International Journal of Emerging MarketsEmerald Article: Competitive advantage of German renewable energy firms in India and China: An empirical study based on Porter's diamondCorinna Dögl, Dirk Holtbrügge, Tassilo Schuster

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To cite this document: Corinna Dögl, Dirk Holtbrügge, 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

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Competitive advantage of Germanrenewable energy firms in India

and ChinaAn empirical study based on Porter’s diamond

Corinna Dogl, Dirk Holtbrugge and Tassilo SchusterDepartment of International Management, University of Erlangen-Nuremberg,

Nuremberg, Germany

Abstract

Purpose – The purpose of this paper is to analyze the competitive advantage of German renewableenergy firms in India and China. Porter’s diamond model is modified and specified for the renewableenergy industry.

Design/methodology/approach – Based on Porter’s diamond model of competitiveness, theauthors examine the demand for renewable energies in India and China and the ability of Germanfirms to meet this demand.

Findings – While the overall demand for renewable energies in India and China is significant, thestudy reveals remarkable differences in the fields of biomass, solar and wind energy. The findings aremeant to address managers in the renewable energy industry and to aid policy makers inenvironmental support and action.

Research limitations/implications – A major theoretical contribution of the study is theapplication of Porter’s diamond model to the renewable energy industry, as well as the identificationand operationalization of the relevant causal and proxy variables.

Practical implications – The paper provides a detailed analysis of the factors on which thecompetitive advantage of German renewable energy technologies in India and China is based. Thishelps managers of renewable energy firms to focus on those areas where they have particularstrengths and to introduce measures to overcome potential weaknesses.

Originality/value – The authors used a modified version of Porter’s diamond model and specified itfor the renewable energy industry. The model was tested empirically in Germany and both emergingcountries on the basis of secondary data.

Keywords Germany, India, China, Renewable energy, Energy industry, Competitive advantage,Competitiveness, Asia, Porter’s diamond

Paper type Research paper

IntroductionIndia’s and China’s demand for renewable energyThe global energy industry is on the brink of radical change. Carbon dioxide emissionsthreaten the world climate, while oil reserves are being depleted and the dependence ona few oil producing countries endangers the global oil supply (Petermann, 2008). Thereis an ongoing discussion among politicians, economists, and engineers aboutthe sustainability of the present energy systems and their future development in thetwenty-first century (European Commission, 2002). This implies that new sustainableenergy alternatives such as wind, biomass and solar energy are required soonerthan later.

The current issue and full text archive of this journal is available at

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Received 16 September 2010Accepted 23 November 2010

International Journal of EmergingMarkets

Vol. 7 No. 2, 2012pp. 191-214

q Emerald Group Publishing Limited1746-8809

DOI 10.1108/17468801211209956

Emerging market countries are expected to account for 75 percent of the increase inemissions over the next decades, which will cause further environmental problems(O’Neill and Lawson, 2007). Consequently, their unquenchable thirst for energy and theawareness of global warming are leading to a growing importance of renewable energytechnologies in these markets (Goldman Sachs, 2007). With growing markets and agrowing demand for energy, India and China are considered to be interesting targetmarkets for investors in biomass, solar and wind energy technologies (Ramesh, 2009;Watts, 2009).

Today, India is the sixth largest energy consumer, and India’s energy hunger isestimated to increase by 400 percent until 2032 as a result of strong economic growthand a fast growing middle-class (Knipp, 2008a). Due to the increasing energy demand,frequent power cuts and the growing awareness of climate change, the IndianGovernment has made great efforts to develop and promote renewable energytechnologies. Thus, the use of renewable energies has become more visible over the lastyears (Malla, 2010; Misra, 2007) and India was the first country that created a ministrydedicated exclusively to renewable energy (Business India Intelligence, 2009). As atropical country the energy generation potential of biomass is remarkable and some ofit is already used for domestic, commercial and industry applications (Ernst & Young,2007). Solar resources are also abundant with the sunniest locations on the southeastcoast (Meisen, 2008). Moreover, there is a huge potential for wind energy in thesouth/west of India and its 7,000-mile coastline also offers significant potential foroff-shore which is currently untapped (European Union (EU), 2006; Boyle et al., 2008).The vast potential of renewable energy technologies is significant, but overall only 10percent of it is utilized. However, the quota shall increase up to 25 percent by the year2030 and investments of at least $10 billion are necessary to realize these plans, makingthe Indian Government dependent on foreign investments as it cannot afford themoney on its own (Kiefer, 2008; Knipp, 2008b). Thus, the investment climate forrenewable energy technologies is promising for foreign firms.

China has become the world’s second largest energy consumer, and the rapiddevelopment of its economy further increases this demand. China meets this challengeby expanding electricity generation from renewable energies and its ambitions in thisregard are huge (Lew, 2007). In 2006, China passed the Renewable Energy Law, whichimplements the further development of renewable energies (Yu et al., 2009). Accordingto the Chinese National Development and Reform Commission, renewable energies areexpected to account for 15 percent of China’s total energy consumption by2020 (Gu and Mayer, 2007). However, the actual implementation is low, and currentlyonly 1-2 percent of biomass, solar and wind energy is used for electricity generation(Menshausen, 2007). Forest and agricultural remains hold a huge untapped biomasspotential and the Chinese solar power and wind energy potential are vast as well.Nevertheless, China has only recently resolved internal barriers and started to expandits wind energy capacity. Especially in the wind energy and solar sector hugeinvestments are expected during the next 15 years (Lew, 2007; Ying, 2007). Strongpolitical efforts, ambitious renewable energy targets and the vast renewable energypotential 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).

