the demand for renewable energy technologies is the highest in Germany, but China and India follow close behind. German rms stand apart in their level of R&D spending on renewable energy technologies (UNEP and SEFI, 2008). Demanding customers as well as high research and development expenditures are reasons why German rms reached a lead market status in the renewable energy industry worldwide. Demanding customers pressure rms to continuously innovate and

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improve their products. Interestingly, compared to Germany, the scores for India and China are only slightly lower, and the market volume for wind energy in China is even higher because of high market growth rates for this technology (OECD and IEA, 2007). In terms of sophistication, the differences are signicantly larger between Germany and the two emerging markets, which can be explained by a higher education index and more R&D investments in renewable energy technologies in Germany (REN21, 2007b; UNDP, 2008). Nevertheless, in both emerging markets the market for renewable energies grows rapidly, and the trend is expected to continue in the next years. As argued in Proposition 1b, a competitive advantage of German rms with regard to this dimension can be assumed. Table II indicates that the values of related and supporting industries in Germany are signicantly higher than those of Indian and Chinese rms, thus supporting our Proposition 1c. The largest differences can be observed in biomass and solar industry. An exception is the high score of related and supporting industries in the wind energy industry in China. According to the Chinese ministry for economy reveals that there are currently about 100 Chinese suppliers for the wind energy industry (Lutzenkirchen, 2008) which proofs the high relevance of this sector. The competitive advantage that may result from this favorable position of German rms is, however, reduced by high customs and local content requirements in India and China (Rajsekhar et al., 1999; Liu et al., 2002). For example, in accordance with the regulation of the Chinese Government, 70 percent of the equipment in a wind energy project has to come from domestic sources (Haugwitz, 2008). Additionally, rms tend to use more domestic suppliers as they mature in their activity in the foreign markets (Duncan, 1985). Thus, German rms in the renewable energy sector can exploit their competitive advantage only if rms in related and supporting industries further invest in India and China, too. The high scores for Germany with regard to rm strategy, structure and rivalry can be explained by the long history of the use of renewable energy in the home market, the high level of competition in all sectors and the increasing consolidation processes taking place (Haag et al., 2008; Federal Environment Agency, 2007; UNEP and SEFI, 2008). In India and China, signicant differences exist within the individual industries, i.e. rivalry in the solar and wind energy sector is stronger than in the biomass industry. For example, India is the third largest silicon solar cell producer worldwide already today (Ernst & Young, 2007). Chinese rms, such as Xinjiang Gold Wind and Donfgang Steam Turbine, are successful in renewable energies, especially in the wind industry. Also foreign rms such as Nordex and Repower from Germany as well as Gamesa from Spain contribute to the level of rivalry in China (Li and Gao, 2007). Relating to our Proposition 1d, the determinant strategy, structure and rivalry implies a signicant competitive advantage of German rms in India and China which is greater for this than for any other dimension of the diamond. Diamond surface areas After reporting the main ndings for each dimension of the diamonds separately we will now analyze the diamond surface areas for the three technologies. Porter suggests that a large diamond represents high competitiveness and a small diamond represents low competitiveness. The diamond surface area is calculated by summing up the individual areas of each quadrants triangle as shown in Table III.

Germany Biomass ASD rm strategy, structure and rivalry * 1/2 demand conditions ARD related and supporting industries * 1/2 demand conditions AFR related and supporting industries * 1/2 factor conditions ASF rm strategy, structure and rivalry * 1/2 factor conditions Area sum Difference (Germany India) and (Germany China) Solar ASD rm strategy, structure and rivalry * 1/2 demand conditions ARD related and supporting industries * 1/2 demand conditions AFR related and supporting industries * 1/2 factor conditions ASF rm strategy, structure and rivalry * 1/2 factor conditions Area sum Difference (Germany India) and (Germany China) Wind ASD rm strategy, structure and rivalry * 1/2 demand conditions ARD related and supporting industries * 1/2 demand conditions AFR related and supporting industries * 1/2 factor conditions ASF rm strategy, structure and rivalry * 1/2 ractor conditions Area sum Difference (Germany India) and (Germany China) 246.4 199.8 115.2 142.1 703.5 238.7 195.8 122.9 149.8 707.2 213.1 184.3 157.4 182.0 736.9

