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Study on regulation and innovation
Staying with the theme of catching up on items concerning innovation and regulation (see yesterday’s posting), here is a study from last year from ITIF on The Impact of Regulation on Innovation in the United States: A Cross-Industry Literature Review. The paper is a high level review of the theory and available evidence, including a discussion of what the author calls the Porter Hypothesis. This is a reference to Michael Porter’s argument that regulations can serve as a forcing function to create new opportunities and competitive advantage (see earlier posting).
I think the paper’s conclusions are worth quoting at length:
Regulation that does not require innovation for compliance will generally stifle innovation, although it may spur circumventive innovation if the firm or industry can find a path to escape the regulatory constraints. For regulation that does require compliance innovation, the impact on innovation is nuanced. Faced with this sort of regulation, firms reallocate funding from other business activities toward the innovative activity that will bring them into compliance. Yet these other business activities may also include investments in other potential innovations–those that the firm preferred prior to the imposition of the regulation. This is evident in many cases where social regulation causes social innovation to increase but causes market innovation to decrease. Hence, the net impact of this sort of regulation on innovation is unclear; there is no way to know whether the resulting social innovation is more valuable to society than the market innovation that was forgone. Nor is it clear whether regulation that requires compliance innovation will enhance firm or industry competitiveness. On occasion, the Porter Hypothesis is borne out by the evidence: there are several cases in which social regulation does indeed improve the competitiveness of firms and industries. Nevertheless, in the majority of cases there is an apparent trade-off between market innovation that benefits the firms and that which serves only to meet the compliance standards of regulation.
What is clear is that regulators can design regulation such that it minimizes the compliance burden on firms while maximizing the probability that the compliance innovation will be successful. Regulation should be flexible, allowing the firm and the market to decide the optimal path to implementation. Regulation should also be expedient–both in its implementation and execution–and unambiguous, minimizing the uncertainty facing firms when bringing new products or processes to the market. Regulators should also jump at opportunities to reduce information asymmetry in the market, or even to provide expert knowledge in collaboration with industry in order to aid the innovation process. And regulators should be cognizant of the trade-offs between the sudden enactment of stringent regulation versus the gradual increase of stringency over time. The most elementary lesson, however, is that, regardless the impact of regulation on innovation in general, if regulators simply place innovation at the forefront of their policy analysis along with distributional, fairness, and environmental concerns, then the United States will undoubtedly see a marked and sustained improvement in its innovative potential.
In other words, regulation can be used to promote innovation, but it needs to be designed carefully with that outcome, along with others, in mind.
2012-08-08 10:32:40
Source: http://www.athenaalliance.org/weblog/archives/2012/08/new-study-on-regulation-and-innovation.html
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