Innovation, the diesel engine and vehicle markets: Evidence from OECD engine patents

• The propensity to develop emissions control responds to pollution control laws in Japan.
• The propensity of engine efficiency innovation responds to car markets.
• Declines in loan rates stimulated the propensity to develop emissions controls techniques.
• Publicly funded R&D supports innovation of engine efficiency.
• Price effects on innovation outweigh that of the US CAFE standards.

This paper uses a patent data set to identify factors fostering innovation of diesel engines between 1974 and 2010 in the OECD region. The propensity of engine producers to innovate grew by 1.9 standard deviations after the expansion of the car market, by 0.7 standard deviations following a shift in the EU fuel economy standard, and by 0.23 standard deviations. The propensity to develop emissions control techniques was positively influenced by pollution control laws introduced in Japan, in the US, and in the EU, but not with the expansion of the car market. Furthermore, a decline in loan rates stimulated the propensity to develop emissions control techniques, which were simultaneously crowded out by increases in publicly-funded transport research and development. Innovation activities in engine efficiency are explained by market size, loan rates and by (Organisation for Economic Cooperation and Development) diesel prices, inclusive of taxes. Price effects on innovation, outweigh that of the US corporate average fuel economy standards. Innovation is also positively influenced by past transport research and development.