Innovation dynamics and environmental technologies: the emergence of fuel cell technology

Journal of Cleaner Production 11 (2003) 459–471 www.cleanerproduction.net

Innovation dynamics and environmental technologies: the emergence of fuel cell technology J. Hall∗, R. Kerr Faculty of Management, University of Calgary, 2500 University Drive NW Calgary, Alberta, Canada T2N 1N4 Accepted 10 May 2002

Abstract The purpose of this paper is to explore the dynamics of environmental innovation using the case of Ballard Power System’s Proton Exchange Membrane (PEM) fuel cell technology. Many have argued that this technology offers considerable environmental benefits and may surpass the internal combustion engine as the dominant vehicular power source. However, more than a century of incremental improvements, government policy and the emergence of complementary industries have made the latter a dominant and difficult to challenge technology. The authors review the difficulties of developing and adopting a radical innovation by analysing the value chain and supporting infrastructure. They also question the environmental implications and the role of government policy with regard to such technologies.  2002 Elsevier Science Ltd. All rights reserved. Keywords: Environmental innovation; Radical innovation; Fuel cells

1. Introduction The development of a radical innovation is fraught with barriers and difficulties, and is thus, a complex and uncertain process [1]. This is particularly the case with radical environmental innovation, which offers a difficult paradox. On the one hand, radical environmental innovation is increasingly under more scrutiny than incremental approaches, since there is often a greater degree of perceived risk by both the firm and other stakeholders. On the other hand, many argue that incremental environmental innovation is insufficient for slowing down environmental degradation, let alone able to fix the damage already done. However, incremental innovation builds on previous competencies and other assets, and is therefore, less likely to disrupt economic systems and be scrutinized to the same degree as radical environmental innovation. Thus, incremental innovation is the path of least resistance for industry and policy makers who are

Corresponding author. Tel.: +1-403-220-2694; fax: +1-403-2820095. E-mail address: [email protected] (J. Hall). ∗

constrained by industrial dynamics and economic pressures. The purpose of this paper is to analysis the implications of radical and incremental innovation of one potential environmental technology, fuel cells. Briefly stated, fuel cells are electrochemical devices that produce electricity through clean chemical reactions rather than environmentally detrimental processes like combustion. They have existed in their most basic form for over 160 years, but expensive components, inadequate power densities and competing technologies, particularly, the dominant internal combustion engine with over 100 years of incremental innovation, have restricted investments in fuel cell development. In the past decade, however, exciting advances in fuel cell engineering coupled with global concerns over environmental degradation, global warming and resource depletion resulting from traditional fossil fuel-based energy systems have rekindled interest in this potentially revolutionary technology. Drawing from a broad range of innovation theories and concepts, we review the degree of ‘radicalness’ of fuel cell technology from the perspectives of key stakeholders. By identifying the innovation issues associated with each stakeholder, we seek to offer policy makers, innovators and other stakeholders a clearer pic-

0959-6526/02/$ - see front matter  2002 Elsevier Science Ltd. All rights reserved. doi:10.1016/S0959-6526(02)00067-7

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ture of how this technology will impact their activities, and what directions can be taken to successfully introduce an innovation with potentially strong environmental benefits. This paper begins with a theoretical discussion of some of the key issues of innovation dynamics, with a particular emphasis on radical versus incremental innovation and its implications for new environmental technologies. Next a technical overview of fuel cells, the role of government and of Ballard Power Systems, a worldleader in proton exchange membrane (PEM) fuel cell technology are presented. Based on the theoretical discussion, an analysis of the nature of this technology and the implications it will have on the various stakeholders is made. Some of these key innovation issues include the degree to which the technology is incremental, modular, architectural or radical in nature; the implications of technological trajectories and regimes, network externalities, dominant designs, deep structural adjustments, core competencies (enhancing and destroying), etc. The key stakeholders include suppliers, the innovator, customers and complimentary innovators, government regulatory bodies, industrial development agencies, noncomplimentary innovators (such as oil and gas companies), environmental groups, safety advocates, and those responsible for infrastructure such as municipal governments. Meeting stakeholder concerns are a main constraint in successful environmental innovation. By identifying some of the key innovation issues for each of the main stakeholders, we hope to offer policy makers, innovators and other stakeholders a clearer picture of how this technology will impact their activities, and what directions can be taken to successfully introduce an innovation with promising environmental benefits. Furthermore, we propose that the more radical the technology is perceived to be by a stakeholder, the greater the resistance to that technology. Thus, a key to successful environmental innovation is to reduce the degree to which each stakeholder perceives the technology to be radical.

2. An overview of innovation dynamics Schumpeter [2] was one of the first to recognize the importance of innovation in modern industrial economies, describing it as a difficult, expensive process of throwing out the old in favour of the new. He also defined the categories of innovation: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates” (1942, p. 83). Following Schumpeter, Nelson and Winter [3] stress that technological advance leads to human progress, but is uneven

