Journal of Cleaner Production 141 (2017) 1454e1466

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Journal of Cleaner Production

journal homepage: www.elsevier.com/locate/jclepro

The action mechanism analysis of environmental pressures on the

development of environmentally friendly technologies using a neoschumperian model
Li-ming Chen a, *, Wen-ping Wang b
a
b

School of International Trade and Economics, Nanjing University of Finance and Economics, Nanjing 210000, China
Department of Management Science & Engineering, Southeast University, Nanjing 210000, China

a r t i c l e i n f o

a b s t r a c t

Article history:
Received 21 November 2015
Received in revised form
22 July 2016
Accepted 23 September 2016
Available online 28 September 2016

In order to analyze the action mechanism of environmental pressures on the development of environmentally friendly technologies (EFTs), this paper constructs a neo-schumpeterian simulation model
containing rms' production, pricing, pollution abatement investment, (environmental) R&D, entry &
exit decision-making and consumer choice behavior. The objective of this paper is to investigate the
inuence of consumer demand preferences and environmental policies on rms environmental investment decision-making as well as the development of EFT. Results showed that consumers prefer
product price, a market-based instrument (MBI) combined with an information-oriented instrument
(IOI) can promote the development of EFT, while MBI applied alone will reduce environmental investment. Under scenarios that consumers prefer product quality, a command and control environmental
policy (CAC) can promote the development of EFT to a greater extent, but it inhibits environmental investment and damages the average prot rate of prot of the industry. If consumers prefer environmental performance of rms, CAC or IOI is advantageous to the change of EFT. However, in such a case
environmental investment and consumer utility are reduced.
2016 Elsevier Ltd. All rights reserved.

Keywords:
Environmental innovation
Environmental policy
Consumer demand
Industrial dynamic
Evolutionary economics

1. Introduction
Innovation is the source of competitiveness of a rm. The
motivation that a rm invests in R&D activity is to win consumers
recognition through independent innovation or imitation of better
crafts and better product, thereby gaining greater market share and
more prots. However, because of public goods attribute of environment, the innovation activity of a rm is inclined to reduce
production cost and improve product quality, while environmental
criterion has been ignored for a long time. As a result, technology
evolution path has locked in environmentally deteriorative paradigm since the industrial revolution.
As environmental issues are becoming more and more prominent, the environmental pressure caused by the growth of green
consumer demand and the increasingly stringent environmental
policies have led rms to improve their environmental performance by means of environmental invest (Kleindorfer et al., 2005;

* Corresponding author.
E-mail address: 670856479@qq.com (L.-m. Chen).
http://dx.doi.org/10.1016/j.jclepro.2016.09.184
0959-6526/ 2016 Elsevier Ltd. All rights reserved.

Sarkis et al., 2011). Some of these environmental investments are

being used for environmental R&D activities to improve the level of
environmental technology, and the remaining is being used for
pollution abatement activities to reduce pollution emission in the
production process. Firms carefully assess the cost and benet of
environmental investment, and make a trade-off between prot
rate and environmental performance, so as to determine the size
and the manner of environmental investment (King and Lenox,
2001; Pagell and Wu, 2009). Consequently, environmental investment strategies vary across rms. Moreover, the results of environmental R&D investment are often varied, uncertain, pathdependent (Kline, 2001), and have dual externalities due to the
spillover effect of knowledge and the public goods attribute of
environment (Rennings, 2000). These features make it difcult to
predict the results of environment R&D investment. The diversity
of environmental investment strategy along with the difculty in
predicting the results of environmental R&D makes the inuence of
environmental pressure on rms' environmental investment decision and the development of environmentally friendly technologies become complicated and confusing. Then, what is the impact
of consumer demand and environmental policies on rms

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

environmental investment decision-making? Under different consumer demand conditions, what kinds of environmental policy
instruments can effectively promote the change of environmentally
friendly technologies?
The paper is structured in the following way. In Section 2 a
literature overview is given. In Section 3 a description of the
simulation model is presented. In Section 4 results of model experiments are discussed. Finally some conclusions and policy recommendations is derived.
2. Literature review
Environmental innovation is affected by many complicated
factors, including not only external pressure from environmental

les, 2009; Yalabik and
policy and green consumer demand (Gonza
Fairchild, 2011), but also rm-specic factors such as environmental responsibility, perfection degree of environmental management system, technology base and organizational capability,
etc. (Demirel and Kesidou, 2011). Oltra and Saint Jean (2009)
further pointed out that technological regimes such as technological opportunities, technological cumulativeness and technological
appropriability conditions are also an important factor inuencing
environmental innovation of rms. This paper mainly focuses on
the inuence of external environment pressure on environmental
innovation so as to explore how to create good conditions for the
generation and diffusion of environmental innovation.
Since Porter and Van der Linder (1995) proposed the environmental Porter hypothesis, the relationship between environmental
policies and environmental innovation has been debated. Most
studies conrm that environmental policy can stimulate environmental innovation, but the conclusions vary regarding the design
and the type of environmental policy, the type of environmental
innovation as well as research objects. For instance, Popp (2005)
concluded that environmental regulation has a strong inuence
on both the creation and adoption of new technologies. Johnstone
and Labonne (2006) showed that the severity of environmental
policy and the exibility of environmental policy have a positive
effect on environmental R&D investment for the manufacturing
sector of seven OECD countries. Demirel and Kesidou (2011)
examined 289 rms in the UK and discovered that environmental
regulation policy can effectively stimulate the innovation in pollution control technologies but have little effect on cleaner production technologies. Demirel and Kesidou also discovered that
environmental tax has no signicant impact on motivating any of
environmental innovation. Based on an empirical study of 5222
small and medium enterprises in 27 European countries, Triguero
et al. (2013) also found that environmental regulation policy has
no obvious impact on cleaner production technology innovation,
but it has a positive effect on green product innovation.
Desmarchelier et al. (2013) used cellular automata model to
compare the effectiveness of market-based environmental policy
and information-oriented environmental policy on environmental
innovation of service rms. Desmarchelier et al. discovered that
market-based environmental policy was more effective than
information-oriented environmental policy, while informationoriented environmental policy appears to give rise to a perverse
effect that causes market niches for the most environmentally
friendly services to disappear.
Green consumer demand is another external pressure that
triggers environmental innovation. Kammerer (2009) studied the
environmental innovation of 92 German manufacturers of electrical and electronic appliances. His ndings indicated that both
environmental regulation and consumer benet inuence the level
and application of green product innovation. Popp et al. (2011)
pointed out that apart from environmental regulation, consumer

1455

pressure also fosters environmental technology innovation.

