6 ‘Emerging Markets and Innovation’ Insights from the IFC Annual Research Conference

It was on 2 and 3 April that INSEAD supported the International Finance Corporation's Annual Research Conference, held at the World Bank in Paris. The conference hosted a series of world-leading researchers who presented their work in relation to the conference theme, "Emerging Markets and Innovation: Harnessing New Technologies for Growth."

The research centred on understanding the rate of green innovation in developed income countries vs middle- and low-income countries based on patent filings. It discussed on VC funding shifts and the importance of R&D as well as knowledge spillovers. Dean Francisco Veloso gave an address, and INSEAD Professor Philippe Aghion presented his work "Schumpeterian Growth for Lower Income Countries" for the Day 2 keynote.

Susan Lund, of the IFC opened by sharing that although most technological R&D has happened in the developed world, going forward, emerging markets will be innovators in the energy transition, a point Professor Aghion further reinforced (see Insight 2).  New IFC research shows already that trade in green products has shifted from solely developed countries to emerging markets. Emerging markets are becoming innovators and have a comparative advantage.

Here are six insights from the research:

1. Renewables Have Never Been Cheaper

Professor of Economics Robin Burgess (LSE) presented "Ray of Hope? China and the Rise of Solar Energy" (w/ Ignacio Banares-Sanchez, David Laszlo, Pol Simpson, John Van Reenen, and Yifan Wang). He shared that dealing with climate change is easier when an individual or a country is rich and much harder when it’s poor. The cost of solar has dramatically fallen, and that prices fell much quicker than projected. Burgess shared that solar prices fell most rapidly when China entered the picture in 2007, when the first Chinese city adopted subsidies. The 40% price drop in solar is due, in large part, to China's city subsidy policies. This scale-up of solar and wind was faster than any tech in history and rose at a rate no one saw coming. According to Associate Professor Conor Walsh from Columbia University and his research 'Clean Growth' (w/ Costas Arkolakis) on average, actual installations have been more than three times higher than their five year forecasts. This new capacity, however, is causing congestion problems, with the installation and connection to the grid for a new solar plant taking up to five years. In Texas, however, this has been brought down to two years. This creates a significant drop in wholesale prices, and renewables can be decentralized and local.

2. Market Opportunities for Emerging Economies BUT be aware of Past Dependencies

Professor Philippe Aghion highlighted that past dependence is important to take note of in the transition from 'dirty' to 'clean' technologies. Firms and countries that have historically focused on innovating ‘dirty’ technology tend to continue along that trajectory unless there is targeted intervention. By contrast those with a history of ‘clean’ innovation are more likely to keep innovating in clean tech. This provides an opportunity for low-income countries without an entrenched past dependency to position themselves and innovate clean and green. However, middle-income countries (especially those reliant on coal) face tougher transitions, as past dependencies stick.

According to Professor of Professor of Economics Ralf Martin (IFC & Imperial Business School) green is a growth market.  Green exports have been outperforming other exports. Clean technology is not just a growing area but creative destruction – a Schumpeterian wave.  Over 80% of all innovations are from high-income countries, but in low-income countries, 12% of innovation is in green fields, compared to just 8% in high-income countries.

To ensure a green transition the global North must consider the equitable transfer of technology. Delaying green intervention increases long-term costs, as the technological and economic gap between dirty and clean options widens. Aghion shared that subsidies will play an important role to particularly to counteract negative effects like the shale gas boom, which reduced coal use in the short term but diverted long-term innovation away from renewables.

INSEAD Professor Philippe Aghion delivering his key note

3. VC funding is shifting away from net zero

Professor of Entrepreneurial Finance Ramana Nanda (Imperial) presented “Innovating to Net Zero: Can Venture Capital and Start-Ups Play a Meaningful Role?” (w/ Silvia Dalla Fontana) When focusing on the US, and examining USPTO patents related to net zero, the research shows that patents which are which are most based in science are harder to finance. VCs are, however, disproportionately engaged in funding patents which are science backed, and these VC-backed startups have a 2x–3x rate of influence in citations.