amongst economies, sectors and industries and offers irreversible and irresistible changes. Effective technology exploitation depends upon the underlying technologies, demand and characteristics of the organizations, all of which operates within an uncertain, complex and varied environment. Furthermore, there is considerable uncertainty in research and development (R&D), difficulties in making choices, effects from externalities, consumer valuations, etc. Hence, there is usually no one best way of doing things. Given this uncertainly and complexity, innovation thus offers the double-edged sword of being a difficult task, but also one that potentially generates unique, difficult to imitate organizational capabilities that can lead to competitive advantage [4]. Under these circumstances, Nelson and Winter and Dosi et al [5] propose the concept of ‘technological trajectories’, where technology is driven by both technology pushes and demand pulls. Successful technologies can be seen as gathering momentum, with an increasing reliance on scientific advances and ‘learning by doing’ and ‘learning by using’. Related to technological trajectories is the concept of selection environments, or factors which lead firms to select specific technologies and determined by such factors as cost advantages, differentiation advantages, government regulations, environmental considerations, professional responsibility, etc. Firms search out various technological opportunities, some of which fail and are discontinued. According to Kemp and Soete [6], technological trajectories can be identified as new technological systems and technological paradigms composed of socio-institutional elements, supplier–user relations, resource extraction, production, transport, marketing, finance, insurance, repairs, waste disposal, etc. As these systems and their corresponding infrastructure develop, a wide range of externalities arises, including pollution, at increasing rates [3,6]. This can be conceptualized as being part of a ‘technological regime’, where search mechanisms focus on previous areas of expertise [7]. For example, industries dominated by mechanical engineering, such as the automotive industry, will search for innovation solutions from this discipline. Kemp et al. [8] expand this definition to include the influence of existing technologies in the broader technical systems, consumption patterns, and management beliefs and search heuristics of the selection environment. Related to technological trajectories and regimes are the effects of network externalities, defined by Katz and Shapiro [9] as the utility derived when consumption of a good by consumers increases due to consumption by other users of that and/or other goods that are connected to the first good. According to Dhebar [10], network externalities can be direct (e.g. a telephone network or the Internet, where the more users make the technology more useful) or indirect (e.g. digital video disk players, which depends on the availability DVDs, which in turn

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is dependent upon consumers with DVD players). Good road systems, service stations, high quality petroleumbased fuels, poor public transportation, etc. all help maintain the status of the car, although it should be noted that not all of these factors may hinder the development of the fuel cell. According to Abernathy and Utterback [11], sustained technological evolution in an industry often leads to the emergence of a ‘dominant design’, defined by Suarez and Utterback [12] as “…a specific path, along an industry’s design hierarchy, which establishes dominance among competing design paths” (p. 416). They hypothesized that the peak of the population curve (i.e. firm density) for an industry occurs around the year in which a dominant design emerges, at which point economies of scale become a competitive factor. Prior to the appearance of a dominant design, many of its separate features may be tested in various products, which may be customized for a particular market niche by many competing firms producing on a relatively small scale. They note that the dominant design is not always based on the best technology, as network effects, political manoeuvring and strategic intent among others may determine a less technologically sophisticated product. The VHS videotape winning over Sony’s Betamax is the classic example of this phenomenon. Like technological trajectories, the difficulties associated with the phenomenon of dominant designs is staying within the trajectory and predicting the next stage. Incumbent firms are often hindered by their present competency-base, or what Christensen [13] calls the ‘innovators dilemma’. Furthermore, they can often derive considerable rents by incrementally improving on the present technology [14]. These technological competencies can be a key aspect of the firm’s core competencies. For example, Honda, unlike many auto manufacturers, will not subcontract the manufacturing of their engines because they are identified as the company’s core competence [15]. Industry leaders often become losers because they have difficulty managing ‘technological discontinuities’, which are innovations that offer considerable cost, quality or other benefits over the existing offerings [16]. Their once-valuable assets and capabilities become core rigidities [17], which sometimes allow firms outside of the industry, unencumbered with these rigidities, to exploit radical innovations [18]. Conversely, large dominant firms usually have considerable assets and capabilities to protect their position-the power of incremental innovation in the hands of large sophisticated firms with interconnected infrastructures supporting their technology can be a massive barrier to a radical new technology [11,19,20]. Much of what has been discussed was played out in the automotive industry at the turn of the century. Kirsch, [21] for example, argues that had the electric vehicle companies succeeded in establishing profitable

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operating companies in major urban areas, and had those companies attracted customers, suppliers, and infrastructure providers to the electric vehicle, it is possible that the transportation industry would have been dominated by electric vehicles rather than gas piston ones. Interestingly, he argues that, as electrification is now sufficiently universal and standardized, the long-run prospects for electric transportation systems are strong. Technological achievement is, therefore, a necessary but not sufficient condition for successful innovation. The adoption of alternative technological systems with fewer negative externalities (which is supposedly the case for fuel cells) is often inhibited by the dominance of the previous/present technological growth trajectory. Understanding the innovative process requires being cognizant not only of the evolution of individual technologies but also the structure that links them together, including the influence of institutions and modes of organizational behaviour [22]. Furthermore, the adoption of radical technologies may require significant changes in the supporting infrastructure [8]. 2.1. Radical versus incremental innovation The aforementioned discussion has alluded to the differences between incremental and radical innovation. For the purpose of this discussion, incremental innovation is essentially the effects of continuous change that exploits existing businesses and product lines, and can generally rely on traditional administrative and corporate management practices [23]. Furthermore, the technological base does not usually vary from the firm’s traditional area of expertise, and is thus competence enhancing [14]. In contrast, radical innovation usually involves considerable departure from the present knowledge base, which can be either technological or market knowledge [24] and may require vastly different organizational, administrative and infrastructure requirements. Friar and Balachandra [25] propose that technological ‘radicalness’ is a function of the amount of learning/behavioural adjustment required on the part of the customer using the product, while Tushman and Anderson [14] see it as the degree to which it is competence destroying. Radical innovation may offer opportunities for new entrants, while incremental innovation is more likely to benefit established firms [26]. Radical innovation is usually the source of enabling technology that is capable of causing what Lipsey and Bekar [22] refer to as a Deep Structural Adjustment (DSA). They propose that throughout history DSAs, although rare, have impacts across the entire economy. They further contend that innovations in transportation are capable of causing widespread effects that require significant structural changes, and cite the automobile as an example of an enabling technology that caused a DSA. Van Mossel [27] makes the bridge between PEM