Horbach et al. (2012) empirically analyzed the determinants of
environmental innovation based on the German Community
Innovation Survey. Horbach et al. found that environmental regulation is particularly effective in end-of-pipeline pollution control
technology innovation, while consumer demand is another
important source of green product innovation and cleaner production technology innovation. Windrum et al. (2009) examined
the effect of heterogeneous consumer demand on environmental
innovation and found that the distribution of consumer preferences
determines whether cleaner design are developed within a technology paradigm, whether new, more environmentally benign
paradigms are developed, and whether these new paradigms
replace older, environmentally harmful technology paradigms.
Although these researches have provided many valuable insights, some shortcomings still exist. Firstly, they fall short of holistically examining the process that rms environmental
investment is transformed into environmental innovation result.
This may lead to biased results (Hallstedt et al., 2013; Cheng et al.,
2014). Secondly, they are unable to adequately distinguish between
different types of environmental innovation due to limited data
availability. Different types of environmental innovation respond to
environmental pressure in diverse ways. Failure to distinguish between them may lead to over generalization. Finally, environmental
innovation could be affected by multiple environmental policies
simultaneously. Existing studies seldom explore the superposed
effect of environmental policies (Kemp and Pontoglio, 2011).
This paper intends to solve these challenges by expanding neoschumpeterian simulation model proposed by Nelson and Winter
(1982). The N-W model provides a general framework for the
analysis of technological evolution. It does not involve consumer
demand factors. In fact, consumer demand is an important factor
affecting the technological evolution (Adner and Levinthal, 2001;
Almudi et al., 2013; Sun and Guo, 2014). In order to analyze the
impact of consumer demand on environmental innovation, consumer decision-making is introduced into N-W model by drawing
lessons from supplier-user co-evolution model proposed by
Janssen and Jager (2002) as well as Saint Jean (2005). Other factors
such as pollution abatement investment, environmental R&D and
different types of environmental innovation are also introduced
into the model. Thus the proposed model holistically investigates
the process that rms environmental investment is transformed
into environmental innovation. In addition, different types of
environmental policies are integrated into the model in the form of
combinatory parameters, which makes it possible to explore the
superimposed effect of multiple types of environmental policies.
This paper attempts to expand the exiting literature from the
following aspects: (1) pollution abatement investment, environmental R&D and consumer choice behavior are introduced into NW model, so that N-W model can be used to analyze the inuence
of environmental pressure on rms environmental investment
decision-making and environmental innovation. (2) By simulation
experiment under different scenarios of consumer demand and
environmental policy, this paper qualies the magnitude of the
effect of environmental pressure on the development of environmental friendly technologies.
3. Industry evolution model under the N-W framework
Based on N-W model, this paper develops a model of industry
evolution, which is introduced into environmental investment,
environmental innovation, rms' entry and exit as well as consumer choice behavior, so as to explore the impact of consumer
demand and environmental policies on rms environmental investment decision-making and the change of environmentally

1456

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

friendly technologies.

3.1. Basic hypothesis

Suppose diverse rms in the industry interact with each other
through innovation, imitation and investment. Firms as the main
body of evolution, constantly search for better production technology. Firms prots determine whether to expand or reduce
production capacity. Different rms in the industry produce similar
products, but their offerings differ in terms of product price and
product quality and environmental effect generated in the process
of production and consumption. Each rm determines their product price via mark-on in the existing technical condition.
Firms' entry and exit depends on market selection. During the
same period, different rms use different technologies to produce
diverse products with varied product quality and environmental
effect. Because of the difference in rms' capital productivity and
pollution-emission efciency, rms' product price and environmental impact in production process are also different. Therefore,
consumers obtain distinct utility by purchasing products of
different rms, and then rms differ in competitiveness due to
market selection. Firms with high market adaptability obtain high
prots and market share, while rms with low market adaptability
have a low prot rate and market share. Since the selection set is
uncertain, any selection results are also uncertain. Therefore, rms'
decision and consumers behavior are varied and interactional.
The industry evolution is discussed in discrete timet 0; 1; /.

uij;t

max EIPit EIPit

i
environmental effect of unit product. EFPit max EIP
i

it min EIPit
i

EIPit 1  XitPAE =XitAP . Similarly, the environmental tness in conmaxXitEIC XitEIC

i
.
sumption process isEFCit maxX
EIC
minX EIC
i

it

it

3.2. Consumer utility and market dynamics

The utility gained by consumerj through buying product of rmi
is

if YitPP < CTjtPP ; YitPF > CTjtPF ; YitPEF > CTjtPEF

>
:
0;
otherwise

Xtk X0k 4k ,ln qkt1 ;

EI

i.e.PEFit lEFP ,EFPit 1  lEFP ,EFCit h , where lEFP is the weight

that given to environmental performance of rm in the production
process by consumers; hEI 20; 1 is a parameter representing the
extent of environmental information disclosure. The environmental tness in production process (EIP) is associated with the










8
PP
PP
PP
PF
PF
PF
PEF
PEF
PEF
>
hSj ,si;t1 ;
< hj , CTjt  Yit hj , Yit  CTjt hj , Yit  CTjt

Suppose the industry takes shape att 0. There arent rms in the
industry, andm consumers in the market att  1. Due to a difference in technical level, rms show different levels of capital productivity (AK), pollution-emission efciency (AP, expressed as the
inverse of pollutant produced by unit output), pollution-abatement
efciency (PAE), product quality (PF), and environmental effect that
generated in the process of consumption (EIC).
For the sake of simplicity, the following notations are used; rm
is labeled as i (i 1; /; nt ); consumer is labeled as j(j 1; /; m);
rm characteristic is labeled as k (k AP, PAE, PF, EIC, AK); the
attribute value of each rm characteristic is denoted asX k ; product
characteristic is labeled asl (l PP, PF, PEF); the attribute value of
each product characteristic is denoted asY l .
Firms posses different technical levels vis-a-vis their characteristics. Denote the scale parameter of technical level of the k-th
k
rm characteristic asq 2N . The greater the scale parameter is, the
higher the technical level of corresponding rm characteristic. This
can be stated as follows:

Xtk

determines the speed to which the attribute value of the k-th rm

characteristic increases with the improvement of technical level,
4PA ,ln1 I PA is the impact of pollution abatement investment on
the improvement of the pollution-abatement efciency.
Corporate performances in each characteristic determine the
attribute values of product characteristics. Specically, product
price is related to capital productivity and mark-up rule, and
environmental tness of product is composed of two parts, namely,
environmental tness in the production process (EFP) and environmental tness in the consumption process (EFC),

X0k

4 ,ln

qkt1
k

Xtk X0k  4k ,ln qt1

Here,

X0k




PA
;
4 ,ln 1 It1

 


l
l
l
CTjtl CTj;t1
,max hl , Y t  Y t1 ; 0
2

CTjtl

l
CTj;t1



l
l
,4h , Y t  Y t1
l

l PF; PEF
3



l
l
h , CTjt  CTj;t1 5
l

lPF;PEF

l PP

k AK; AP; PF
PA

PF
PEF and hS parameters determining consumer
with hPP
j ; hj ; hj
j
preference to product price, product quality, environment tness of
product and market share of rmi.
CT l is the minimum consumer requirement (threshold value) for
the l-th product characteristic. Only ifY PP < CT PP , Y PC > CT PC
andY PEF < CT PEF , does the consumer buy rm's product and gain
positive utility.
The thresholds of consumer demand evolve in the light of
average performance of each product characteristic in the industry
and consumer preference parameters. The evolution process is
described by the following equations.

k PAE

k EIC

is the initial value of the k-th rm characteristic,4k > 0

with a parameter controlling the speed to which the thresholds of

P
l
consumer demand change andY t
si;t1 ,Ytl . If average perfori
mance of product quality (environmental tness) in the industry
advances, then the minimum consumer requirement for product
quality (environmental tness) will be enhanced. But at the same
time, consumers' willingness to pay will also be increased.
The probability that consumers choose to buy products of a rm

