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Innovation and decarbonization strategies of firms: insights from the Portugal 2020 program and relation to local contexts

Mário Vale, Tiago Louro Alves, Margarida Fontes, Ricardo Paes Mamede, Nuno Bento

7th Geography of Innovation Conference | GeoInno 2024

1. Introduction
In the aftermath of the Paris Agreement, climate action has proliferated worldwide, with cities and regions taking initiatives to promote more sustainable systems (Gibbs and O´Neill, 2017; United Nations, 2017). Simultaneously, it has been suggested that these transition pathways exhibit significant regional variations, leading to diverse environmental outcomes. Large cities and urban core regions have taken the lead in these efforts (C40 Cities, 2016), while many non-core regions often face weak economic structures and limited innovation dynamics, which create obstacles for the development of new environmentally friendly pathways (Grillitsch and Hansen, 2019).
Effective decarbonization strategies must encompass various sectors beyond energy to include transport, industry, buildings, and food (IPCC; 2022). This transformation is multisectoral raises different challenges for regions and firms. While the literature is expanding rapidly (e.g., Markard and Rosenbloom, 2022), there remains a gap in the discussion regarding decarbonization pathways in studies that link sustainability transitions, firms, and regions. The novelty of the article lies precisely in the analysis of individual decarbonization strategies of companies (relevance, type and drivers) and the regional context where they emerge.
In this paper, we address these challenges in three ways. Firstly, we assess the decarbonization strategies of companies that have received support from the innovation policy program Portugal 2020 (PT2020) by comparing them with a typology of decarbonization pathways derived from the literature. Secondly, we relate the revealed decarbonization pathways adopted by the firms with the specialization of the economic base to identify which regions and sectors are driving (lagging) in the transition to a low carbon economy. Thirdly, we delve into the policy implications for decarbonization pathways considering regional specificities. This analysis is crucial for understanding the diverse decarbonization strategies and effective policies emerging in various types of regions, such as urban-metropolitan, rural, and industrial areas, and inform low-carbon transition policies.

2. Decarbonization pathways, firms and regions: theoretical foundations
Decarbonization is increasingly important in firms' investment strategies as they face raising pressures from the market and regulation (Bento et al., 2020).
Existing economic structures and the agency of various actors significantly influence the decisions of the firms. Overall, decarbonization efforts are driven by factors like regional specialization, firm characteristics, and proximity effects (Neffke et al., 2018; Trippl et al. 2020; Santoalha and Boschma, 2021). Furthermore, sustainability transitions exhibit a distinct geographical dimension. In regions dominated by less advanced industrial structures, the process of transitioning towards greener practices is particularly challenging (Vale et al, 2023).
The path to decarbonization is not without obstacles. Market allocation alone may not suffice to deliver the required level of investment in a timely manner, given prevalent market failures and difficulties in benefit appropriation. Public policies, such as PT2020 provides essential support to enterprises through grants and financial engineering, encouraging the inclusion of technological innovation in projects. While not mandatory, the projects under PT2020 can also integrate a decarbonization dimension, further incentivizing firms to adopt environmentally conscious practices.

3. Research methodology
We started by identifying the firms whose projects are relevant for decarbonization from those that received funding from the Portuguese innovation incentive scheme PT2020 within the period of 2014-2020. For that, we employed natural language processing and matching techniques that compared the text of the firms’ proposals to two alternative definitions of decarbonization. We also performed the same technique against the definitions of each decarbonization pathway from a typology that has been previously constructed (Alves et al., 2023), to rule out false positives/negatives. Out of the initial 2,793 firms whose applications were successful, 278 firms (10%) were found to have projects with relevance for decarbonization. As a result, it was also feasible to categorize the firms' projects based on their respective (dominant) decarbonization pathways. Finally, we conducted an analysis of these results taking into account the firms’ size, age, sector, and the regional context.
The typology of decarbonization pathways used in this study derived from an automatic systemic review of the literature that analysed over 1 million papers (Alves et al., 2023). It has identified six main categories, including integrated systems, technology breakthroughs, demand and co-benefits, decarbonization of electricity, electrification of uses, and land use and circularity. The typology of decarbonization pathways provides a useful framework for categorizing the strategies of the firms on decarbonization, that help to identify key trends and commonalities among different approaches.

4. Empirical results and discussion
The proportion of decarbonization projects is modest, corresponding to 10% of the 2,793 firms that were supported by the incentive scheme PT2020, financed by the European Structural Investment Funds between 2014-2020. Decarbonization projects are mainly concentrated in the Porto metropolitan area and its extensions to the North and South (Ave, Aveiro, Cávado). The results may have a potential bias because the Lisbon metropolitan area has limited access to this policy programme due to being a developed region (and companies may use subsidiaries located in other regions to access to the funds). Older firms and medium-size companies are comparatively more active and successful candidates, denoting the role of the incentives system in supporting well established firms in transition processes. Newcomers were less important than expected in novel activities (Neffke et al., 2018), however less acquaintance with this innovation support scheme may not be ruled out.
The two most common decarbonization pathways adopted by the firms were demand and co-benefits and decarbonization of electricity. These two pathways represented 48,5% and 34,4% of total projects, respectively. These two pathways include more readily available technological solutions. Less common decarbonisation directionalities include the electrification of uses and technological breakthroughs (8,3% and 6,6%, respectively), while land use and circularity, and integrated systems are rare.
Firms located in regions with higher productivity level in the manufacturing sector (r=0.42) and more urbanized contexts (r=0.36) tend to be more active in decarbonizing investments in this policy programme. It is also noteworthy that the greater the CO2 emissions from the industrial sector in the region, the higher the level of firms involved in decarbonization investments (r=0.53). The empirical evidence corroborates general findings on the literature, demonstrating that in regions with less advanced industrial structures, with a few exceptions, firms have relatively limited engagement in the sustainability transition processes.
The distribution of the firms’ projects by decarbonization pathways follows a stable pattern at the regional level, especially in the regions with more projects. These regions show similar structures of CO2 emissions, with a very high share of heat (in buildings) & electricity production and industry. Interestingly, the other regions with 10 or less projects funded (right of Viseu Dão Lafões) show much higher heterogeneity in terms of decarbonization pathways. Contrary to the previous group, road and other sources dominate the structure of CO2 emissions. This result seems to indicate that contextual factors matter in the firms' choice of strategies for decarbonization. Further research should highlight the effects of the regional specialization on the strategies of decarbonization.

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