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fuel cells, automobiles and DSAs by asserting that as the automotive and energy sectors move to assimilate this new technology, similar structural changes will occur. This will be discussed in more detail subsequently. The degree to which a technological system excludes new radical technologies may be partly dependent upon the concept of modularity. Schilling [28] states that modularity is the degree to which a system’s components can be separated and recombined, as well as the degree to which the ‘rules’ of the system architecture enable or prohibit the interchanging of components. Henderson and Clark [29] claim that most products are composed of connected components; thus, firms need both the knowledge to understand the components (component knowledge) and the knowledge to understand the linkages (architectural knowledge). If the innovation improves both component and architectural knowledge, it is incremental; if it destroys both, it is radical. If only architectural knowledge is destroyed (but component knowledge is enhanced), then they refer to it as architectural innovation, as opposed to modular innovation where component knowledge is destroyed and architectural knowledge is enhanced. A useful model that takes into account some of the theories discussed above is the Innovation Value-added Chain model [26,30]. Under this model, an innovation has implications for not only the firm, but also the supply base, customers and complimentary innovators. The degree to which an innovation impacts each valueadding stakeholder varies, and thus, has quite different implications. For example, Afuah [26] uses the case of an electric car, which has implications not only for the automaker, but also their suppliers (e.g. fuel injection systems suppliers) customers (the means by which they will charge their car) and complimentary innovators (fuel suppliers, distributors and retailers). Thus, the extent to which an innovation is radical or incremental is very much dependent upon where a firm exists in the innovation value-added chain. 2.2. Environmental innovation As the previous discussion illustrates, innovation is not an easy task; there are a wide range of factors that influence the process. Adding environmental implications only makes it more challenging. Some of these challenges are discussed next. Along with higher standards of living, technical change has led to a wide range of socially and environmentally undesirable side affects. Gray’s paradox illustrates this issue, where industrialization (which, according to Schumpeter, is driven by innovation dynamics) has brought both unprecedented levels of environmental impacts, and the economic capabilities needed to address these problems [31]. Balancing the trade-off between

economic well-being and environmental improvement is a main concern for both academics and policy makers. Cairncross [32], Green et al. [33] and Ashford [34] all argue that technical change is the primary means by which firms can reduce their environmental impacts without producing detrimental economic impacts; while Kemp [35] also recognizes that technical change is both the potential cause and cure for environmental problems. According to Kemp et al. [8], the task is not just the control or promotion of a single technology, but to change the integrated system of technologies and social practices without creating major transition problems. Hart [36] and Hart and Milstein [37] go further by arguing that environmental and social improvement is a new catalyst for the next round of creative destruction, but that incremental innovation is not enough to address pressing sustainable development issues; it must be driven by radical technology. One such highly publicized example advocated by Hart and Hart and Milstein is the application of biotechnology to agriculture, a radical innovation dominated by Monsanto, but one that has come under enormous scrutiny by environmental groups and resistance by European stakeholders due to the high degree of risk [38]. The success of a technology, particularly those that are radical as well as those addressing environmental concerns, is not only dependent upon technological and market knowledge as argued by Abernathy and Clark [24] discussed above, but also a clear understanding of stakeholder and more generally social concerns [39]. To complicate matters, social views of a new technology are highly subjective, may differ across stakeholder groups and are in constant flux. This may act as either a barrier or a catalyst to the development of a particular technology [8]. In addition to understanding stakeholder concerns, Kemp [35] argues that the adoption of alternative technological systems with fewer environmental impacts is often inhibited by the dominance of the previous/present technological growth trajectory. Schot [40] argues that current selection environments are often not receptive to alternative forms of technology. To successfully commercialize technology, the infrastructure, competitive factors and other components of the selection environment must be changed. Government strategy should encourage other actors to impose environmental conditions, and should be a regular part of market transactions. More recently, the same authors have analysed these issues in the context of alternative, more sustainable transportation technology [8]. They argue that there are a number of barriers in the adoption of such environmental innovations, both inside and outside of the organization that are interrelated and often reinforce each other. For alternate fuel transport systems, this includes as follows. 앫 Technological and production factors—The degree to

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which the new technology fits into the old system will play a key role in how the technology is accepted. The introduction of battery-fed electric vehicles, for example, will require the development of an infrastructure for charging batteries. Developing a massproduced product is a long and risky process, and may make previous sunk investments obsolete. Mass-producing cars with combustion engines is a core competence both technically (i.e. products, production processes and R&D activities) and organizationally (modes of control, marketing and strategies) for car companies. They have limited competencies necessary for producing alternate vehicles, and may be hesitant until the market becomes sufficiently large. Policy issues—Even though governments may be committed to environmental protection, they often do not send out clear signals. For instance they cite the strict Japanese safety requirements for natural gas, which increases the cost of on-board gas cylinders and refuelling stations to five times the level of other countries. The Californian zero-emission vehicle legislation strongly stimulated the development of electric vehicles but discouraged the development of hybrid-electric vehicles, although the latter may be cleaner if electricity production emissions are considered. Cultural and psychological factors—The car has taken on a broader meaning than simply a form of transportation. Larger, more powerful cars appear to be a trend that positively reflects status. Countering these norms is a risky business venture, as the new technology is judged on the basis of the characteristics of the dominant technology. They use the example of Volkswagen’s so-called ‘idle-off device’ that shuts off the engine when the car is stationary or slowing down, reducing inter-city fuel consumption by 20–30%. Drivers, fearing that the engine will not restart, have not accepted this technology. Demand factors—Users are usually hesitant to adopt new technologies, which are often initially more expensive and have not yet been proven. Only a few consumers will accept lesser performance in return for a lesser environmental impact. Furthermore, auto dealers may be reluctant to promote cars that do not meet traditional consumer preferences. Infrastructure and maintenance—New technologies often require new infrastructure, such as distribution systems for hydrogen technology or special provisions for charging electric cars. Maintenance skills will also have to adapt, and will be initially expensive until there are sufficient numbers making it viable for mechanics to acquire the skills. Difficulties include who pays for the costs of developing the infrastructure, and how sunk investments in the existing infrastructure are accounted. Undesirable social and environmental effects—New