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

1457

depends on the utility obtained by consumers and consumers

rational extent (RE). According to the probability selection model
(McFadden, 1981), the probability that a consumerj choose to buy
product of rmi can be expressed as

convenience, assuming that there is no inventory for a rm, the actual

sales volume of a rm (SV) is the smaller one of production capacity
and sales volume. Thus, the prot of rmi in the periodt is equal to the
product of gross prot per unit output and sales volume, that is to say:



exp RE,uij;t


fij;t P P
exp RE,uij;t




K
SVit min sit ,Qt ; XitAK ,Kit a

with RE20; 1 indicating the rational extent of a consumer. In

general, 0.01e0.1 is a more appropriate rational level (Traulseu
et al., 2006).
Market dynamics includes the change of total market demand
and the evolution of market share of rms. Both of them are related
to consumer utility. Suppose that the total market demand (Q) is
related to time and average utility of consumers, that is to say
U

Qt Q0 ,exps,t 2,ut h

with s a parameter determining demand growth rate and

2  N0; s22 a random variable reecting demand shift. Q0 is initial
PP
fij;t ,uij;t is average consumer
total market demand. ut
i

utility. hU is consumer utility elasticity for market demand.

The change of market share is dened by the logit dynamic
equation according to the principle of stochastically optimal reaction dynamic (Hofbauer and Sigmund, 2003), which depends on
current market share, intensity of market selection (lMS ) and the
probability that rm's product being chosen by consumers. The
evolution of market share of rmi can be expressed as
P
sit 1  lMS ,si;t1 lMS , fij;t , where lMS 20; 1 is intensity of
j

market selection. It reects perfection degree of market. The

biggerlMS is, the more perfect the market. The information can be
quickly passed on among consumers, and consumers can quickly
respond. lMS 1 is a simulation for perfect market, and market
share of rm is entirely determined by consumer choice. Another
extreme case islMS 0, which corresponds to a monopoly market
in isolation. The consumer is locked in existing supply rms and can
not react to other rms in this case. lMS 20; 1 are all cases of
imperfect market, which are caused by geographical division,
market institution or sheer inertia (Metcalfe, 1981).
3.3. Firm decision
Suppose that capital is the only production factor for all rms. The
technology adopted by each rm and corresponding capital productivity, pollution-emission efciency and pollution-abatement
efciency determine rm-specic unit production cost, pollution
intensity, product quality as well as environmental effect in the
consumption process. Firms create or imitate better technology
through R&D activities, so as to enhance their competitiveness.
Furthermore, rms are allowed to freely enter and exit the market.
3.3.1. Product price and prot
Product price (Y PP ) of a rm is determined by its production cost
(c) and mark-up (m), namelyYitPP cit ,1 mit with cit c0 =XitAK
and c0 representing unit capital cost (including capital rent and
capital depreciation and so on). The mark-up rule followed by a
rm depends on the growth of market sharegitS sit  si;t1 . If the
previous term of market share is reduced, a rm will reduce markS
up in order to improve the market share, that ismit m0 ,expgi;t1
.
Suppose that the entire market space is divided by the incumbent
rm. The maximum sales volume of each rm is equal to the product
of total market demand and respective market share. For

pit YitPP  cit ,SVit

withaK indicating output elasticity of capital.
3.3.2. Investment decision
The future production scales of a rm depend on its investment
decision. Firm increases capital through investment, and ultimately
improves the production capacity. If rm prots, it will determine
the subsequent investment to expand production. Assume that the
intended invest (I * ) of a rm is1 mI times of the previous term of
prot, namelyIit* 1 mI ,pi;t1.
Assume that some of the prot is used for investment (I) and the
remaining is deposited in rm's account as its saving (FS). In
addition, the unused capital (RK) can also be used as rm's saving,
K
that isRKit Kit  SVit =XitAK 1=a . Firm is allowed to get loans.
Therefore, its saving can be negative. The loans will increase rm's
total debts (TB). Moreover, rm will take a certain proportion (z) of
prot to repay debts. Ifz,pt1 is more than the total debts in the
periodt  1, then all debts can be paid off; otherwise, there will be a
debit balance. Therefore, each period of debt repayment (RB) is
associated with the previous term of debts and prot, that is:


RBit

z,pi;t1
TBi;t1

TBi;t1  z,pi;t1
TBi;t1 < z,pi;t1

Considering the interest factor, rm's total debts in the periodt

can be determined asTBit 1 r,TBi;t1  RBit Bit , wherer is
interest rate.
Each period of rm's saving is calculated by subtracting the sum
of investment and debt repayment in current period from the sum
of prot and unused capital in the prior period, namelyFSit pi;t1 RKi;t1  It  RBt . So, rm's account balance in the
period t is equal toFAit FAi;t1 FSit withFAi0 0. If rm's account balance in the prior period is more than the intended investment in current period, the rm will use its own funds to invest
without taking debt and vice versa. Loan amount (B) is the gap
between intended invest and rm's account balance. Hence, the
loan amount in period t is given byBit maxIit*  FAi;t1 ; 0.
Firm's new investment in the periodt
is given
byIit minfIit* ; maxFAi;t1 Bit ; 0g. If rm's account balance in
the prior period is more than the intended investment in the current period, thenIit Iit* ; otherwise, investment in the current
period is determined by the sum of rm's account balance in the
prior period and rm's loan amount in the current period.
If rm's current prot is positive, then rm's new investment is
divided into production-expansion investment, R&D expenditure
and pollution-abatement investment, and the proportion that the
rm invests in expanding production isf PROD ; otherwise, R&D
expenditure and pollution-abatement investment are equal to zero,
and new investment is all used to expand production. Thus, rm's
capital stock is given by:

(
Kit

1  d,Kit1 Iit
1  d,Ki;t1 fitPROD ,Iit

pi;t1  0
pi;t1 > 0

Hered20; 1 represents the capital depreciation rate. If rm's

market share increases, rm will make more investment to expand

1458

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

production. The evolution off PROD

can be expressed
S
PROD .
asfitPROD 1 gi;t1
,fi;t1
The remaining investment (IR) (calculated by subtracting the
production-expansion investment from new investment) is used
for R&D expenditure (R&D) as a proportion off R&D . The remaining
part is used for pollution-abatement investment (IPA).





IRit pi;t1 , 1  fitPROD ,Iit ; R&Dit fitR&D ,IRit ;




1
 >0
1  fitR&D ,IRit ; 
0
0

IPAit

R&D b,f R&D*  f R&D

The evolution off R&D is given byfitR&D fi;t1
i;t1
i;t1
R&D*
with f
a segmentation coefcient between R&D expenditure
and pollution-abatement investment for the rm with the greatest
prot growth rate andb20; 1 a parameter controlling learning
intensity of a rm.

