Volume 3: Rethinking Innovation Policy: The Role of the State
Faced with new technologies that confound existing financial regulatory structures, regulators around the world have been experimenting with new approaches to regulating fintech. The most prominent of these experiments have been innovator-focused programs that provide guidance (and in the case of regulatory sandboxes, regulatory relief) to private sector firms, in order to help them navigate a confusing thicket of financial regulation that might otherwise impede their innovation. These innovator-focused programs can improve efficiency and competition in the provision of financial services, but can—at best—only make incidental contributions to the financial regulatory goals of consumer and investor protection, and the promotion of financial stability. This Article argues that when regulatory resources are scarce, the priority should be experimentation by the regulators in order to advance the core financial regulatory goals of protecting investors, consumers and the financial system. This Article therefore surveys recent technological experimentation by financial regulators (known as “SupTech”) and concludes that while the experimentation to date has been valuable and may improve the execution of longstanding financial regulatory functions, further experimentation is needed to address the new problems and risks created by the rise of fintech.
A conventional economic narrative provides intellectual underpinnings for governments to subsidize research and development (“R&D”) that coordinates risky research to benefit many in society. This essay compares this narrative with the origins and invention of the internet. Are the historical facts consistent with the conventional economic narrative? Does the conventional economic narrative offer a complete explanation for why government subsidized R&D related to the internet produced high economic value? The essay shows why that narrative is consistent with historical experience, and incomplete in crucial respects. To remedy incompleteness, an analyst needs to appreciate the role of lead-users and good governance of technology transfer. Accounting for such factors, the essay develops a number of implications for technology policy.
Public finance—whether in the form of grants, subsidies, or tax credits—is increasingly being cast as the panacea to either a world of IP and all its foibles, or a world in which innovators have insufficient incentives to undertake risky research. The idea is that, rather than supporting innovation through the gifting of exclusive rights like patents, government can use taxpayer dollars to support research and development activities directly. This article casts doubt on the notion that public finance can ever provide a suitable alternative for incentivizing innovation. It makes this point by examining financial subsidies currently offered by U.S. state governments. Each year, state governments across the U.S. purport to award billions of dollars in public financing for “innovation.” But it turns out these so-called innovation incentives typically have little to do with encouraging novelty or inventiveness. They are in reality designed to promote politically attractive goals: principally, the goal of job creation. This article identifies the phenomenon—essentially, jobs programs dressed up as innovation incentives—and reveals why it could be highly problematic for innovation policy. By diverting investment towards subject matter that is labor-intensive, these incentives may end up encouraging developments that are the opposite of “innovative,” in the ordinary sense of the word. Those who support relying more heavily on public finance as an innovation policy tool need to confront the reality that, when taxpayer money is on the line, political goals may well trump the desire to reward truly innovative endeavors.
This article uses recent literature on Public-Private Partnerships (P3s) to argue that “Regulation as Partnership” is often a more productive approach to regulation than the more common adversarial and transactional approaches common to the contemporary regulatory environment. Partnerships, in which public entities engage the private sector to serve some government purpose (often to construct infrastructure) in exchange to some ownership interest derived from that purpose, have become popular since the 1980s. They are most often thought of as an alternative vehicle for financing public projects. But they primarily operate (and are most effective when) by aligning the incentives between the public and private project participants. This alignment of incentives stands in stark contrast to the often adversarial and transactional approach to much regulation – with regulation of the tech sector highlighted as an example in this article.