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technologies may solve problems but may also introduce new ones. Electric car batteries may cause additional waste problems, while some alternative fuels lead to an increase in certain types of emissions; a cheap energy source may increase driving, thus generating greater traffic connection, accidents etc. Based on these assessments, we now briefly explain how he applies these key concepts in the subsequent analysis.1 The assessment begins with the Innovation Value-added Chain model, which is a useful approach for identifying the nature of innovation (incremental, modular, architectural or radical) and those that play a role in its development (suppliers, the innovator, customers and complimentary innovators). However, given the nature of environmental innovation, the value-added chain is expanded to include other key stakeholders, such as government regulatory bodies, non-complimentary innovators (such as oil and gas companies), environmental groups, safety advocates, those responsible for infrastructure such as municipal governments, etc. Focusing on this broader array of stakeholders, we then discuss not only the incremental, modular, architectural or radical nature of the innovation for each stakeholder, but also the other key innovation issues discussed above, such as the implications of technological trajectories and regimes, network externalities, dominant designs, deep structural adjustments, core competencies (enhancing and destroying) and Kemp et al’s [8] barriers in the adoption of environmental innovations. As discussed previously, radical environmental innovation offers a difficult paradox; it is increasingly under greater scrutiny than incremental approaches, as there is a greater degree of perceived risk. Conversely, others argue that incremental environmental innovation is ‘too little and too late’ to cure our environmental problems, but usually does not go under the same degree of scrutiny as radical environmental innovation. The analysis draws from a wide range of innovation theories to investigate the degree of radicalness of fuel cell technology, from the perspective of the key stakeholders, and not only those directly involved in the innovation process. By identifying the innovation issues associated with each stakeholder, policy makers, innovators and other stakeholders can gain a clearer picture of how this technology will impact their activities, and what directions can be taken to successfully introduce an innovation with potentially strong environmental benefits.

1 Given that Ballard has committed to the technology, we are primarily interested in external issues such as the concept of dominant design issues (discussed above), infrastructure issues, government policy and undesirable side effects.

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3. Fuel cell technology: an overview Fuel cells are electrochemical devices that produce electricity through clean chemical reactions rather than environmentally detrimental processes like combustion. They basically consist of a positive and negative electrode separated by an electrolyte. Hydrogen is passed over the negative electrode and oxygen over the positive electrode. In the process, a hydrogen ion travels through the electrolyte and the electron released by the ionization of the hydrogen atom travels through a circuit and provides power. The hydrogen ions and electrons are then combined with oxygen at the positive electrode and form water [41]. The whole process is similar to that of a battery, except that it will continue to generate electricity as long as there is a hydrogen and oxygen supply. There are several types of fuel cells and each can be classified according to their electrolytes. Some fuel cells such as the Proton Exchange Membrane (PEM) and Phosphoric Acid models (PAFC) have an acidic electrolyte while others such as the Alkaline (AFC) and Molten Carbonate fuel cells (MCFC) have an alkaline electrolyte. There are also fuel cells with solid-state ceramic electrolytes such as the Solid Oxide model (SOFC). Each of these technologies differs according to their power density, fuel-to-electricity efficiency and operating temperature. Consequently, different fuel cells are uniquely suited to specific applications [42]. PEM fuel cells are particularly well suited for automotive applications because they exhibit high power density, can begin operating at low temperatures (20 °C) and can reach peak performance below the boiling point of water (100 °C). Additionally, PEMs can change power output almost instantaneously when hydrogen is introduced or restricted, which is important in automotive applications [43]. Similarly, the Alkaline Fuel Cell (AFC) also operates at ambient temperature. AFCs are the only type of fuel cell that works with a broad range of inexpensive catalysts like nickel. By eliminating the most costly component of the fuel cell, alkaline fuel cells were seen as having a cost advantage over competing technologies [42]. However, with advances in micro-coating techniques, other fuel cells like PEMs are not constrained by the cost of platinum. Micro-coating decreases catalyst loading thereby reducing the quantities required while maintaining the performance and longevity of the catalyst. It is widely accepted that PEMs and AFCs are best suited for transportation, portable and micro-applications. The other three types, MCFC, PAFC and SOFC are more likely to be positioned in the stationary power production market. This is because their operating temperatures are sufficiently high as to be a disadvantage in mobile uses such as transportation applications. This high operating temperature, although a hindrance to

portable applications, is a benefit to stationary applications for several reasons. First, fuel cells that run at high temperatures often do not require a catalyst to promote the reaction, thereby reducing the cost of the system. Second, high operating temperatures are desirable for generating electricity from hydrocarbon fuels. This is because high temperature fuel cells do not usually require an external reformer or ‘mini-refinery’ to make hydrogen. Instead, hydrogen is produced directly through a catalytic reforming process either directly inside the cell or external to the cell in the hot zone. Finally, fuel cells that operate at higher temperatures offer a co-generation option in which the heat given off by the cell could be captured [42].