3.3.3. R&D decision

A rm improves its performance of each characteristic through
R&D activity, and thereby enhances its competitiveness. Accordingly R&D expenditure can be divided into ve parts used to
improve capital productivity, pollution-emission efciency,
pollution-abatement efciency, product quality as well as reduce
environmental impact in the consumption process. The segmentation coefcient is denoted as r k respectively. So the R&D expenditure of a rm for the k-th type is given by R&Dkit ritk ,R&Dkit . The
evolution ofr k depends on R&D indexRIitk .
R&D index reects rm's investment preference for different
types of R&D activities, which not only has to do with the inertia that
a rm complies with the bypast R&D allocation strategy, but also
depends on the necessity of raising superiority and reducing inferiority. Denote the best, the worst and average performance on each
_k ^k
P
k k
characteristick as X t ,X t and X t (X t
si;t1 ,Xitk ) respectively. Then

expenditure is transformed into the level of innovation R&D.

l2IN


PR INitk l1IN , R INitk
l3IN
1

with lIN ; lIN and lIN parameters controlling the innovation success probability. The imitation success probability (PR_IM) can be
calculated in a similar way.
The second stage determines the technical level of a rm
after R&D activities. If innovation succeeds, the position of a
rm in the technology space will get promoted. The level of
innovation can be expressed asN steps randomly going forward
in the technology space. The random variable N has Poisson
distribution density, and the average step number (ASN) is also
determined by the R&D expenditure allocated on the innovation
research:




ASNitk 1  exp  jk ,R INitk
Therein, jk is a scale parameter of innovation. The technical
k
level after innovation success of rm i(~
q ) evolves in the light of
k
innovation resultN :



l .
n
o


k
~
l!
qit qkit Nitk ; Pr Nitk l exp  ASNitk , ASNitk
If a rm succeeds in imitation, it will employ the best technology
_k

in the industry q . For the rm simultaneously succeeding in

innovation and imitation, its technical level in next period is given
by:



l .
n
o


k
~
l!
qit qkit Nitk with Pr Nitk l exp  ASNitk , ASNitk

the necessity of raising superiority and reducing inferiority on

l ,Z k 1l ,W k

Z
Z
it
Pit k
characteristicsk of rmi is dened as ZWitk l , P
Zitk 1lZ ,
Wit
Z
k
k






^k
_k
k
k


withZitk X t  Xitk =X t andWitk X t  Xitk =X t indicating the superi

ority and the inferiority on characteristicsk of rmi respectively. lZ is

a parameter controlling the importance of the superiority. Thus, the
k
1  lRI ,ZWitk
evolution of R&D index is given by RIitk lRI ,RIi;t1

withlRI a parameter controlling the inertia that a rm complies with

the bypast R&D allocation strategy.
The R&D expenditure used for characteristick is divided into
innovation (R&D IN k ) and imitation (R&D IMk ) with a segmentation coefcienthk , that is to say, R&D INitk hkit ,R&Dkit
andR&D IMitk 1  hkit ,R&Dkit . The strategy of allocating each type
of R&D expenditure to innovation and imitation also depends on
the change of market share of a rm. If rm's market share is
increased, the proportion of innovation research will be increased;
if rm's market share is reduced, the rm will allocate more R&D
expenditure to imitation research. Therefore, the evolution ofhk can
S
be expressed ashkit 1 gi;t1
,hki;t1 .
The results of rm's R&D expenditure can be described as a two
stage stochastic process.
The rst stage determines whether innovation or imitation
succeeds or not. The Innovation success probability (PR_IN) depends on the level of innovation R&D (R_IN):


R INitk 1  lR

lR

IN

IN


k
lR
,R INi;t1

IN ,R&D

INitk

is a parameter controlling the speed to which R&D

3.3.4. Entry and exit decision

The model allows new rms to randomly enter industry. If
average prot rate (ACR) of the industry exceeds the threshold of
return on capital (CRT), the rm potential to enter the industry may
enter the industry, and the probability entering the industry is
lENT ,ACRt
calculated by PR ENTt 11ACR
withlENT 20; 1 a parameter
t

controlling the difculty degree of a rm entering the industry and

P sit ,pit
ACRt
Kit . In principle, the rm potential to enter the industry
i

(its capital is equal to zero) can randomly imitate the routine of

incumbent rms. Assume that new entrants always try to imitate
the rm with the highest prot rate in the industry, and its initial
capital is randomly given. For the rm not entering the industry, its
capital stock is still zero. In the process of market selection, the rm
with high tness continues to grow, while the rm with low tness
is sifted out. Suppose that a rm will exit the market in the
following circumstances, and it would not entry the market once it
has exited.
(1) If rm's prot is less than zero and prot growth rate is less
than the minimum requirement (0.03), then the rm will
exit market. This guarantees that a rm can continue to
operate for a period of time when rm's prot is less than
zero.
(2) If rm's debt to capital ratio (TB=K) exceeds the highest debt
to capital ratio CLR and its prot ratio is less than zero, then
the rm will go bankrupt due to insolvency, thus exiting the
industry.
(3) If rm's capital stock is lower than the lowest level KMIN, the
rm will chooses to exit market.

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

1459

3.4. Model framework

4. Model simulation and simulation results

The industrial evolution model constructed in this paper includes ve modules:

In this paper, MATLAB is used to construct the simulation

environment of industrial evolution, and a simulation experiment
is carried out to investigate the inuence of consumer demand and
environmental policies on rm's environmental investment decision and the change of environmentally friendly technology (EFT).
Assume that market is divided up by ten rms in the initial time of
the experiment, that is, the initial market share of each rm is 1/10.
There are fty consumers in the market. The capital, technical level,
capital productivity, pollution-emission efciency, pollutionabatement efciency, product quality and the environmental
impact in the process of consumption for each rm in the initial
time are randomly given according to uniform distribution on
corresponding interval. The thresholds of product price, product
quality and environmental tness for each consumer are also given
in the light of uniform distribution on corresponding interval.
Appendix A presents the range of rm's state and consumer demand threshold in the initial time of experiment.
In order to compare industrial evolution process under different
conditions of consumer demand and environmental policy, three
consumer demand scenarios (product price priority (A), product
quality priority (B) and environmental performance priority (C))
and four environmental policy scenarios (without environmental
policy (a), pollution-emission standard (b), pollution-emission tax
(c) and environmental information disclosure (d)) are designed,
and then twenty four combined scenarios are nally got, namely
Aa, Ba, Ca, Ab, Bb, Cb, Ac, Bc, Cc, Ad, Bd, Cd, Abc, Bbc, Cbc, Abd, Bbd,

 First, given rm's technical level, compute production cost,

product quality and the environmental effect in the process of
production and consumption, and then calculate product price
and environmental tness.
 Second, calculate consumers' utility according to rm's current
product price, product quality, environmental tness and market share, and then compute rm's current market share and
total market demand according to current consumers' utility
and rm's previous market share, thereby determine rm's sales
and (gross) prot.
 Third, according to rm's previous prot and current account
balance, calculate rm's intended invest and loan amount, and
then solve rm's new investment and investment decision, and
nally determine rm's production-expansion investment, R&D
expenditure and pollution-abatement investment.
 Fourth, calculate rm's R&D decision and its technical level in
the next period.
 Fifth, solve rm's entry and exit decision.
Fig. 1 shows the basic framework of the model (not including
rm's entry and exit decision). Multiple arrows pointing to a variable indicate that multiple variables codetermine the variable.