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The renewable energy sector in GermanyIn terms of the global transition from fossil fuels to renewable energy, German firmsplay a leading role as Germany is one of the world’s leading research hubs forenvironmental technologies. Moreover, German firms became the world leader ininstalling renewable energy technologies, particularly in solar, wind and biomassenergies (Ernst & Young, 2008; Laird and Stefes, 2009). The strong market positionprovides German firms with the unique chance to supply the world market with itsown 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 firms advanced to benationally and internationally competitive. They provide key components for biomass,solar and wind facilities (Kohler, 2008). A survey of 1,500 firms in the environmentalindustry confirmed that the renewable energy business is booming (Federal Ministry ofEnvironment, Protection of Nature and Nuclear Safety, 2007). This fast development haspropelled Germany into a lead market position in environmental technology. Leadmarkets link critical future challenges to technological innovations and are highlycompetitive (Mansfield, 1968; Porter, 1990). German firms in the renewable energy sectorare characterized by high R&D expenditures and a large number of patents, which is thebasis of their technological leadership (Federal Environment Agency, 2007; Laird andStefes, 2009). This makes German firms internationally competitive and helps them tobuild 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 benefit fromthe 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 andChina we will analyze the competitiveness of German firms in these two countries andto determine whether they have exploitable competitive advantages in biomass, solarand wind energy technologies. We elaborate Porter’s (1990) Diamond and argue thatthis concept is an appropriate framework because it suggests that the national homemarket (Germany) plays an important role in shaping the extent to which nationalfirms are likely to achieve advantage in other countries (India and China).

In the next section, Porter’s model is described and adapted to the renewable energyindustries. Afterwards, propositions will be derived to determine the competitiveadvantage of German firms in India and China. Then the measures to empirically testthe approach for the renewable energy industry will be explained. In the followingsection, the findings will be presented and discussed. Finally, we will summarize themain contributions of this study, discuss its limitations and provide recommendationsfor further research.

Theoretical framework and research propositionsCompetitive advantage and Porter’s diamond modelDuring recent years, many researchers have discussed competitive advantage ofnations, industries, and firms from various perspectives. One of the most prominentand frequently applied approaches is the framework of Porter (1980) which proposesan industry-based explanations for competitive advantage. In this study we focus on

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the competitive advantage of a specific industry and therefore, follow Porter’sapproach. According to Porter (1990), competitive advantage in a given industry is acombination of the ability to innovate, to improve processes and products as well as tocompete. To determine national competitive advantage in different industries, Porter(1990) developed a conceptual framework which he labeled diamond that consists offour interrelated determinants.

Factor conditions represent the factor endowment of a country and can bedistinguished in basic factors and advanced factors. Natural resources, physicalresources, unskilled labor as well as capital resources belong to the basic factors,whereas modern digital data communication infrastructure and highly educatedpersonnel represent the advanced factors.

Demand conditions describe the manner of domestic demand for products orservices in a certain industry. Three broad attributes are significant: the composition,the size and pattern of growth as well as the internationalization of domestic demand.

Related and supporting industries are industries, in which firms can share activitiesintersectorally in the value chain, e.g. technology development, suppliers, distributionchannels and marketing.

Firm strategy, structure and rivalry describe the conditions of a country determininghow firms are organized and run. Goals (i.e. firm goals, goals of individuals), domesticrivalry and new business formation determine this factor as well.

Two exogenous factors, chance and government, may also affect competitiveadvantage. Chance contains events that cannot be influenced by firms, e.g. acts of pureinventions, major technological discontinuities and surges of world or regionaldemand. Finally, the government can influence each of the four determinants in apositive or negative way.

Our adaption of Porter’s framework to the renewable energy industries in Germany,India and China is based on the suggestions and modifications of several previousstudies (Cartwright, 1993; Davies and Ellis, 2000; Dunning, 1993; Narula, 1993;Rugman and D’Cruz, 1993; Sledge, 2005). First, we applied Cartwright’s (1993, p. 61)“simplified quantitative model based on interval scales with the aim of faithfullyinterpreting Porter’s intentions.” While Porter (1990) describes the diamond conditionsin a narrative and qualitative way, this approach allows for a quantitative analysis.Thus, influencing several subsequent empirical studies (Clarkson et al., 2007;Moon et al., 1998; Sledge, 2005; Stone and Ranchhod, 2006). Second, we excludedchance 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 inline with Van den Bosch and Van Prooijen (1992) who criticize that the impact ofnational culture is given too little attention in Porter’s model and suggest combiningPorter’s framework of competitive advantage with Hofstede’s dimensions of nationalculture. They argue, for example, that uncertainty avoidance has a negative influenceon the diffusion of new technologies. Based on these considerations our research modelconsists of four determining factors and two exogenous factors which have beenintensively discussed in previous studies.

To analyze rivalry in the home market, we also integrated foreign multinationalcorporations as they have a decisive influence on the competitiveness of a country. Theexclusive focus on home country characteristics would neglect the influenceof multinational corporations on foreign markets (Dunning, 1993). In particular,

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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 D’Cruz, 1993) allows us to analyze the competitiveposition of German renewable energy firms in India and China.