4. The rise of fuel cells As discussed in our theoretical section, technological change is an evolutionary process, and therefore history matters. Koppel [43] analysed the fuel cell in an historical context and his ideas are represented in the following three paragraphs. Fuel cell technology can be traced back to the work of British Scientist Sir William Grove in 1839. He discovered that just as it was possible to split water into hydrogen and oxygen using electricity, it was also possible to generate electricity by combining these two gases. Grove built a fuel cell stack using sulphuric acid as the electrolyte and platinum as the catalyst. Grove’s research sat idle until 1889 when British scientists Ludwig Mond and Charles Langer attempted to turn Grove’s invention into a practical device. They were the first to call it a ‘fuel cell.’ However, the cost of platinum and low power densities discouraged commercial production of the device. In 1932 British Scientist, Francis T. Bacon (descendent of the 17th century philosopher of the same name) tried to get around the high cost of platinum by building a cell that had an alkaline electrolyte, which allowed him to use nickel as the catalyst. In 1959 Bacon partnered with a farm equipment firm from Milwaukee and in that same year they had a fuel cell-powered tractor. In the early 1950s General Electric (GE) came onto the fuel cell scene when a Pennsylvania coal company had shown interest in fuel cells for stationary power generation. Initially GE was not particularly impressed, but established a modest fuel cell program to protect their interests in the power field. GE scientists were the first to develop a PEM fuel cell. However, the company was initially only interested in large-scale power generation using ordinary air and a cheap fuel so the invention, which required pure hydrogen and oxygen, languished for a few years. Then came Sputnik and the space race and with it a revived interest in fuel cells for extraterrestrial applications, where pure oxygen and hydrogen were being carried on board for other purposes, and cost was

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not a critical issue. In August 1965, the Gemini 5 spacecraft used GE’s PEM fuel cells as a source of electrical power. By this time Francis Bacon started working with Pratt and Whitney (P&W) on an alkaline fuel cell for the space program. Ultimately P&W’s cheaper alkaline fuel cell was chosen to provide on-board power for the Apollo space mission. Demoralized by the decision to put alkaline fuel cells on-board Apollo and dogged by the high cost of platinum, GE eventually sold their fuel cell division. It was not until the late 1970s that Ballard entered the fuel cell industry as a potential contender. By applying novel materials and engineering techniques, the company fostered longer life and higher power densities from their fuel cells. Ballard’s technological advances coupled with memories of the OPEC oil crisis and resource depletion sparked renewed interest in fuel cells throughout the next two decades. We return to Ballard’s role shortly, after a discussion of government influence in this technology. 4.1. The role of government It is generally accepted that governments play a key role in innovation, and especially the development of radical technologies. In fact, government institutions have spawned many radical innovations including the radio, the Internet and, as the previous historical account has shown, fuel cells. In particular the ‘military-industrial complex’ in the US continues to supply a pipeline of next-generation technologies, management skills and organizational forms that simply would not exist otherwise [1,44,45]. Additionally, governments play a major role in regulating intellectual capital laws, building infrastructure and instituting policies that speed the mass adoption of new technologies. Consequently governments must be considered major stakeholders in the innovation value-added chain. Although, the role of government in technology development differs between countries, most have some form of national system of innovation [46,47]. Often governments take an active role in research and development at the university and military levels and most have a national research council that support a portfolio of technologies through grants, loans, financing for potential customers or in-kind services. Additionally, many countries have a business development bank that makes loans and in some cases takes equity positions in emerging, technology-based companies. Consistent with these trends, in the early 1980s the Canadian Department of National Defence awarded the then obscure battery company Ballard Power Systems a contract for a low-cost solid polymer fuel cell that later came to be better known as the Proton Exchange Fuel Cell. At that time the Canadian Military was in the second phase of its Defence Industry Productivity Pro-

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gram (DIPP), where the defence industry was seen in terms of its strategic spin-offs of skills, technologies and other benefits that were expected to extend to nondefence industries [22]. Since that time, the Canadian Federal Government committed over $70 million to fuel cell research and development, most of which went to Ballard, while the British Columbia Provincial Government’s support for Ballard Power exceeded $20 million [27]. These government funds have been instrumental in developing the ‘Ballard Cluster,’ Vancouver’s concentration of fuel cell-related firms, universities and funding institutions. It should also be noted that private firms did not begin fuel cell research in Canada; rather it was started by a small group of scientists in academia, government and the military (which draws parallels with Hughes’ [44] term ‘military, industrial, academic complex’. Koppel [43] argues that the fuel cell represents a rare Canadian case of clear and timely technical and economic thinking in government and shows how a collaborative effort between public and private organizations can lead to the establishment of a successful new industry.

5. Ballard power systems Ballard is widely considered the world-leader in PEM fuel cell technology. The Vancouver-based company researches, develops, manufactures and markets zeroemission PEM fuel cells. Ballard has portable, stationary and transportation applications for the PEM fuel cell and has solidified alliances and/or partnerships with some of the world’s largest and most influential companies. Ballard envisions PEM fuel cell technology eventually dethroning fossil fuels as the dominant design in the transportation and micro-generation industries. In Ballard’s early days, PEM fuel cells were an area largely ignored by the alternative energy research community. A small group of scientists at Los Alamos National Laboratory in New Mexico and Ballard were virtually the only organizations in North America working on PEM fuel cells. When researchers at Ballard replaced DuPont’s conventional Nafion membrane with Dow Chemical’s experimental lower electrical resistance polymer membrane, they were able to boost a PEM fuel cell’s power output by a factor of four. When Ballard made its research findings public in 1986, Byron McCormick, the head of the fuel cell division at Los Alamos was quoted [43] “they have made the electric vehicle possible. This is the most significant breakthrough in fuel cells that I’ve ever seen” (p. 94). Essentially, Ballard made the key discovery that transformed PEM fuel cells from an obscure research topic into an industry and positioned Ballard as the world leader in this area. Unfortunately, the industry was still in its infancy, commercial applications were non-existent and Ballard did not have