Fig. 1. Model framework.

1460

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

Table 1
Scenario labels and related parameters.
Scenario

Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario

Parameter

1
2
3
4
5
6
7
8
9
10
11
12

Aa
Ba
Ca
Ab
Bb
Cb
Ac
Bc
Cc
Ad
Bd
Cd

Scenario

hPP

hPF

hPEF

PET

PEC

PES

hEI

0.6
0.3
0.1
0.6
0.3
0.1
0.6
0.3
0.1
0.6
0.3
0.1

0.3
0.6
0.3
0.3
0.6
0.3
0.3
0.6
0.3
0.3
0.6
0.3

0.1
0.1
0.6
0.1
0.1
0.6
0.1
0.1
0.6
0.1
0.1
0.6

0
0
0
0
0
0
0.005
0.005
0.005
0
0
0

0
0
0
0.025
0.025
0.025
0
0
0
0
0
0

0
0
0
0.6
0.6
0.6
0
0
0
0
0
0

0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.7
0.7
0.7

Cbd, Acd, Bcd, Ccd, Abcd, Bbcd, Cbcd. Therein, consumer demand
scenarios are dened by different parameter values of consumer
preference related to product price, product quality and environmental tness. Pollution-emission standard belongs to command
and control environmental policies (CAC). If rm's environmental
tness does not reach the environmental standard (PES), then
government will levy charge on excess pollutants in accordance
with the expense rate of PEC. Pollution-emission tax is a marketbased instrument (MBI). Government levies a certain amount of
pollution-emission tax on rms in accordance with the tax rate of
PET. It is perceived that a rm may increase production costs and
thus reduce market competitiveness due to its poor environmental
performance under environmental policy of pollution-emission
standard or pollution-emission tax. Environmental information
disclosure is an information-oriented instrument (IOI). IOI can
improve consumers' knowledge about rms' actual performance
(hEI ) through eco-labels, etc thus affecting rms' market share and
prot. Table 1 reports the labels of twenty four scenarios and the
relevant parameter values. The values of the other parameters

Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario
Scenario

Parameter

13
14
15
16
17
18
19
20
21
22
23
24

Abc
Bbc
Cbc
Abd
Bbd
Cbd
Acd
Bcd
Ccd
Abcd
Bbcd
Cbcd

hPP

hPF

hPEF

PET

PEC

PES

hEI

0.6
0.3
0.1
0.6
0.3
0.1
0.6
0.3
0.1
0.6
0.3
0.1

0.3
0.6
0.3
0.3
0.6
0.3
0.3
0.6
0.3
0.3
0.6
0.3

0.1
0.1
0.6
0.1
0.1
0.6
0.1
0.1
0.6
0.1
0.1
0.6

0.005
0.005
0.005
0
0
0
0.005
0.005
0.005
0.005
0.005
0.005

0.025
0.025
0.025
0.025
0.025
0.025
0
0
0
0.025
0.025
0.025

0.6
0.6
0.6
0.6
0.6
0.6
0
0
0
0.6
0.6
0.6

0.2
0.2
0.2
0.7
0.7
0.7
0.7
0.7
0.7
0.2
0.2
0.2

except scenario-related parameters can be found in Appendix B.

The industrial evolution process is calculated for 50 periods in the
simulation experiment. For the sake of making the simulation results more reliable, the simulation model has been run for 100
times, and the mean of the simulation results is taken as the nal
results.
4.1. The simulation of the basic process of industrial evolution
This paper rst investigates the industrial evolution process
under the scenario that consumers are more willing to buy cheaper
products and without environmental policy (i.e. scenario 1), and
then analyzes the impact of different types of environmental policy
instruments on the rm's environment investment decision and
the development of EFT under diverse consumer demand conditions. Fig. 2 depicts the evolution process of rm's investment
decision-making under scenario 1, where new invest is divided into
two parts: productive investment and environmental investment.
Productive investment is the sum of production-expansion

Fig. 2. Evolution of rm's investment decision (scenario 1).

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

investment and productive R&D (R&DAK R&DPF), while environmental investment is the sum of pollution-abatement investment and environmental R&D (R&DAP R&DPAE R&DEIC). Fig. 2
shows that new investment is mainly used in the production activities under scenario 1, the larger part of which is used to expand
the production scale, while productive R&D is in a subordinate
position. Although environmental policy is absent, consumers don't
completely ignored rms' environment performance (hPEF 0:1)
and have a certain knowledge about rms' environmental performance (hEI 0:2). Therefore rms still have a motivation to
improve their environmental performance. However, the motivation is not strong. Environmental technology level is not only lower
than productive investment, but also lower than R&D expenditure.
From the component of environmental investment, pollutionabatement investment and environmental R&D are almost on a
bar, but more environmental R&D is devoted to improving
pollution-abatement efciency, indicating that the mode of pollution control is dominated by end-of-pipe treatment. As a result of
consumer preferring to product price, R&D expenditure is more
inclined to improve capital productivity. It is worth noting that the
R&D expenditure for green product design catches up from behind,
surpassing the R&D expenditure for improving pollution-emission
efciency and gradually equaling the R&D expenditure for
improving pollution-abatement efciency.
Fig. 3 displays the evolution of average technical level of the
industry under scenario 1. Fig. 3 indicates that the R&D expenditure
for improving capital productivity is more than that for product
quality, but the improvement in the technical level of product
quality is faster. This is mainly because process innovation has
higher probability of success than product innovation, and it is
more difcult to be imitated by other rms. For the result of environmental R&D, pollution-abatement efciency has the fastest
improvement speed corresponding to its R&D expenditure, and the

1461

pollution-emission efciency comes second, while the environmental impact in the process of consumption is the lowest.
Fig. 4 demonstrates each evolution index of industry performance and consumer utility under scenario 1, where capital conP
P
centration degree is given byCCEt
Kit 2 = Kit 2. The greater
i
i
the index, the more uneven is the capital distribution
between the
rms. Fig. 4 shows that the average capital productivity, product
quality, pollution-emission efciency and pollution-abatement efciency in the industry have a certain degree of growth with the
improvement in technical level. However, the environmental
impact of the industry in the process of production (or consumption) begins to slow down after the early rapid growth. This phenomenon is not difcult to understand. In the early stages of
industrial development, the pollution-abatement role of a progress
in EFT is hidden by the rapid growth of industrial capital and the
rapid expansion of production scale. As the expansion of production scale slows down, the effect of EFT progress begins to appear.
Since consumers prefer to buy more expensive products, the predominant competitive strategy of rms is to improve capital productivity and reduce production cost. Consequently, the average
price of the industry declines gradually. With a decrease in product
price, the prot rate of the industry also falls, but the gap between
the prot rates of different rms increases. With new rms
continually entering the industry, because new rm always tries to
imitate the rm with the highest prot rate in the industry, which
in a certain extent, breaks the monopoly trend of the rm with rstmover advantage, the capital distributes more evenly between
different rms (it is characterized by decrease of capital concentration degree). For consumers, the utility obtained from industrial
development rises in general. However the utility obtained by
price-sensitive consumers uctuates more violently in the early
stage of price instability.

Fig. 3. Evolution of average technical level of the industry (scenario 1).