PropositionsFactor conditions, which are divided into basic factors and advanced factors, represent acountry’s 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 basicfactors (Vestergaard et al., 2004), while the infrastructure as well as the scientific andengineering institutions represent advanced factors. The stronger the advanced factorsin an industry, the more competitive the firms in this industry are (Porter, 1990). Withoutappropriate advanced factor conditions, firms would have to expend their own resourcesto provide such structures for commerce. For example, the quality of employees iscrucial for the renewable energy industry because of its high-tech character (especiallysolar resources and critical products for wind energy). The larger the pool of qualifiedemployees in the manufacturing industry in a country is, the more qualified employeesare available also for foreign firms. Foreign firms also hire local employees and benefitfrom their number and qualification. Thus, we assume that differences in factorconditions are a main source of competitive advantage and propose:

P1a. The larger the differences in factor conditions with regard to renewableenergies between Germany and India/China, the higher the competitiveadvantage of German firms in India/China.

Demand conditions describe the nature of domestic demand for products or services inan industry. The quality of home demand is more important than its quantity. Porterargues that demanding customers expect innovations and pressure firms to developmore sophisticated products or services. Therefore, domestic demand can be consideredas a primary source of competitiveness. This would mean that a high level of demand forrenewable energies in a country drives firms in this industry to become innovative andinternationally competitive. Based on those considerations we assume that firms in therenewable energy sector which are highly innovative are able to customize theirproducts better to the conditions in other countries. Therefore, we propose:

P1b. The larger the differences in demand conditions with regard to renewableenergies between Germany and India/China, the higher the competitiveadvantage of German firms in India/China.

Related and supporting industries include firms that directly or indirectly affect a givenindustry. Porter (1990) argues that focal industry national success is likely if the countryhas a competitive advantage in related and supporting industries. The existence ofsuccessful related and supporting industries in the home market provides opportunitiesfor communication and technical exchange. Additionally, focal industry internationalsuccess can also generate demand for complementary products. For renewable energiesit can be argued that particularly high-tech industries are relevant. Spillover effects ofthese industries may enhance the innovativeness of technologies in the biomass,

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wind and solar industry and thus the competitive advantage of firms operating in thesesectors. Therefore, the following proposition can be derived:

P1c. The larger the differences in related and supporting industries with regard torenewable energies between Germany and India/China, the higher thecompetitive advantage of German firms in India/China.

The factor firm structure, strategy and rivalry includes country conditions thatinfluence domestic rivalry as well as how firms are organized and run (Porter, 1990). Themore firms exist in a sector, the fiercer the competition and the stronger the pressure forinnovative firm strategies and structures. Declining industries, on the other hand, areoften characterized by a low degree of rivalry as well as less innovative firm strategiesand structures. The same applies to industries which are dominated by monopolisticfirms. We assume that this applies to the renewable energy industries as well whereinnovativeness and the adaptation of new technologies are key sources of competitiveadvantage. On the basis of this argument we can derive the following proposition:

P1d. The larger the differences in firm strategy, structure and rivalry with regardto renewable energies between Germany and India/China, the higher thecompetitive advantage of German firms in India/China.

Porter (1990) argues that a large diamond represents high competitiveness and a smalldiamond represents low competitiveness. Since the four determining factors influenceeach other, their relationship is better characterized by a multiplicative than by anadditive combination. A country in which all four determining factors show a mediumvalue 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 therespective Indian/Chinese diamond, the higher the competitive advantage ofGerman firms in India/China.

MethodologyData collectionPrevious research in the area of national competitiveness has often been survey-based(Papanastassou and Pearce, 1999). While surveys have particular advantages, they arealso often characterized by small sample sizes, subjectivity and self-reporting bias. Inattempt to avoid these disadvantages, this study is based on secondary data.

An extensive set of official and semi-official 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-governmentalorganizations (such as the World Wind Energy Association (WWEA) and chambers ofindustry and commerce) have been screened and whenever possible we relied on thoseofficial or semi-official sources. They are highly reliable and allow for comparisonsbetween the three countries in our study because they are based on standardizeddefinitions. In cases were official sources were not available, we analyzed companyreports, business databases (e.g. Ebsco Host, Science Direct) and other internetresources. The use of secondary data sources for empirical studies based on Porter’s

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Diamond is also consistent with previous research (Nair et al., 2007; Sledge, 2005; Stoneand Ranchhod, 2006; Vestergaard et al., 2004).

MethodTo determine the competitive advantage of German renewable energy industries inIndia and China, we calculated two separate diamonds and compared them in form of adouble diamond as proposed by Dunning (1993) and Rugman and D’Cruz (1993). Thefour dimensions of the diamond were specified for the renewable energy industry andcalculated with a simplified quantitative model based on interval scales (Cartwright,1993). Thereby, each variable was determined by a composite score of two causalvariables, which were itemized by different proxy variables for the renewable energyindustry. Table I lists all causal and proxy variables that we used to determine thecompetitive advantage of Germany, India and China.

For the purpose of constructing and interpreting the double diamonds with regardto the size of the axes and the surface area, we added the two causal variables market

DeterminantsIntervalscale Causal variable Proxy variable

Factor conditions (max. 20)Basic (1-10) Natural Resources Available potential of renewable

energy resourcesAdvanced (1-10) Scientists, Infrastructure

& InnovationQuality of math and scienceeducationRenewable energy infrastructurePatent applications field under thePCT for renewable technologies

Demand conditions (max. 20)Market volume (1-10) Market Size & Growth Currently installed capacity in MW

Market growth (% p.a.)Sophistication (1-10) R&D Investments

& SophisticationNew investment by region (VC/PE)2007 in million USDEducation index

Related and supportingindustries

(max. 20)