The largest number of net zero patents focus on green energy generation/ wind and solar, followed by a significant proportion of patents focused on transportation, and the smallest number of patents is on carbon capture.  However, VC backed startups are starting to shift away from net zero.  The strongest growth in VC funding is in ICT/ deep tech development, where there has been 5-a fold venture capital increase in fintech and consumer facing goods. Laura Cozzi, Director of Sustainability, Technology, and Outlooks at the International Energy Agency’s (IEA), also shared that in 2024 VC funding in the energy sector saw a 40% drop compared to 2022, due to AI. This shift in funding towards fintech and AI is partly due to the ability to capture value. If you can’t capture value, it is much harder for VCs to get behind. For climate-based projects experimentation cycles are long, capital heavy and more costly to scale. Professor Nanda put this down to a human capital issue. Whilst there are a lot of patents and innovation coming out of universities, there researchers are not as good at building and scaling a business resulting in many lab experiments from universities which are not super successful to show at scale. Nanda called for universities need to be better at creating deal flows between university lab projects and VCs.

4. Data on the green energy sector is still very rough

Laura Cozzi (IEA) shared insights from Energy Technology Perspectives 2024 and World Energy Employment. Looking at the state of energy innovation we find that China (in terms of energy) overtook US and Germany in 2021. China accounts for 70% of global manufacturing output value for 6 clean technologies. And when examining the global market value for clean energy technologies, in 2035, under current policy settings, 2.1 trillion USD, the value of global crude oil market, will captured by China. Clean and modern technologies are sizeable economic opportunities however there is a lack of data on clean technology manufacturing.  There are emerging market geographies with big opportunities such as Latin America. Due to large iron and lithium reserves, high demand for fertiliser, skills of the workforce and good energy infrastructure, it is expected that by 2050 they will become the third largest battery manufacturer and the second largest exporter of near-zero emissions ammonia. North Africa is positioning itself as an EV manufacturing hub and which will contribute to 3% of GDP by 2050. Africa will also be expected to meet all ammonia demands with domestic resources by 2050. This is partly due to good renewable resources, large cobalt reserves and avaliable energy infrastructure (in North and South). "This international cooperation and strategic partnerships will be vital to enable emerging markets to step up the value chain and increase diversification in global supply chains for energy technologies and their components." -said Cozzi.

However, a skills gap in many markets which is an impediment to green transition. In general, clean jobs make up smaller share of overall job growth in EMDEs.  China is once again leading the way with 20% of overall clean energy jobs, compared the average 2%. Professor of Political Economy Elena Verdolini (Brescia) further reminded us that data is very rough in the green energy sector and there is no data set for developing countries so the ability to project forward is quite limited. But what is clear is that we learn more from countries technologically similar to us so many emerging countries source from other emerging countries when innovating in energy technologies. 

5. Emissions Markets for pollutions are here: and they work

Pollution is arguably more of a reason to transition over CO2 and high pollution in countries such as India might not reflect a lack of regulatory effort. Most environmental regulation is command and control. Yet this command-and-control approach has not been effective. Associate Professor Anant Sudarshan (Warwick) asked the question, would market based instruments work and his research “Can Pollution Markets Work in Developing Countries? Experimental Evidence from India” (w/ Michael Greenstone, Rohini Pande, & Nicholas Ryan) showed there is a market for particulates.

Trialling this premise in Gujarat, India, a shift to market-based instruments from command and control showed that emission market drastically reduced noncompliance and functioned well. Noncompliance fell from 34% to 1% and emissions were cut by 20 -30%. Professor Sudarshan noted that sometimes greater impact comes from changing something operational rather than working to change the systemic issues.

6.   Jevons Paradox: Both Innovation and Green Industrial Policy is Needed

There is an elusive promise that climate innovation will save us but it is not enough just to innovate. Too many times, ‘fantastic progress’ is cited within the green tech space with consistent and rising green R&D, and yet CO2 emissions are not coming down. The David Zalaznick Professor of Business, Patrick Bolton (Columbia & Imperial) urged us to take this as a warning when he presented, “The CO2 Question: Technical Progress and the Climate Crisis" (w/ Marcin Kacperczyk & Moritz Wiedemann).  Whilst there is good news that there is technical progress such as the levelized cost of electricity (LCOEs) has decreased, due to renewables, in past two years it has increased slightly.

Professor Bolton spoke on Jevons paradox. The progress made through new innovations in carbon efficiency is being compromised by increased sales and use of the carbon-efficient product. A strong rebound effect is at play, and it must be limited. There needs to be green innovation at industry level and a policy lesson that we need green industrial policy to guide by providing detailed guidance on the transition. There are many areas in which we have the tech to transition but not guidance on the “how to”.  It is imperative to give more robust and precise information to market players.  We cannot hope the market will get it right.