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exclusive use of Dow’s polymer, thus all PEM fuel cell research would soon be using it. Consequently, Ballard required an immediate influx of cash to build upon its breakthrough. Instead of searching for large American partners, Ballard approached the Canadian military and received several million dollars to develop a 4-kW field generator with stealth properties—a quiet running unit with low heat emissions. The military research grants sustained Ballard through the late 1980s and with the emergence of large-scale venture capital in the 1990s the company had sufficient investment to continue with its goal of replacing the internal combustion engine. 5.1. Ballard’s investment in collateral (complementary) assets Ballard has 500 employees, most of which are involved in R&D. They also have a small sales force, which are primarily engaged with value added resellers such as automakers and power generation companies who are incorporating Ballard’s technology into products for their respective industries. Additionally, Ballard is not currently branding its name to the general public, although most officials in the automobile and power generation industry know who they are. Although, Ballard maintains strong relationships with the federal and provincial governments, the reality is that only $2 million of the company’s $33 million in revenue is derived from Canadian sources, a decline of 71% over a two year period [47]. Conversely, sales to Japan and Germany have increased 281 and 244%, respectively, over the same period and sales to the US have remained stable. Additionally, there has been no commitment on the part of the Canadian government to purchase Ballard’s PEM fuel cells or create incentives for the use of fuel cell technology in the country. Further research into the strategic direction of the company indicates that Ballard, as the leader in PEM fuel cell R&D, is engaged in several high-profile partnerships with global leaders in the automobile and power generation industries including Ford, Daimler Chrysler, ALSTOM of France and EBARA of Japan. These partners are incorporating the cells into the product designs in their respective industries. For instance, Ford, Daimler Chrysler and Ballard recently formed two new ventures: XCELLSIS and Ecostar Electric Drive Systems (EEDS). XCELLSIS is focused on developing, manufacturing and commercializing fuel cell engines while EEDS is responsible for developing drive trains for electric vehicles [48]. These partnerships provide Ballard Power Systems with extensive global exposure, significant market experience, and extensive manufacturing and field service expertise. There are extensive network effects in the industry. In particular, the adoption of fuel cells in the automotive industry will require major investments in infrastructure.

Some of these necessary investments will include largescale hydrogen production facilities, hydrogen delivery systems and fuel cell maintenance and repair capacity[49]. As fuel cell technology and hydrogen infrastructure develops, hydrogen-powered vehicles will become more attractive substitutes for internal combustion vehicles and a positive feedback loop may result. An environment may prevail in which the depth and breadth of the fuel cell’s impact will grow in proportion to the resources invested in it and its infrastructure. Arthur [50] referred to this phenomenon as the ‘bootstrap effect.’ At the same time, history, and the foregoing theoretical discussion tells us that there is no guarantee that such a radical departure from the norm will succeed.

6. Analysis 6.1. Are fuel cells a radical or incremental innovation? The organizational view defines an innovation in terms of the extent to which it impacts a firm’s capabilities and renders existing technical knowledge obsolete. In other words, it is the extent to which an innovation is competence destroying [14]. Similarly, the economic view defines an innovation based on the extent to which it renders old products non-competitive. Since fuel cells have the potential to render internal combustion engines obsolete and destroy competencies built around them (such as fuel injection and storage systems), it can also be assumed that fuel cells may also cause these old products to become non-competitive. Consequently, under the organizational and economic view, fuel cells are likely to be considered a radical innovation. However, both these views are myopic in that they are focused on the impact of the innovation on the firm’s capabilities and competitiveness, and disregard many other stakeholders that may play a role in the success or failure of the technology. As discussed above, technological ‘radicalness’ is also a function of the amount of learning/behavioural adjustment required on the part of the consumer [25]. The natural progression of this argument would be to suggest that all stakeholders should be included in the radical versus incremental perspective. Obviously, innovation has implications for the entire innovation value-added chain (suppliers, manufacturers, complementary innovators and customers), as well as governments, environmental groups, safety advocates and ‘non-complimentary’ innovators, such as gasoline producers and distributors. So far we have argued that environmental innovation is highly influenced by the demands and perceptions of stakeholders (which are often greater in variety than other forms of innovation). Furthermore, the degree to which these stakeholders consider a technology radical

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plays a key role in the success of the innovation. Based on these arguments, we will now analyse fuel cell technology based on a modified version of the Innovation Value-added Chain Model. The modifications include other non-innovation value-chain stakeholders such as government regulatory bodies, non-complimentary innovators (such as oil and gas companies), environmental groups, safety advocates, infrastructure developers, etc. Note that this is not intended to be a comprehensive list, but one that should be sufficient for our discussion. Also, in addition to incremental, modular, architectural or radical innovation proposed by the Afuah and Bahram model, we expanded the nature of innovation to include technological trajectories and regimes, network externalities, dominant designs, deep structural adjustments, core competencies (enhancing and destroying) and Kemp et al’s [8] key barriers as discussed above. Thus, we analyse the impact of this technology for each stakeholder. Note, for the sake of space, only the impact of fuel cell technology on the automobile, is reviewed.

7. Customers 7.1. Automakers As already discussed, automakers are involved in strategic alliances with fuel cell companies such as Ballard. From a generic, primarily technological perspective, the most efficient means of integrating fuel cell technology is if it is regarded as modular innovation, where the fuel and drive system can be integrated within the automakers’ models with minimal modifications. This implies that there is less of a disruption to their manufacturing processes, and the car will remain as the dominant form of personal transportation. Network externalities and supporting industries will also be necessary for this to be a successful innovation for the automakers. A comparably safe, reliable, readily available and relatively cheap source of hydrogen must be available. Furthermore, automakers will need to retrain their mechanics and reorient their sales staff away from large, inefficient vehicles. This may be a very difficult task for the North American market, given that automakers have been promoting ever larger and more powerful vehicles for the last 10 years. It should be noted that there are considerable differences in strategies between firms within the industry. For example, engine manufacturing is a core competence for Honda, and has been a focal point for their diversification strategies. Having recognized the value of their engine development and manufacturing capabilities, Honda does not subcontract out their engines, in contrast to Chrysler (before they merged with Daimler). A departure from the internal combustion engine may thus have much more serious implications in the form of com-