Related companies (1-10) Related & Supportingfirms

Share of medium & high-tech valueadded in total manufacturing

Support (1-10) R&D investments Gross domestic expenditure onR&D

Firm strategy, structureand rivalry

(max. 20)

Rivalry (1-10) Competition in HomeProduct Market

Competition intensity

Structure/strategy (1-10) M&A Innovative Drive Corporate M&A by country oftargetCapacity of innovation

Government and culture (max. 4)Government (-2-2) Government Support Financial support systems and

environmental regulationsCulture (-2-2) Impact of national culture Hofstede: Values for “Masculinity”

and “Uncertainty Avoidance”

Table I.Operationalization

of Porter’s diamond forthe renewable energy

industry

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volume and structure/strategy of Porter’s (1990) original study, which were notincluded in the quantitative approach of Cartwright (1993). For the measurement of theproxy variables we computed an interval scale with a minimum of zero and amaximum 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 valuesbetween 0 and 10. For government and culture, we adopted a three-point scale fromCartwright (1993). For example, an interventionist policy with a negative impact on thediamond was evaluated with 22, a policy that has no influence on the diamond with 0and a government that facilitates the diamond process with þ2. We summed up thescores of both factors and obtained scores between 24 and þ4. Thereby, every scorepoint represents 10 percent. Hence, a score of þ4 extends the axes of the diamond to140 percent of its initial value and a score of 24 reduces the axes to 60 percent.

Depending on the type of raw data we used two different conversation andstandardization modes. All quantitative and survey data were converted into a scalebetween 0 and 10. We logarithmized the data in the cases of patent applications filedunder the PCT for renewable energy technologies and currently installed capacity inMW. Qualitative data which were extracted from major business databases(e.g. Ebsco Host, Science Direct) and from international and national official andsemi-official resources were evaluated by the authors. Afterwards, there subjectiveevaluations were discussed with industry experts.

MeasuresFactor conditions. To determinate basic and advanced factors, we adopted measuresused in several previous studies. Basic factors were measured by the amount of naturalresources (Clarkson et al., 2007; Vestergaard et al., 2004) and advanced factors by thenumber of scientific 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 withoutbiomass, sun-light or wind, renewable energy could not be generated. The naturalresources could also be regarded as an influencing factor on the national level as theyare available for all industries in the same way. In this case, the natural resources areinput factors for generating renewable energy and, therefore, regarded as an industrylevel factor. To analyze natural renewable energy resources, their potential in Germanyas well as India and China was examined and approximated in terms of megawattswith reference to the most recent predictions (Ernst & Young, 2007; Federal Ministry ofEnvironment, Protection of Nature and Nuclear Safety, 2008; World Energy Council,2007).

Scientific and engineering institutions are considered to be knowledge resourcesthat increase the advanced factor endowments in knowledge-intensive industries, suchas the renewable energy industry (Porter, 1990). In our study we measured thescientific and engineering institutions with the index “Quality of math and scienceeducation” taken from the Global Competitiveness Report, 2007/2008 (Porter et al.,2007).

We measured infrastructure by using the Renewables Infrastructure Index, which isone element of the Ernst & Young Renewable Energy Country Attractiveness Indexand offers specialized and current information for this industry (Ernst & Young, 2008).

Beise and Cleff (2004, p. 479) argue that:

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[. . .] the country-specific attributes that increase the international competitiveness of a locallyadopted innovation are more important for the international success of a firm’s innovationthan other advantages a country can have as the first to market.

The renewable energy industry is highly innovative and innovations are generallygenerated through R&D. Patents are an indicator for innovation and provideinformation about specific technological areas ( Johnstone et al., 2008). In our study,we used the actual number of patents in each renewable energy technology as ameasure for innovative strength. Therefore, initially, the relevant IPC codes forrenewable energy technologies were established (OECD, 2008a) and the latest availabledata (2005) of all relevant patents in biomass, solar and wind energy were extractedfrom the OECD (2008b) patent database. Before the linear transformation of the datainto scores between 0 and 10 we log-transformed the original quantitative data becauseof the large gaps between the country values.

Demand conditions. We measured this factor by combining consumer sophisticationwith 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 determinedby the current market size and the future market growth for a technology.

Market size has been used in recent studies, however, with different methods ofmeasurement. Nachum (1998), who investigates the Swedish engineering consultingindustry, measures the size of home demand in terms of total annual investment inengineering consulting within a country, and Sledge (2005) uses the automotivecompetitor revenues within the home country as a percentage of the total globalautomotive industry. In this study, we used the total capacity in megawatts installeduntil the end of 2007 to determine the market size (Boyle et al., 2008; Federal Ministry ofEnvironment, Protection of Nature and Nuclear Safety, 2008; WWEA, 2008). We alsolog-transformed this data before the linear transformation.

Market growth is as important as the absolute size of the market and indicates afuture trend. A fast growing domestic market inspires the firms in a country to adoptnew technologies and leads them away from the belief that “such technologies wouldmake existing investments redundant” (Porter, 1990, p. 94). We derived the data forthis item from the alternative policy scenario of the World Energy Outlook 2006 forbiomass and wind energy (2004-2015). In this report, values for Germany are notavailable, so we used the data published in a report of the German Federal Ministry ofEnvironment, Protection of Nature and Nuclear Safety (2009) instead. For solar energy,values of the European Photovoltaic Industry Association (2008) Global MarketOutlook for Photovoltaics Until 2012 were used. The market growth for solar energywas determined from 2007 to 2012.