1462

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

Fig. 4. Evolution of Industrial performance and consumer utility (scenario 1).

Table 2
The evolution of rm's investment decision under different scenarios.
Scenario

Productive investment
Productionexpansion
investment

Scenario1
Scenario2
Scenario3
Scenario4
Scenario5
Scenario6
Scenario7
Scenario8
Scenario9
Scenario10
Scenario11
Scenario12
Scenario13
Scenario14
Scenario15
Scenario16
Scenario17
Scenario18
Scenario19
Scenario20
Scenario21
Scenario22
Scenario23
Scenario24

5.639
5.691
5.834
5.695
5.695
5.803
5.614
5.581
5.785
5.657
5.638
5.762
5.612
5.627
5.819
5.694
5.657
5.775
5.596
5.642
5.801
5.686
5.685
5.825

Environmental investment

Productive R&D expenditure

R&DAK

R&DPF

Sum total

3.876
3.767
3.348
3.958
3.778
3.320
3.878
3.652
3.298
3.911
3.726
3.205
3.853
3.680
3.324
3.956
3.724
3.251
3.846
3.699
3.254
3.909
3.713
3.340

3.721
4.023
3.668
3.771
4.010
3.625
3.696
3.911
3.616
3.727
3.960
3.644
3.672
3.980
3.654
3.755
3.957
3.631
3.690
3.984
3.657
3.698
4.023
3.660

4.111
4.221
3.843
4.181
4.218
3.803
4.104
4.108
3.794
4.135
4.166
3.786
4.080
4.163
3.825
4.174
4.165
3.787
4.081
4.172
3.806
4.123
4.204
3.834

Sum
total

Pollutionabatement
investment

5.652
5.706
5.839
5.708
5.709
5.807
5.628
5.596
5.790
5.670
5.653
5.767
5.625
5.642
5.823
5.707
5.672
5.780
5.609
5.656
5.806
5.698
5.699
5.829

3.665
3.789
3.933
3.735
3.785
3.912
3.671
3.681
3.878
3.695
3.728
3.854
3.677
3.746
3.913
3.732
3.737
3.886
3.662
3.729
3.876
3.698
3.751
3.949

4.2. The results of industrial evolution under different scenarios

Table 2 reports the evolution of rm's investment decision under 24 scenarios. The values of each index in Table 2 are weighted
P
average results during the whole study period withut t 2 = Tt1 t 2

Environmental R&D expenditure

Sum total

R&DAP

R&DPAE

R&DEIC

Sum total

3.181
3.236
3.756
3.227
3.240
3.708
3.139
3.086
3.675
3.190
3.171
3.712
3.146
3.186
3.740
3.238
3.221
3.768
3.182
3.174
3.755
3.186
3.185
3.733

3.364
3.457
4.100
3.402
3.449
4.075
3.343
3.315
4.048
3.383
3.395
3.953
3.350
3.401
4.095
3.392
3.424
3.975
3.369
3.385
3.951
3.368
3.386
4.097

3.231
3.340
3.937
3.281
3.327
3.898
3.222
3.192
3.850
3.270
3.259
3.899
3.248
3.279
3.920
3.299
3.292
3.898
3.284
3.296
3.903
3.258
3.283
3.923

3.746
3.836
4.436
3.791
3.829
4.402
3.725
3.695
4.370
3.770
3.768
4.349
3.737
3.781
4.425
3.795
3.802
4.372
3.766
3.775
4.361
3.758
3.775
4.427

4.010
4.117
4.555
4.069
4.113
4.524
4.004
3.997
4.492
4.039
4.053
4.471
4.012
4.069
4.543
4.068
4.076
4.495
4.020
4.056
4.485
4.034
4.069
4.553

R&D
expenditure

4.270
4.374
4.536
4.333
4.370
4.501
4.258
4.255
4.474
4.294
4.315
4.456
4.246
4.319
4.525
4.328
4.326
4.473
4.255
4.322
4.469
4.285
4.347
4.528

as weights. In order to facilitate observation, the index has been

converted into logarithmic values. It can be seen that if consumers
prefer to product price, MBI applied alone or in combination with
other two environmental policy instruments (Scenario 7, 13, 19),
will reduce (each) productive investment and R&D expenditure. If

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

MBI is applied alone (Scenario 7), it will reduce environmental

investment. With regard to productive R&D expenditure, MBI
applied alone (Scenario 7) will reduce R&DAK. If it's applied in
combination with other two environmental policy instruments
(Scenario 13, 19), this will lead to a reduction in the productive R&D
expenditure. For environmental R&D expenditure, MBI applied
alone or in combination with CAC (Scenario 7, 13) will reduce R&D
expenditure. In addition, MBI applied in combination with IOI
(Scenario 19) will reduce pollution-abatement investment. On the
whole, if consumers prefer to product price, CAC or IOI (Scenario 4,
10) will increase each type of investment, but CAC (Scenario 4) will
play a greater role in productive investment. If consumers prefer to
product quality, only CAC applied alone (Scenario 5) can increase
productive investment, R&DAK and R&DAP. If consumers prefer to
rms' environmental performance, CAC applied in combination
with IOI (Scenario 18) will increase R&DAP, while three kinds of
environmental policy instrument applied simultaneously (Scenario
24) can increase pollution-abatement investment. Furthermore,
each type of investment has varying degrees of reduction with the
introduction of the environmental policy.
Table 3 reports the evolution of average technical level of the
industry under 24 scenarios. It can be seen that if consumers prefer
to buy cheaper products, except MBI combined with IOI (Scenario
19), all environmental policies will hinder the progress of production technology. However, except CAC (Scenario 4), environmental
policies are conducive to an improvement in.
product quality. Environmental policy can effectively promote
the improvement speed of pollution-emission efciency and
pollution-abatement efciency. This is par for the course. If IOI is
applied alone (Scenario 10) or CAC is applied in combination with
MBI (Scenario 13), the improvement speed of environmental
impact in the consumption process will decline. On the whole, if
consumers prefer product price, MBI combined with IOI (Scenario
22) can promote the development of EFT to a greater degree. If
consumers pay more attention to product quality, environmental
policies (except CAC applied alone (Scenario 5) or in combination
with IOI (Scenario 17)) hinder the improvement speed of pollutionabatement efciency and product quality. Considering that complex design of environmental policy will generate additional cost, if
consumers prefer to product quality, CAC (Scenario 5) can promote
the development of EFT to a greater extent. If consumers pay more
attention to environmental performance of rms, the introduction
of environmental policy can effectively promote the improvement
speed of product quality. However, except IOI (Scenario 12), environmental policy hinders the improvement speed of environmental impact in the consumption process. CAC (Scenario 6) will
promote the progress of production-side technology. And other

