No Diffusion at All: Trade, Free Riding, and Government Underspending in Environmental Innovation

Abstract

Governments have an irreplaceable role in supporting environmental innovation due to market failure. Nevertheless, this article develops the free riding argument that the trade-driven technology transfer incentivizes national governments to underspend on environmental innovation. The data on government environmental research and development (R&D) expenditures and bilateral trade volumes of environmental goods from 32 OECD countries, 1982–2017, are used to substantiate my argument. Spatial regression finds that nations spend less on environmental R&D as a response to the increasing spending from their trade partners in the preceding year. This research contributes to the broader literature by presenting a new mechanism underlying the trade-environment nexus and showing that the strengthening transnational interdependence does not necessarily drive norms and policies to diffuse internationally.