To determinate sophistication of home demand, most recent studies use R&Dinvestments (Boyle et al., 2008; Vestergaard et al., 2004) as well as sophisticated anddemanding buyers (Moon et al., 1998; Sledge, 2005) as proxy variables. We measuredR&D investments in the renewable energy industry by using the venture capital andprivate equity (VC/PE) investments in 2007 for each technology. VC/PE investmentsdescribe “all money invested by VC/PE funds as equity in the firms developingrenewable energy technology” (Boyle et al., 2008). The relevant data was obtained bycombining the VC/PE new investments in technology in 2007 and the VC/PEtransactions by country in 2007 (UNEP and SEFI, 2008).

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Firms can also gain competitive advantage if domestic buyers are sophisticated anddemanding with regard to products or services (Porter, 1990). Moon et al. (1998) andSledge (2005) consider that demand sophistication will increase with the level ofeducation. Therefore, we used the education index of the United Nations DevelopmentProgramme (UNDP) to measure this item (UNDP, 2008). This measurement was similarto Moon et al. (1998) who determine the consumer’s sophistication for the automotiveindustry by using the percentage of the population with higher education in the homemarket.

Related and supporting industries. Although the related and supporting industriescan differ for each renewable energy technology, they all belong to the medium andhigh-tech industry. Examples for these are the high-tech companies Conergy andM þ W Zander FE GmbH which are suppliers of firms in the biomass, solar, and windenergy sector at the same time (Conergy, 2008; M þ W Zander, 2008). Based on theseconsiderations we measured the strength of related industries by the share of mediumand high-tech value added in total manufacturing in a country (United NationIndustrial Development Organization, 2008).

The renewable energy industries and their related and supporting industries areconsidered to be very innovative. Therefore, we used gross domestic expenditure onR&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, whichprovides a global overview of the major economic, social and environment indicators(Factbook, 2008c).

Firm structure, strategy and rivalry. This determinant is separated into the twocausal variables rivalry as well as structure and strategy. We measured rivalry throughthe competition in the home product market. Structure and strategy were determined bycorporate 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 qualitativedescription similar to the method applied by Nair et al. (2007). Therefore, we examinedthe total turnover in a country, amount of firms, firm size and the number of employees(Boyle et al., 2008; Federal Ministry of Environment, Protection of Nature and NuclearSafety, 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 therenewable energy industry represent a consolidation that tends to create tighter marketconditions (Boyle et al., 2008). Additionally, backward vertical integration up to the levelof 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 asproxy variable to represent firm strategy and structure (Sledge, 2005). To determineM&A activity in the renewable energy industry, corporate M&A by country of target in2007 was utilized. We obtained the data from the Global Trends in Sustainable EnergyInvestment, 2008 report of UNEP and SEFI (Boyle et al., 2008). Another element of firmstrategy and structure is the firm’s innovative drive, which is extremely important forthe renewable energy industry. We measured innovative drive with the capacity ofinnovation that describes how firms obtain technology (Clarkson et al., 2007). The datawas derived from the Global Competitiveness Report, 2007/2008 (Porter et al., 2007).

Government and culture. We measured government with governmental support forrenewable energy technologies (Vestergaard et al., 2004). Government is a decisive factor

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for the renewable energy sector, because without public support there would be nomarket for renewable energy technologies (Beise and Rennings, 2005). The maingovernmental influence on the international competitiveness of renewable energytechnologies lies in the financial support in the form of feed-in tariffs (Wustenhagen andBilharz, 2006). By 2007, 37 countries had already adopted feed-in policies and more thanhalf of these countries passed these policies in recent years (Renewable Energy PolicyNetwork for the twenty-first century (REN21), 2007a). In addition to feed-in tariffs, manyother important promotion policies exist. Further financial support instruments aredirect investment support, soft loans and tax allowances (Grotz, 2005). Anotherimportant factor is the stringency of environmental regulations, which represents acritical factor for comparative advantage (Costantini and Crespi, 2008; Porter andVan der Linde, 1995). In the short run, firms can also benefit from fairly craftedenvironmental regulations that are stricter or are introduced earlier than those faced bytheir competitors in other countries. Consequently, stringent environmental regulationsstimulate innovation and enhance competitiveness (Porter and Van der Linde, 1995).In this study, we examined all information about financial support systems forrenewable energy technologies as well as environmental regulations with a qualitativemeasure used by Vestergaard et al. (2004), and calculated a score between 22 and þ2.

To measure the impact of culture on the renewable energy industry, two ofHofstede’s cultural dimensions, uncertainty avoidance and masculinity are utilized.Concerning the latter, Kedia and Bhagat (1988) argue that masculine countries aregenerally more effective in new technologies than feminine countries and support thisargument with the successful technological diffusion in the highly masculine countriesJapan, Singapore, Hong Kong and Taiwan. Uncertainty avoidance has an importantimpact on the internationalization of home demand. The more uncertainty is avoided ina culture, the less it is open to foreign influences. Also the openness to new ideas isstrongly negatively correlated with uncertainty avoidance (Hofstede, 2001;Van den Bosch and Van Prooijen, 1992). Hofstede (2001) measured uncertaintyavoidance on a scale between 0 and 100, with 0 representing low uncertainty avoidanceand 100 representing high uncertainty avoidance. Masculinity was measured in asimilar way. We calculated the arithmetical average of both items and linearlytransformed it into a score between (22) and (2).

Findings and discussionIn the following, we report the main findings by comparing the diamonds of Germanywith India and China for the renewable energy industry. We distinguish betweenbiomass, wind and solar energy and report the findings related to the individualdimensions of the diamond first. Afterwards, we analyze the diamond surface areas forthe three technologies.