1463

environmental policies will hinder the progress of production

technology, or the progress of production-side environmental
technology. Therefore, if consumers prefer environment performance of rms, CAC or IOI (Scenario 6, 12) are more advantageous
for changing EFT.
Table 4 reports on the industrial performance and consumer
utility under 24 scenarios, and the environmental impact of capital,
production (consumption) is the result of the log10 indexing.
Table 4 shows that compared with the absence of environmental
policy, if consumers prefer product price, environmental policy will
increase pollution-emission efciency and product quality. The
average capital of the industry, pollution-abatement efciency and
environmental impact in the consumption process will increase
with the introduction of environmental policies except MBI (Scenario 7). MBI combined with IOI (Scenario 19) has the most obvious
effect upon the environmental impact in the production process,
while the environmental impact in the production process is
increased by the most in case of CAC (Scenario 4). Environmental
policies except MBI (combined with IOI) (Scenario 10, 19) reduce
the capital productivity and product price, but the average prot
rate of the industry is not hurt. If CAC is applied alone or in combination with MBI (Scenario 4, 13), the distribution of capital between rms will become concentrated, and vice versa. For
consumers, different environmental policies have diverse effect
upon consumer utility. CAC and pairwise combined environmental
policies (Scenario 4, 13, 16, 19) increase consumer utility, and vice
versa. If consumers prefer to product quality, environmental policy
increases the environmental impact in production and consumption process, which is mainly due to the decline in the level of
environmental technology. Different environmental policies exert
distinct inuence on capital productivity and product quality, and
MBI (Scenario 8) has the strongest negative effects on capital productivity and product quality. CAC applied alone (Scenario 5) plays
the most important role in improving product quality. If CAC is
applied in combination with MBI (Scenario 14), it results in the
most obvious improvement effect on capital productivity. CAC, IOI
and CAC combined with MBI (Scenario 5, 11, 14), damage average
prot rate of the industry to some extent. However, if CAC, IOI and
MBI are applied at the same time (Scenario 23), the average prot
rate of the industry will be increased by the most. Although MBI, IOI
and CAC combined with MBI (Scenario 8, 11, 14) are conductive to
reducing product price, environmental policies contribute to
improving average product price of the industry. If IOI is applied
alone or CAC is applied in combination with other two kinds of
environmental policy (Scenario 11, 14, 17), the distribution of capital
between rms will become more even, and vice versa. For consumers, environmental policy reduces consumer utility, but it is an

Table 3
The evolution of average technical level of the industry under different scenarios.
Scenario

TLAK

TLAP

TLPAE

TLPF

TLEIC

Scenario

TLAK

TLAP

TLPAE

TLPF

TLEIC

Scenario1
Scenario2
Scenario3
Scenario4
Scenario5
Scenario6
Scenario7
Scenario8
Scenario9
Scenario10
Scenario11
Scenario12

22.33
20.02
14.43
19.80
20.32
14.62
21.03
18.27
13.98
21.17
19.57
14.25

20.15
23.81
28.18
22.45
22.87
30.47
20.61
20.98
27.49
20.14
21.18
33.08

20.05
23.71
29.86
22.42
24.42
33.66
21.83
21.21
31.71
23.43
23.31
31.42

31.07
38.27
33.46
30.31
40.70
31.23
31.06
36.52
31.11
32.40
37.75
33.20

18.72
19.97
29.38
19.84
21.93
28.50
19.23
19.99
25.48
18.31
19.34
30.52

Scenario13
Scenario14
Scenario15
Scenario16
Scenario17
Scenario18
Scenario19
Scenario20
Scenario21
Scenario22
Scenario23
Scenario24

21.33
21.89
15.01
20.61
20.70
12.96
23.05
18.93
13.41
21.66
20.22
14.73

22.01
23.17
28.55
22.51
23.02
26.72
23.57
20.31
28.03
22.20
24.06
27.99

23.51
24.05
29.60
24.30
22.79
27.49
22.48
21.24
30.65
20.91
22.81
29.55

33.13
41.36
31.55
35.70
37.04
30.40
34.09
36.78
30.34
34.23
36.47
31.13

18.58
21.32
27.90
20.22
19.84
27.13
20.97
20.74
26.68
18.77
20.75
29.12

1464

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

Table 4
The evolution of industry performance and consumer utility under different scenarios.
Scenario

Capital

Capital
concentration
ratio

Prot
rate

Capital
productivity

Pollutionemission
efciency

Pollutionabatement
efciency

Product
price

Product
quality

Environmental impact
in the production
process

Environmental impact
in the consumption
process

Consumer
utility

Scenario1
Scenario2
Scenario3
Scenario4
Scenario5
Scenario6
Scenario7
Scenario8
Scenario9
Scenario10
Scenario11
Scenario12
Scenario13
Scenario14
Scenario15
Scenario16
Scenario17
Scenario18
Scenario19
Scenario20
Scenario21
Scenario22
Scenario23
Scenario24

5.866
5.989
6.151
5.938
6.003
6.158
5.835
5.833
6.062
5.903
5.939
6.054
5.880
5.964
6.133
5.943
5.949
6.044
5.896
5.936
6.026
5.906
5.954
6.130

0.061
0.049
0.043
0.062
0.049
0.047
0.060
0.051
0.051
0.060
0.047
0.044
0.064
0.048
0.041
0.058
0.048
0.043
0.054
0.050
0.049
0.059
0.053
0.046

0.280
0.276
0.275
0.293
0.273
0.267
0.279
0.280
0.271
0.287
0.269
0.279
0.272
0.269
0.278
0.290
0.276
0.286
0.280
0.281
0.294
0.285
0.286
0.279

0.263
0.258
0.233
0.261
0.258
0.232
0.258
0.250
0.226
0.266
0.256
0.235
0.261
0.266
0.237
0.262
0.261
0.226
0.273
0.258
0.230
0.261
0.259
0.233

0.257
0.276
0.294
0.276
0.276
0.299
0.259
0.267
0.286
0.266
0.266
0.308
0.266
0.275
0.296
0.278
0.274
0.290
0.280
0.266
0.294
0.271
0.279
0.293

0.162
0.170
0.178
0.168
0.171
0.179
0.161
0.166
0.173
0.167
0.167
0.177
0.164
0.170
0.177
0.170
0.170
0.174
0.166
0.167
0.176
0.162
0.170
0.178

0.200
0.214
0.242
0.216
0.216
0.246
0.199
0.212
0.236
0.208
0.206
0.239
0.197
0.204
0.239
0.217
0.214
0.251
0.200
0.214
0.253
0.207
0.220
0.247

0.329
0.356
0.344
0.337
0.362
0.338
0.330
0.346
0.330
0.340
0.348
0.343
0.335
0.360
0.340
0.354
0.352
0.338
0.347
0.353
0.338
0.341
0.354
0.340

5.979
5.998
6.044
5.999
5.994
5.997
5.965
5.921
5.997
5.983
5.955
5.953
5.969
5.977
6.046
5.981
5.964
5.986
5.938
5.995
6.001
5.998
6.001
6.042

5.575
5.654
5.692
5.637
5.632
5.662
5.573
5.545
5.648
5.608
5.598
5.616
5.589
5.627
5.703
5.618
5.612
5.630
5.581
5.613
5.661
5.639
5.645
5.696

0.415
0.484
0.574
0.425
0.490
0.560
0.409
0.466
0.550
0.404
0.451
0.501
0.424
0.487
0.575
0.418
0.457
0.489
0.418
0.461
0.492
0.410
0.471
0.568

exception to CAC alone or in combination with MBI (Scenario 5, 14).

