The innovative power of good regulations

Wimar Bolhuis: Laws and rules are often seen as obstacles to innovation and renewal. They restrict the freedoms and opportunities of entrepreneurs and scientists. As a result, they hamper progress when it comes to improving our prosperity and well-being. Nevertheless, regulations may occasionally be an actual catalyst for both financially profitable and socially valuable innovations. There are a number of reasons for this, five of which I describe in this reflection.

(1.) First, regulations can create a ‘safe’ environment in which innovations can be funded and developed better. This happens when rules increase certainties for companies and reduce their risks. Clarity about future market requirements at an early stage can encourage more experimentation with future business models. This, in turn, can accelerate the further development of profitable use cases. The presence of rules thus creates a better environment for innovation and entrepreneurship than a rule-free environment.

(2.) Second, new rules and laws that push innovation in a desired direction – or, vice versa, that block undesirable paths – force entrepreneurs and scientists to specialise when it comes to their research and development (R&D) activities. They also stimulate companies and public authorities to draw up policies that encourage the actual uptake of these innovations. All this can raise ROI forecasts and reduce risks.

(3.) Regulations that push innovative activities and capital investment in a specific direction may even result in a geopolitical competitive advantage over countries with more generic policies.

That specific policy, the earlier decision to take a particular path, gives one party the edge. Similarly, specific European Union (EU) legislation and regulations may boost the financial returns from R&D investments as well as the social value of innovations emerging in the EU bloc.

After all, these increase market entry costs for innovations developed outside the EU, as such innovations have to comply with EU regulations before they can be made available to 450 million consumers.

What Anu Bradford called the ‘Brussels effect’ has a huge impact on global production and consumption. In addition to classic competition rules, such legislation prevents companies from gaining a dominant position.

(4.) A fourth reason, moreover, is that regulations may give rise to new markets, systems, and social norms that cause innovations to flourish against the odds. New legal frameworks provide clarity, stability, and predictability. On the one hand, this may enable a productive development organisation to be designed and built. On the other hand, an increase in social acceptance may cause consumer demand to adopt an innovation to grow.

This is especially the case if regulations ensure the socially valuable and safe use of a particular new technology, which increases legitimacy, consumer and product demand, and profitable scalability.

(5.) In conclusion, values-driven regulation of technological innovations can increase social returns. Rules and laws may not only protect against negative effects of new technologies, but also enhance their positive impact on society.

This is a public role that has been – and continues to be – essential throughout history, as Daron Acemoglu and Simon Johnson show in their book Power and Progress. We now also see regulations having a positive catalytic effect on the ethics of artificial intelligence as well as sustainable production and consumption, leading to all manner of creativity and systemic innovation.

So, are regulations always a good thing? Obviously not. For example, it is essential that rules and laws are flexible and do not prescribe exactly how activities should be carried out. Above all, they should not lay down which criteria the outcomes or consequences of innovative applications should comply with. This also reduces compliance costs and hassle for innovative producers and consumers.

The above implies that experts in the fields of governance, institutions, and regulation have a key role in ensuring that the greatest value is gained from technological innovations. This is an instructive observation, as we ultimately want to create as much financial, economic, and social value for the Netherlands and Europe as possible from technical innovations.

Hopefully, you will take away this insight from the reflection above: that it is not simply fewer regulations, but rather smart legal innovations that occasionally give those necessary nudges that increase innovative strength.

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