Diamond axesTable II shows all determinants for Germany, India and China and as government andculture influence all other determinants in size they are presented first.

As presented in Table II, governmental and cultural influences have a positiveimpact on biomass, solar and wind industries in all three countries. One explanation forthis finding is that all three countries have remarkable renewable energypromotion policies. During the recent years the promotion of wind energy has been

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Biomass Solar Wind

Government and cultureGermany Government 2 2 2

Culture 0 0 0Sum 2 2 2

India Government 1 2 2Culture 0 0 0Sum 1 2 2

China Government 1 1 2Culture 1 1 1Sum 2 2 3

Difference (Germany 2 India) 1 0 0Difference (Germany 2 China) 0 0 21

Factor conditionsGermany Basic 3.6 3.6 7.2

Advanced 9.2 9.2 9.2Sum 12.8 12.8 16.4

India Basic 6.6 10.8 7.2Advanced 6.6 7.2 6.8Sum 13.2 18 14

China Basic 12 12 13Advanced 8 8 8.7Sum 20 20 21.7

Difference (Germany 2 India) 20.4 25.2 2.4Difference (Germany – China) 27.2 27.2 25.3

Demand conditionsGermany Market volume 10.8 8.4 7.2

Sophistication 12 12 12Sum 22.8 20.4 19.2

India Market volume 9.4 6.6 7.2Sophistication 5.5 6 6Sum 14.9 12.6 13.2

China Market volume 10.2 7.2 9.8Sophistication 7.2 7.2 7.8Sum 17.4 14.4 17.6

Difference (Germany – India) 7.9 7.8 6Difference (Germany – China) 5.4 6 1.6

Related and supporting industriesGermany Related companies 9.6 10.8 10.8

Support 8.4 8.4 8.4Sum 18 19.2 19.2

India Related companies 3.3 6 7Support 2.2 2.4 2.2Sum 5.5 8.4 9.2

China Related companies 7.2 8.4 10.4Support 4.8 4.8 5.2Sum 12 13.2 15.6

Difference (Germany – India) 12.5 10.8 10.0Difference (Germany – China) 6 6 3.6

Firm strategy, structure and rivalryGermany Strategy, structure 11.4 11.4 11.4

Rivarlry 10.8 12 10.8

(continued )

Table II.Descriptive resultsand differences

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especially significant in China (Li and Gao, 2007; REN21, 2007b), even stronger than inGermany. This can be explained by the fact that wind energy already is a relativelymature technology in Germany and the governmental support has been reduced duringthe last years. By comparing the two emerging markets, culture has a slightly higherinfluence in China than in India. The Chinese culture is more masculine than Indiawhich means that the likelihood of adapting and implementing innovative renewableenergy technologies is slightly higher in China than in India. Germany is a moremasculine culture as well, and innovative technologies for energy saving andrenewable energies are very common in this country. The results demonstrate thatGerman renewable energy firms have no considerable competitive advantage in Indiaand China with regard to the determinant “Government and Culture”.

There are significant differences between the three countries in terms of factorconditions. In Germany, this is mainly a result of the excellent advanced factorconditions. The quality of math and science education as well as the renewable energyinfrastructure 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 bothemerging countries. While the conditions for biomass and solar energy are less favorablein Germany because of the relative small numbers of sun hours and the limited naturalbiomass resources that can be used for energy generation, the wind conditions are good.The positive influence of basic factor conditions is especially significant for solar energyin India and for wind energy in China. The overall excellent renewable energyprerequisites in China are mainly a result of its large size and its tropical climate (CentralIntelligence Agency, 2008). These positive basic factor conditions are also significant forIndia and have already started to push the advanced factor conditions of firms in bothcountries, as they gain more experience through international investments in renewableenergy technologies. Thus, in contrast to Proposition 1a, German renewable energyfirms solely have a competitive advantage in India with regard to wind energy. Withregard to the other renewable energy technologies, German firms have no competitiveadvantage in India and China with regard to factor conditions.

In terms of demand conditions, the demand for renewable energy technologies is thehighest in Germany, but China and India follow close behind. German firms stand apartin their level of R&D spending on renewable energy technologies (UNEP and SEFI,2008). Demanding customers as well as high research and development expenditures arereasons why German firms reached a lead market status in the renewable energyindustry worldwide. Demanding customers pressure firms to continuously innovate and

Biomass Solar Wind

Sum 22.2 23.4 22.2India Strategy, structure 6.6 10.8 9.6

Rivarlry 2.8 3.6 4.2Sum 9.4 14.4 13.8

China Strategy, structure 8.4 10.8 11.7Rivarlry 3.6 3.6 3.9Sum 12 14.4 15.6

Difference (Germany – India) 12.8 9 8.4Difference (Germany – China) 10.2 9 6.6 Table II.

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improve their products. Interestingly, compared to Germany, the scores for India andChina are only slightly lower, and the market volume for wind energy in China is evenhigher because of high market growth rates for this technology (OECD and IEA, 2007).In terms of sophistication, the differences are significantly larger between Germany andthe two emerging markets, which can be explained by a higher education index andmore R&D investments in renewable energy technologies in Germany (REN21, 2007b;UNDP, 2008). Nevertheless, in both emerging markets the market for renewable energiesgrows rapidly, and the trend is expected to continue in the next years. As argued inProposition 1b, a competitive advantage of German firms with regard to this dimensioncan be assumed.