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petency destruction for firms that rely on the engine as a core competence. In addition to technological issues, there are also public relations and regulatory issues that may play a role. Adopting fuel cell technology may allow automakers to meet zero-emission standards for their fleets, even if not all of their models use the technology. Furthermore, they may be able to demonstrate to the public that the firm takes environmental issues seriously, which in turn can enhance public opinion. Many automakers use eco-themes in their advertising (even though in some cases they are trying to sell environmentally unfriendly SUVs!). However, it should be noted again that automakers have different strategies. Thus, the perspective taken by the automaker of this innovation is very much contingent upon their present strategies and their ability and willingness to change. 7.2. Consumers From a technological perspective, the degree to which consumers perceive fuel cells to be radical will be dependent upon the final product and supporting infrastructure. In other words, if the car has similar driving characteristics, operating costs, availability of fuel and range, etc, then from a technological perspective it may be an incremental innovation. However, from a nontechnological perspective things may be quite different. For example, consumers have been conditioned to hear engine noise (some have gone so far as to use the ‘exhaust note’ to promote the ‘sexiness’ to the car). Consumers have also been seduced into buying cars with far more features and power than is necessary. Many fourwheel drive vehicles never leave paved roads, while even small subcompact cars now have over 120 hp, which is much more than what it needed for regular driving. Hypothetically, a new fuel cell may only be able to deliver 50 hp in the first generation, which is sufficient to meet most daily driving needs. In comparison to other cars, this may be perceived to be grossly underpowered, and thus the technology may have a slower diffusion rate than anticipated. The Toyota Prius, with 70 hp, remains a niche vehicle catering to the eco-market at the time of writing this document. From a cultural perspective, the Prius is indeed a radical departure from the norm. However, engines with less power and targeted at the niche eco-market may not necessarily be a barrier. If spun the right way, these radical aspects can be used to promote the vehicle and the firm as a leader in sustainable development issues. A good start in this niche market will then allow the technology to improve through incremental innovation. Cultural issues also bring up some other interesting perception issues. Hydrogen is commonly associated with two things: the Hindenburg disaster and the hydrogen bomb. Neither of these apocalyptic devices is scien-

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tifically relevant to the discussion of the safety of hydrogen fuel. A fuel cell passenger car operating on hydrogen would never have such a large amount of hydrogen stored in a flimsy cloth, while the enormous temperatures required for hydrogen atoms to fuse would never occur in a fuel cell system or hydrogen storage device. However, scientific relevance can sometimes be overshadowed by other perceptions. Consequently, if fuel cells are linked with dangerous or undesirable technologies, adoption of the technology will inevitably be slow and wrought with intangible risk.

8. Governments From a technological standpoint governments would appear to be unaffected if fuel cells emerged as the dominant design in the transportation sector. Since governments are not part of the value chain in a traditional sense, their competencies would not be radically altered. For instance, the underlying physical infrastructure such as roads and bridge construction would remain unchanged. However, from a non-technological view, governments are one of the stakeholders most severely impacted by the emergence of the fuel cell, and would have a major impact on policy decisions. As mentioned previously, fuel cells are just the enabling technology for a hydrogen-based energy system and there will inevitably be public concerns over the system’s safety. The onus will be on the government to devise safety regulations for the ‘hydrogen economy’ and it is a certainty that the first fuel cell vehicle fatalities will lead to extreme public backlash against the government, auto manufacturers and fuel cell manufactures. Any significant accident or product defect will raise doubts as to the safety of the technology and hamper adoption of the technology. In fact, it is highly unlikely that if the automobile was invented today it would be acceptable as a means of mass transit. Although fuel cells and the hydrogen-based energy system will cause regulatory headaches for governments in regards to safety, they will also offer potential solutions to the worsening economic and environmental problems associated with increasing energy demand. Fuel cells represent a technology with the ability to decrease vehicle-related air pollution in urban areas plagued by smog, while at the same time reducing dependence on foreign oil. They also present an opportunity for countries to partially meet certain global environmental regulations. However, carbon dioxide emissionsrelated regulations such as the Kyoto agreement would only be met if hydrogen can be produced using renewable resources. Therefore, governments must be aware that, given the present state of hydrogen production, environmental externalities will only be transferred to different locations rather than be totally eliminated. Fuel

cells are a near zero-sum environmental technology if hydrogen is produced from a fossil fuel energy system. It is evident that fuel cells will have a significant nontechnological impact on governments. Up to this point the focus has been on the safety and environmental implications of the technology. However, industrial policy has also played a crucial role in the funding of fuel cell research and development, and thus the rise of this technology. Furthermore, government organizations have recognized the economic, environmental and societal value of the technology and have a vested interest to see that it is commercialized in an appropriate way. It is imperative then to not stifle an industry in its infancy by forcing the introduction of technologies that are uncompetitive, as this can compound the problem of negative consumer perception. A good example of legislation addressing these concerns is the California Zero Emission legislation. In 1986 the California Air Resources Board (CARB) set regulations that initially required car manufacturers to sell 10% zero emission vehicles (ZEV) starting in 1998 with increasing percentages every two years thereafter. However, car manufacturers and legislators agreed to postpone the enforcement of the CARB’s regulations until ZEV technology becomes more advanced. Although flexibility has been granted to the manufacturers, the basic regulations remain and will be enforced in the future [51].