India 69.4 40.8 36.3 61.7 208.3 495.2 90.7 52.9 75.6 129.6 348.8 358.3 91.1 63.4 67.2 96.6 318.2 418.7

China 104.4 104.4 120.0 120.0 448.8 254.7 103.7 95.0 132.0 144.0 474.7 232.4 136.9 136.9 169.0 169.0 611.8 125.1

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Table III. Calculation of diamond surface areas

Our results reveal that Germany has signicantly larger diamond surface areas than China, followed by India. According to our Proposition 2, this implies a high competitive advantage of German rms in all three renewable energy industries in both emerging markets. The largest difference can be observed between Germany and India with regard to biomass, where the German diamond is more than three times bigger than the Indian diamond. The smallest difference is observed between Germany and China in the wind energy industry, where the area of the German diamond is only 1.2 times larger than in China. The comparison of the surface areas indicates only small differences within Germany, but remarkable differences within India and China. In Germany, the largest diamond (wind industry) is only slightly larger than the smallest diamond (biomass industry). In India, in contrast, the biomass industry (value 208.3) is clearly less developed than the solar industry (value: 348.8), which is mainly caused by the two determinants rm strategy, structure and rivalry as well as related and supporting industries. Moreover, governmental and cultural inuences have a more positive impact on the solar industry in India and the wind industry in China than on to the other renewable energy technologies (Table II). In China, competitive advantage of domestic rms in the wind energy sector is by far higher than in the solar and biomass industries. Contributions, limitations and implications for further research This study was aimed to examine if German rms in the renewable energy industry have a competitive advantage in India and China and on which determinants this advantage is based. We used a modied version of Porters diamond model and specied it for the renewable energy industry. We then tested the model empirically in Germany and both emerging countries on the basis of secondary data and found that German

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renewable energy rms have a competitive advantage in biomass, solar and wind energy markets in comparison to Chinese and Indian rms in their home countries. The results demonstrate that German rms have a signicant competitive advantage in all three technologies (Figure 1). The positive governmental and cultural inuences have been decisive for the favorable development of the renewable energy demand in Germany over many years. Moreover, German rms face strong rivalry and the suppliers as well as the related and supporting industries in this sector are well developed. Disadvantages occur merely in natural factor conditions and here mainly in the low numbers of sunshine hours. India and China, on the other hand, have favorable basic factor conditions for all three renewable energy technologies. In China, the advanced factor conditions are also better developed than in Germany in all three renewable energy technologies. Also the demand for biomass, solar and wind energy industries is high in India and China and only close behind Germany. With regard to related and supporting industries as well as rm strategy and rivalry, Indian and Chinese rms have to catch up. However, positive cultural conditions in China and the signicant governmental support for renewable energy technologies in both countries push their development further, and the high scores for factor conditions as well as demand conditions demonstrate the future potential of these industries. Thus, German rms can benet due to their competitive advantage of the demand in both countries. In return, investments of German rms promote the domestic renewable energy industries of China and India and help them to fulll their ambitious targets in the long term. Therefore, an important policy implication for the Chinese and Indian Government would be to focus on the dimensions of the diamonds where backlog demand exists and to provide better conditions for the development of renewable energy rms and suppliers. In particular, the further development of special economic zones for such technologies to strengthen their innovativeness and the promotion of co-operation with foreign partners may be promising (Ernst & Young, 2007; Liu et al., 2007). Another important contribution is that this study provides a detailed analysis of the factors on which the competitive advantage of German renewable energy technologies in India and China is based on. Moreover, the study indicates signicant differences within the biomass, solar and wind industries in the countries. This helps managers of renewable energy rms to focus on those areas where they have particular strengths and to introduce measures to overcome potential weaknesses. Moreover, the study helps German rms to decide in which industries a market entry into China and India is most likely to be successful. Our study also shows that the solar and wind energy industries in China and to a lesser extent in India are already well developed. Thus, these two countries are in a much better position compared to other emerging markets such as Russia (Dogl and Holtbrugge, 2010). As a consequence, the competitive pressure in these two countries is likely to increase in the next years. Moreover, market entries of Chinese and Indian renewable energy rms in Germany may be expected. Already today the Indian Suzlon company has a strong position in the German market after its acquisition of REpower. A major theoretical contribution of the study is the application of Porters diamond model to the renewable energy industry as well as the identication and operationalization of the relevant causal and proxy variables (Table I). We also extended this model by including governmental and cultural inuences which have been neglected in previous studies. Thus, our research does not only contribute