Table II indicates that the values of related and supporting industries in Germanyare significantly higher than those of Indian and Chinese firms, thus supporting ourProposition 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 energyindustry in China. According to the Chinese ministry for economy reveals that thereare currently about 100 Chinese suppliers for the wind energy industry (Lutzenkirchen,2008) which proofs the high relevance of this sector. The competitive advantage thatmay result from this favorable position of German firms is, however, reduced by highcustoms 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 ChineseGovernment, 70 percent of the equipment in a wind energy project has to come fromdomestic sources (Haugwitz, 2008). Additionally, firms tend to use more domesticsuppliers as they mature in their activity in the foreign markets (Duncan, 1985). Thus,German firms in the renewable energy sector can exploit their competitive advantageonly if firms in related and supporting industries further invest in India and China, too.

The high scores for Germany with regard to firm strategy, structure and rivalry canbe explained by the long history of the use of renewable energy in the home market, thehigh level of competition in all sectors and the increasing consolidation processestaking place (Haag et al., 2008; Federal Environment Agency, 2007; UNEP and SEFI,2008). In India and China, significant 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 alreadytoday (Ernst & Young, 2007). Chinese firms, such as Xinjiang Gold Wind andDonfgang Steam Turbine, are successful in renewable energies, especially in the windindustry. Also foreign firms such as Nordex and Repower from Germany as well asGamesa 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 impliesa significant competitive advantage of German firms in India and China which isgreater for this than for any other dimension of the diamond.

Diamond surface areasAfter reporting the main findings for each dimension of the diamonds separately wewill now analyze the diamond surface areas for the three technologies. Porter suggeststhat a large diamond represents high competitiveness and a small diamond representslow competitiveness. The diamond surface area is calculated by summing up theindividual areas of each quadrant’s triangle as shown in Table III.

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Our results reveal that Germany has significantly larger diamond surface areas thanChina, followed by India. According to our Proposition 2, this implies a highcompetitive advantage of German firms in all three renewable energy industries inboth emerging markets. The largest difference can be observed between Germany andIndia with regard to biomass, where the German diamond is more than three timesbigger than the Indian diamond. The smallest difference is observed between Germanyand China in the wind energy industry, where the area of the German diamond is only1.2 times larger than in China.

The comparison of the surface areas indicates only small differences withinGermany, but remarkable differences within India and China. In Germany, the largestdiamond (wind industry) is only slightly larger than the smallest diamond (biomassindustry). In India, in contrast, the biomass industry (value 208.3) is clearly lessdeveloped than the solar industry (value: 348.8), which is mainly caused by the twodeterminants firm strategy, structure and rivalry as well as related and supportingindustries. Moreover, governmental and cultural influences have a more positive impacton the solar industry in India and the wind industry in China than on to the otherrenewable energy technologies (Table II). In China, competitive advantage of domesticfirms in the wind energy sector is by far higher than in the solar and biomass industries.

Contributions, limitations and implications for further researchThis study was aimed to examine if German firms in the renewable energy industryhave a competitive advantage in India and China and on which determinants thisadvantage is based. We used a modified version of Porter’s diamond model and specifiedit for the renewable energy industry. We then tested the model empirically in Germanyand both emerging countries on the basis of secondary data and found that German

Germany India China

BiomassASD ¼ firm strategy, structure and rivalry * 1/2 demand conditions 246.4 69.4 104.4ARD ¼ related and supporting industries * 1/2 demand conditions 199.8 40.8 104.4AFR ¼ related and supporting industries * 1/2 factor conditions 115.2 36.3 120.0ASF ¼ firm strategy, structure and rivalry * 1/2 factor conditions 142.1 61.7 120.0Area sum 703.5 208.3 448.8Difference (Germany – India) and (Germany – China) 495.2 254.7SolarASD ¼ firm strategy, structure and rivalry * 1/2 demand conditions 238.7 90.7 103.7ARD ¼ related and supporting industries * 1/2 demand conditions 195.8 52.9 95.0AFR ¼ related and supporting industries * 1/2 factor conditions 122.9 75.6 132.0ASF ¼ firm strategy, structure and rivalry * 1/2 factor conditions 149.8 129.6 144.0Area sum 707.2 348.8 474.7Difference (Germany – India) and (Germany – China) 358.3 232.4WindASD ¼ firm strategy, structure and rivalry * 1/2 demand conditions 213.1 91.1 136.9ARD ¼ related and supporting industries * 1/2 demand conditions 184.3 63.4 136.9AFR ¼ related and supporting industries * 1/2 factor conditions 157.4 67.2 169.0ASF ¼ firm strategy, structure and rivalry * 1/2 ractor conditions 182.0 96.6 169.0Area sum 736.9 318.2 611.8Difference (Germany – India) and (Germany – China) 418.7 125.1

Table III.Calculation of diamond

surface areas

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renewable energy firms have a competitive advantage in biomass, solar and windenergy markets in comparison to Chinese and Indian firms in their home countries.

