The role of intermediate product innovation in the low-carbon transformation of traditional manufacturing

Intermediate products connect upstream technologies and materials to downstream production processes. Innovation embodied in these inputs may therefore spread across production networks and contribute to the low-carbon transformation of traditional manufacturing (LCTTM). This study examines the effect of intermediate product innovation (IPI) on LCTTM under domestic and international circulation. We combine patent- and R&D-based knowledge measures with input–output linkages to construct indicators of IPI, using provincial panel data for China from 2006 to 2020 and panel data for 30 countries from 2001 to 2014. The results show that IPI promotes LCTTM, and the main finding is robust to alternative specifications and tests for endogeneity. The effect is stronger in capital-intensive industries, coastal provinces, key regions involved in the Belt and Road Initiative, non-EU countries, and trade-surplus economies. The mechanism results differ between domestic and international circulation. IPI is associated with a larger share of relatively less carbon-intensive fuels and a greater share of output from less energy-intensive industries in the international sample. In the domestic sample, however, changes in energy composition are not statistically evident. One possible explanation is that the effect initially operates through production-efficiency improvements, while the development of low-carbon value chains may temporarily raise the output share of energy-intensive upstream sectors. IPI also increases green and low-carbon technological innovation in both samples. Further analysis shows that intra-provincial and inter-provincial IPI each contribute to LCTTM, but their interaction is negative, indicating competition rather than complementarity across provinces. At the international level, the evidence is stronger for domestically generated IPI, while innovation originating within and outside traditional manufacturing is positively associated with LCTTM when examined separately. These findings show how innovation embodied in intermediate inputs can affect manufacturing decarbonization through regional and sectoral production linkages.