If consumers prefer rms environment performance, the introduction of environmental policies except CAC combined with MBI
(or further combined with IOI) (Scenario 15, 24) will reduce the
environmental impact in production and consumption process.
This is mainly because of the reduction of average capital of the
industry. Except CAC (Scenario 6), pollution-abatement efciency
decreases with the introduction of environmental policy. Different
types of environmental policy instruments have diverse impact on
pollution-emission efciency and capital productivity. MBI (Scenario 9) has the strongest negative effect on pollution-emission
efciency, and CAC combined with IOI (Scenario 15) has the
strongest accelerating effect on capital productivity. Environmental
policy reduces product quality, but except CAC and IOI (Scenario 6,
9), average prot rate of the industry will improve. Except MBI, IOI
and CAC combined with MBI (Scenario 9, 12, 15), environmental
policy will increase average price of the industry. If CAC is applied in
combination with MBI (Scenario 15), the distribution of capital
between rms will become more even, and vice versa. For consumers, environmental policy will reduce consumer utility, but CAC
combined with MBI (Scenario 15) will increase consumer utility.
5. Conclusions and policy recommendations
In order to investigate the impact of consumer demand and
environmental policy on rms' environmental investment
decision-making and the development of EFT, a neo-schumpeterian
simulation model covering rms' production, pricing, (environmental) investment, (environmental) R&D activity, entry and exit
decision and consumers choice behavior is constructed. Then three
kinds of consumer demand scenarios (product price priority,
product quality priority and environmental performance priority)
and four kinds of environmental policy scenarios (without environmental policy, CAC (pollution-emission standard), MBI (pollution-emission tax) and IOI (environmental information disclosure)
are designed. Finally 24 kinds of combined scenarios are got to

compare the industrial evolution process under different conditions of consumer demand and environmental policy. Simulation
results show that:
(1) If consumers prefer to buy cheaper product and environmental policy is absent, new investment of rms is mainly
used for production activity, and environmental investment
as well as R&D expenditure are relatively insufcient. From
the composition of environmental investment, environmental investment is used more for pollution-abatement
investment and R&D expenditure for improving pollutionabatement efciency, but R&D expenditure for green product design grows more quickly. In this case, the speed of
productive technology progress is faster than environmental
technology, where the technology for product quality makes
a faster progress and the technology for pollution-abatement
efciency advances at the greatest speed. The average prot
rate of the industry has downward trend in the latter stage,
but the difference of prot rate between different rms increases. However, consumer utility uctuates upward.
(2) Under scenarios that consumers prefer product price, MBI
applied alone or in combination with the other two environmental policy instruments will reduce (each) productive
investment and R&D expenditure, while MBI applied alone
will reduce environmental investment. MBI combined with
IOI can promote the development of EFT to a greater degree.
Environmental policies besides MBI (combined with CAC)
reduce product price, but the average prot rate of the industry is not hurt at the same time. CAC and pairwise combined environmental policies increase consumer utility, and
vice versa.
(3) Under scenarios that consumers prefer product quality,
environment policy will put a curb on both productive investment and environmental investment except that CAC
applied alone can increase productive investment. CAC can
promote the development of EFT to a greater extent. CAC, IOI

L.-m. Chen, W.-p. Wang / Journal of Cleaner Production 141 (2017) 1454e1466

and CAC combined with MBI, damage the average prot rate
of the industry to some extent. Environmental policy reduces
consumer utility, but it is an exception to CAC alone or in
combination with MBI.
(4) Under scenarios that consumers prefer environmental performance of rms, compared with the absence of environmental
policy,
both
productive
investment
and
environmental investment are reduced with the introduction of environmental policy. CAC or IOI is more advantageous to the change of EFT. Except CAC and IOI, the average
prot rate of the industry will improve. Environmental policy
will reduce consumer utility, but CAC combined with MBI
will increase consumer utility.
Policy implications of the above conclusions are as follows:
(1) Both consumer demand preference and environmental policy type have an impact on the rms' environmental investment decision and the development of EFT. It may
produce the opposite effect to make environmental policy
without taking into account consumer demand conditions.
(2) The well-designed environmental policy not only do not

1465

policy design as far as possible on the premise ensuring the

effectiveness of environmental policy.
Finally we would like to mention possible directions for further
research regarding our work. A logical extension is may well be the
consideration of specic industry characteristics in order to analyze
the impact of environmental pressures on the development of EFT
under different industry background. In addition, by applying the
environmental ow diagram as presented by Valipour et al. (2012,
2013), further research could touch on systemic environmental
innovation (such as by-product exchange network).
Acknowledgments
This research was supported by NSFC (nos. 71273047 and
71172044) and the Major Program of the National Social Science
Foundation of China (Grant no. 12&ZD207).
Appendix

Appendix A
The range of rm's state and consumer demand threshold in the initial time of experiment
Capital
Technical level
consumer demand threshold
for product price
consumer demand threshold
for product quality
consumer demand threshold
for environmental tness

[500,1000]
[1,2]
[0.6,0.8]

Capital productivity
Pollution-emission efciency
Pollution-abatement efciency

[0,0.1]
[0,0.1]
[0,0.1]

Segmentation coefcient for expanding production

Segmentation coefcient between R&D expenditure
and pollution-abatement investment

[0.45,0.55]
[0.95,1]

[0,0.05]

Product quality

[0,0.1]

Segmentation coefcient between innovation

and imitation

[0.45,0.55]

[0,0.05]

Environmental impact in the

consumption process

[0.8,1]

Appendix B
Parameter values selected for simulation calculation
Parameter name
Parameter controlling growth speed of rm's performance
Inuence coefcient of pollution-abatement investment
on pollution-abatement efciency
Consumer parameter
Demand parameter
Market selection intensity
Cost and price parameter
Output elasticity of capital
Investment decision parameter
R&D decision parameter
Entry decision parameter
Exit decision parameter

Parameter value selected for simulation calculation

4AK 0:15,4AP 0:15,4PAE 0:025,4PF 0:17,4EIC 0:12
4PA 0:035

lEFP 0:5,hS 0:1, 0:8,RE 0:05

Q0 108 ,s 0:01,2 0:01,hU 1:5
lMS 0:6
c0 0:16,m0 0:5
hK 1:5
mI 0:02,z 0:15,r 0:001,d 0:01,b 0:1
lZ 0:7,lRI 0:5,lR IN 0:45,lR IM 0:65l1IN 0:35,l2IN 0:02,l3IN 0:001l1IM 0:55l2IM 0:05,
l3IM 0:001jAK 0:002,jAP 0:001,jPAE 0:001, jPF 0:002,jEIC 0:001,
lENT 0:2,CRT 0:001

CLR 1:1,KMIN 500

harm rms' prot, but also can promote the environmental

technology progress and reduce the environmental impact of
rms, while badly-designed environmental policies have an
opposite effect. This shows that the establishment of environmental Porter hypothesis is conditional. The type and the
executing manner of environmental policy as well as consumer demand are all important factors.
(3) Because different types of environmental policies are not
always co enhanced, coupled with that the implementation
of each type of policy is often required to pay a certain cost, it
is necessary to reduce the complexity of environmental

Appendix A. Supplementary data

Supplementary data related to this article can be found at http://
dx.doi.org/10.1016/j.jclepro.2016.09.184.

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