The results demonstrate that German firms have a significant competitive advantagein all three technologies (Figure 1). The positive governmental and cultural influenceshave been decisive for the favorable development of the renewable energy demand inGermany over many years. Moreover, German firms face strong rivalry and thesuppliers as well as the related and supporting industries in this sector are welldeveloped. Disadvantages occur merely in natural factor conditions and here mainly inthe low numbers of sunshine hours. India and China, on the other hand, have favorablebasic factor conditions for all three renewable energy technologies. In China, theadvanced factor conditions are also better developed than in Germany in all threerenewable energy technologies. Also the demand for biomass, solar and wind energyindustries is high in India and China and only close behind Germany. With regard torelated and supporting industries as well as firm strategy and rivalry, Indian andChinese firms have to catch up. However, positive cultural conditions in China and thesignificant governmental support for renewable energy technologies in both countriespush their development further, and the high scores for factor conditions as well asdemand conditions demonstrate the future potential of these industries. Thus, Germanfirms can benefit due to their competitive advantage of the demand in both countries. Inreturn, investments of German firms promote the domestic renewable energy industriesof China and India and help them to fulfill their ambitious targets in the long term.Therefore, an important policy implication for the Chinese and Indian Governmentwould be to focus on the dimensions of the diamonds where backlog demand exists andto provide better conditions for the development of renewable energy firms andsuppliers. In particular, the further development of special economic zones for suchtechnologies to strengthen their innovativeness and the promotion of co-operation withforeign partners may be promising (Ernst & Young, 2007; Liu et al., 2007).

Another important contribution is that this study provides a detailed analysis of thefactors on which the competitive advantage of German renewable energy technologiesin India and China is based on. Moreover, the study indicates significant differenceswithin the biomass, solar and wind industries in the countries. This helps managers ofrenewable energy firms to focus on those areas where they have particular strengthsand to introduce measures to overcome potential weaknesses. Moreover, the studyhelps German firms to decide in which industries a market entry into China and Indiais most likely to be successful.

Our study also shows that the solar and wind energy industries in China and – to alesser extent – in India are already well developed. Thus, these two countries are in amuch better position compared to other emerging markets such as Russia (Dogl andHoltbrugge, 2010). As a consequence, the competitive pressure in these two countries islikely to increase in the next years. Moreover, market entries of Chinese and Indianrenewable energy firms in Germany may be expected. Already today the Indian Suzloncompany has a strong position in the German market after its acquisition of REpower.

A major theoretical contribution of the study is the application of Porter’s diamondmodel to the renewable energy industry as well as the identification andoperationalization of the relevant causal and proxy variables (Table I). We alsoextended this model by including governmental and cultural influences which have beenneglected in previous studies. Thus, our research does not only contribute

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Figure 1.Biomass, solar and wind

industry in Germany,India and China

Biomass Industry

Solar Industry

Wind Industry

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to the understanding of the renewable energy industry in particular, but also to theapplication of Porter’s diamond model in general.

When interpreting these results it has to be taken into account that this study onlypresents a snapshot of the current situation. Since the renewable energy industry isvery dynamic, a replication of this study in some years might come to different results.The positive governmental influence as well as high scores in factor and demandconditions in China and India indicate that both diamonds have a huge growingpotential although they have a backlog demand in the remaining two determinants.With growing markets, growing energy demand and ambitious targets in reducingcarbon 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 countriesmight be bigger than the German diamonds. This is an important implication forGerman investors in the Chinese and Indian renewable energy industries as itdemonstrates their market potential and underlines that both countries might overtakethe German renewable energy firms during the next decades.

Some limitations result from the methodology of this study. Most of the secondarydata was taken from official statistics, of which a few were not up to date. For the shareof medium and high-tech value added in total manufacturing, for example, the mostrecent data available is for 2003. This applies particularly to variables that are notdirectly observable such as firm strategy or government policies. Although ourmeasures may not be perfect reflections of these variables, we relied on the indicatorsmost often used in previous studies. Moreover, we argue that our findings are robust tothe use of alternative measures. For example, the results do not differ significantlywhen using the Ease of Doing Business Index (The World Bank Group, 2009) insteadof financial support systems as alternative measure of governmental policies. We alsotested for the robustness of our results by applying alternative calculations for the sixdeterminants of the diamond and did not find significant differences.

As mentioned earlier, the diamond model of competitive advantage is not withoutcritique either. For example, the role of the government is discussed controversially.While according to Porter (1990, p. 680), “government has an important role ininfluencing the ‘diamond’ but its role is ultimately a partial one. It only succeeds whenworking in tandem with the determinants”, Stern (2008, p. 412) argues that “governmenthas an important role in directly funding skills and basic knowledge creation for scienceand technology”, which is crucial for the renewable energy industry. Moreover, like mostprevious research, this study is based on the assumption of Porter that high scores forthe six determinants of the diamond lead to competitive advantage without being able tostatistically proof this relationship.

Therefore, further research should focus on the governmental influence on thedevelopment of renewable energy industries and analyze this factor in more detail.The cultural influence on the development of the renewable energy industry should alsobe analyzed further. Similarly interesting would be a longitudinal study which reflectsthe changes in the competitive position of German renewable energy firms in India andChina over time. Finally, future studies should consider the impact of competitiveadvantage in quantitative terms such as FDI outflows, market shares or profitability.

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Further reading

Barney, J.B. (1991), “Firm resources and sustained competitive advantage”, Journal ofManagement, Vol. 17 No. 1, pp. 99-120.

Grant, R.M. (1991), “The resource-based theory of competitive advantage: implications forstrategy formulation”, California Management Review, Vol. 33 No. 3, pp. 114-35.

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Rugman, A.M. and Verbeke, A. (1993), “How to operationalize Porter’s diamond of internationalcompetitiveness”, The International Eeecutive, Vol. 35 No. 4, pp. 283-99.

Rugman, A.M. and Verbeke, A. (1993), “Foreign subsidiaries and multinational strategicmanagement: an extension and correction of Porter’s single diamond framework”,Management International Review, Vol. 33 No. 2, pp. 71-84.

Corresponding authorCorinna Dogl can be contacted at: corinna.doegl@wiso.uni-erlangen.de

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