9. Complimentary and non-complimentary industries Automotive spokespeople and the media have found it simpler to focus on fuel cell vehicles themselves than to address the elusive issue of producing and delivering hydrogen fuel to those vehicles. Similarly, only limited attention has been directed at the repair infrastructure. In industrialized countries, every community has a proliferation of gas and service stations and specialized franchises to take care of everything from refuelling, oil changes and tires to body-work and engine reconstruction. These complimentary industries are the foundation of a massive automotive infrastructure. Some of these industries would be unaffected by the necessary switch to a hydrogen economy that would occur if fuel cells became the dominant enabling technology in vehicular transport. For instance, tire stores and auto-body repair shops would continue ‘business as usual’. However, oil and gas producers, refiners and transportation companies, as well as engine repair firms would need to make drastic changes. Entire industries would either have to develop new competencies to replace those destroyed by the emergence of the fuel cell or perish. Consequently, these firms, although complimentary to the internal combustion engine and fossil-fuel energy system would pose strong

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opposition to fuel cells due to their vested interests in an older system. These firms, because of their inevitable opposition to the fuel cell could be referred to as noncomplimentary industries and would certainly view the fuel cell as being a radical, competency destroying innovation.

10. Finance Ballard and other fuel cell companies face a dilemma when it comes to financing: fuel cells are not self-supporting and consequently fuel cell companies must either borrow (which few fuel cell companies have had to do) or go to the equity markets to raise capital. In the past, fuel cell companies have capitalized on the perception of fuel cells as revolutionary technology with a potentially huge market and have attained the necessary funding with ease. However, recently, the markets have not been kind to any of the technology sectors and the fuel cell groups have been dragged down. Robinson et al. [52] proposed a ‘functional skill hypothesis’. This hypothesis suggests that increasing certain types of skills encourages market pioneering while increasing other types encourages early following or late entry. For instance, excellent R&D and finance skills should encourage market pioneering, greater manufacturing skills should encourage early following and increasing marketing skills should encourage late entry. Ballard was fortunate to be the world leader in a potentially revolutionary technology during times when venture capitalists and the public markets embarked on a frenzied investment binge in the 1990s. Therefore, since Ballard pioneered the industry and was/is developing technology that was/is very attractive to the investment community, the potential for the company to survive is relatively high compared to later entrants. Additionally, the functional skill hypothesis supports Ballard’s pioneering success in the PEM fuel cell industry. The functional skill hypothesis suggests that possessing certain types of skills such as research and development and finance skills should encourage market pioneering. Obviously, Ballard’s competencies in these two areas contributed to its early success. However as increasing numbers of competitors enter the industry it will be necessary for the company to develop dynamic capabilities. That is, Ballard will need to develop its ability to integrate, build and reconfigure its internal and external competencies to address rapidly changing environments [4]. This does not mean that the company must deviate from its firstmover advantage in technology leadership; rather it needs to develop the flexibility to diversify its competencies should it find itself in an environment where factors other than technology can influence the adoption of a given dominant design.

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11. Environmental groups and safety advocates Environmental groups can be a wild card these days when it comes to the development of any new technology that claims to address environmental issues. What makes this a particularly interesting, but difficult stakeholder group is that they have a less structured agenda and organizational forms, yet are becoming increasingly influential and confrontational, as illustrated in the Seattle World Trade Organization (WTO) and Genoa G8 Summit. Radical technologies generate considerable concern for environmental groups, as illustrated by the difficulties suffered by Monsanto. It is highly unlikely that fuel cell technology will not undergo the same scrutiny. While it is beyond the scope of this paper to evaluate the environmental impacts of fuel cell technology, there are some potentially controversial issues that will probably be identified, such as hydrogen production, increased traffic and congestion and continued exploitation of other resources in the production of cars. Furthermore, the more radical this technology is portrayed by the industry and in the media, the more scrutiny it will come under. In a similar fashion safety advocates will also play a role in the success of this technology, as there are inherent dangers in the use and distribution of hydrogen. While Frankenstein metaphors have been used to describe biotechnology,2 Hindenburg metaphors may very well be used to describe hydrogenbased energy sources. In addition to the enormous technical constraints of developing fuel cell technology, it is clear that those promoting the technology have will have to do a fine balancing act to address the concerns and perceptions of the stakeholders. This includes: 앫 Sparking the interest of consumers without scaring them off or stressing them into believing that they need drastically different set of competencies to operate the new technology. 앫 Convincing manufacturers that this is a viable technology with radical benefits, yet requiring only incremental changes to their present technological and organizational capabilities. 앫 Pacifying environmental groups into believing that there are limited environmental risks, while at the same time convincing them that this is a legitimate means of addressing environmental concerns. 앫 Convincing safety advocates that this is no more radical than traditional energy sources. 앫 Maintaining the interest of investors without appearing hypocritical to the above.

2

See for example http://www.frankenfoods.com/

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12. Concluding remarks In this paper Ballard’s fuel cell technology was used to illustrate some of the issues facing environmental innovation. In doing so, we highlighted an interesting paradox: radical environmental innovation is under greater scrutiny than incremental approaches, and is thus a more risky venture for the innovating firm. Furthermore, trends indicate that this scrutiny will increase with the growing influence of environmental, safety and other activist groups. Conversely, many argue that incremental environmental innovation is not enough to solve our environmental woos. This paradox puts the innovating firm in a difficult position. Does one take the path of least resistance and incrementally innovate? If so, then who will come up with the environmental solutions? While this is a complex and difficult situation, we suggest that the degree to which the innovation is radical (and thus risky) is dependent upon the degree to which each stakeholder perceives the technology to be radical. With more than a century of incremental innovation, a large and generally efficient infrastructure, highly capable supporting industries and imbedded behavioural and cultural factors, the dominant gas-piston engine is a major barrier for an alternate technology. However, this task can be less daunting if there is a clearer understanding of the dynamics of innovation as they apply to the stakeholders. In other words, what may appear, at first glance, to be a radical, competency destroying and disruptive innovation may, in fact, be only an incremental or modular innovation from an operational perspective. Developing new technologies to suit these conditions may very well reduce the barriers to success. Identifying the key innovation issues for each stakeholders may allow policy makers, innovators and others to fully understand more about how a technology will impact their activities, and what directions can be taken to successfully introduce an innovation.

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