What about South-South technology transfer? Glachant et al. (2013) find contrasted results. The transfer of climate-related patents or FDI flows between developing countries hardly exists (less than 1% of cross-country patent flows, 1.9% of FDI links), but trade becomes significant (10% of the world total). Recall however that trade is a less knowledge-intensive channel of technology transfer.

## **Innovation through learning-by-doing**

This form of innovation is obviously far more difficult to characterize and quantify as it comes through diffuse incremental improvements made by line workers or others not officially designated as engineers or lab technicians across the value chain. But there are strong reasons to think that learningby-doing is very active in countries where manufacturing is set up.

# **3 Policy Issues**

How to create an enabling environment for innovation and international technology diffusion, in particular in the developing world? That is, a set of government policies and conditions creating and maintaining an overall macroeconomic environment favorable to innovation and technology diffusion? The goal of this part is to identify and assess various components of such environments.

## **3.1 Creating Demand**

Creating demand for green technologies via environmental policies inducing pollution abatement and environmental protection is a prerequisite for green innovation and technology diffusion. The reason is that cutting emissions or protecting the environment is generally not privately profitable yet under standard market conditions. In the absence of public policies providing incentives and imposing constraints on emissions and polluting practices, households and corporations are thus unlikely to adopt green technologies. This conveys what is probably the most important message of our policy discussion. Increasing innovation and diffusion of technologies can only occur in the presence of ambitious environmental policies with proper enforcement (e.g., carbon taxes, Cap & Trade system, emission standards, etc.). This has been documented by many studies both for innovation (Brunnermeier and Cohen, 2003; Newell et al., 1999; Popp, 2002; Crabb and Johnson, 2010) and international technology diffusion (Lanjouw and Mody, 1996; Popp _et al._ , 2007; Verdolini and Galeotti, 2011, Dechezleprêtre et al., 2013).

Environmental policies are designed and implemented at the national level, and they tend to be stricter in advanced economies as developing countries logically give priority to economic development and poverty alleviation. Can developing countries then participate in the greening of global value chains, acquire green techs and innovate without ambitious environmental policies at home?

The answer is yes for technology transfer as illustrated by the photovoltaic industry. In just a few years, China became a world leader in the manufacturing of both photovoltaic panels. Chinese PV companies acquire the necessary technologies to export cells and panels in countries such as Germany, Spain, or the US where feed-in tariffs and renewable portfolio standards trigger massive installations of PV production capacities. In fact, if barriers to trade and transportation costs are low and if the developing country’s workforce is sufficiently qualified, there are no reasons why production and the necessary technologies remain located in the countries with environmental demand.

Of course, it could give birth to serious political difficulties: Political leaders in many countries frequently argue that ambitious environmental and climate domestic policies can help local firms achieve technological leadership, thereby improving the competitiveness of the national economy. But 7