Biomass Industry

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Solar Industry

Wind Industry

Figure 1. Biomass, solar and wind industry in Germany, India and China

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to the understanding of the renewable energy industry in particular, but also to the application of Porters diamond model in general. When interpreting these results it has to be taken into account that this study only presents a snapshot of the current situation. Since the renewable energy industry is very dynamic, a replication of this study in some years might come to different results. The positive governmental inuence as well as high scores in factor and demand conditions in China and India indicate that both diamonds have a huge growing potential although they have a backlog demand in the remaining two determinants. With growing markets, growing energy demand and ambitious targets in reducing carbon dioxide that both countries revealed at the Copenhagen climate summit 2009, the biomass, solar and wind energy industries will gain further importance (Ramesh, 2009; Watts, 2009). This indicates that in some years the diamonds of both countries might be bigger than the German diamonds. This is an important implication for German investors in the Chinese and Indian renewable energy industries as it demonstrates their market potential and underlines that both countries might overtake the German renewable energy rms during the next decades. Some limitations result from the methodology of this study. Most of the secondary data was taken from ofcial statistics, of which a few were not up to date. For the share of medium and high-tech value added in total manufacturing, for example, the most recent data available is for 2003. This applies particularly to variables that are not directly observable such as rm strategy or government policies. Although our measures may not be perfect reections of these variables, we relied on the indicators most often used in previous studies. Moreover, we argue that our ndings are robust to the use of alternative measures. For example, the results do not differ signicantly when using the Ease of Doing Business Index (The World Bank Group, 2009) instead of nancial support systems as alternative measure of governmental policies. We also tested for the robustness of our results by applying alternative calculations for the six determinants of the diamond and did not nd signicant differences. As mentioned earlier, the diamond model of competitive advantage is not without critique either. For example, the role of the government is discussed controversially. While according to Porter (1990, p. 680), government has an important role in inuencing the diamond but its role is ultimately a partial one. It only succeeds when working in tandem with the determinants, Stern (2008, p. 412) argues that government has an important role in directly funding skills and basic knowledge creation for science and technology, which is crucial for the renewable energy industry. Moreover, like most previous research, this study is based on the assumption of Porter that high scores for the six determinants of the diamond lead to competitive advantage without being able to statistically proof this relationship. Therefore, further research should focus on the governmental inuence on the development of renewable energy industries and analyze this factor in more detail. The cultural inuence on the development of the renewable energy industry should also be analyzed further. Similarly interesting would be a longitudinal study which reects the changes in the competitive position of German renewable energy rms in India and China over time. Finally, future studies should consider the impact of competitive advantage in quantitative terms such as FDI outows, market shares or protability.

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Rugman, A.M. and Verbeke, A. (1993), How to operationalize Porters diamond of international competitiveness, The International Eeecutive, Vol. 35 No. 4, pp. 283-99. Rugman, A.M. and Verbeke, A. (1993), Foreign subsidiaries and multinational strategic management: an extension and correction of Porters single diamond framework, Management International Review, Vol. 33 No. 2, pp. 71-84. Corresponding author Corinna Dogl can be contacted at: corinna.doegl@wiso.uni-erlangen.de

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