Our popular Innovation & Antitrust series continues on its popular path to its 3rd installment, in which its author, Ass’t Professor Sofia Ranchordas, deals with regulation.  Prior pieces included the topics of ‘convergence or customization?’ and the deeply inquisitive ‘in the eye of the beholder…?’  The series continues.

Regulation and Innovation in Africa: licence to innovate?

Ass’t Prof. Sofia Ranchordás (Tilburg Univ. Law School)

In part II of the African Antitrust Innovation Series, Sofia Ranchordás discussed the relevant concept of ‘innovation’ underlying the discourse on innovation/competition/IP in African countries.  She concluded that in the African context, the advancement of economic growth may imply adopting a context-specific concept of ‘innovation’, where more attention is paid to incremental improvements performed by local innovators. Before analyzing whether competition laws can play a role in the advancement of innovation in the African context, it is important to take two steps back in this third part of the Innovation and Antitrust Series and:

(i) Analyze the African innovation policy context and its challenges;

(ii) Question whether regulation can and should play a role in the advancement of innovation.

(i) Wanted: Innovation in Africa

Up until recently, COMESA did not adopt an interventionist approach towards innovation in its member states, however it was expected that African governments would devote at least one per cent of GDP to R&D. Year after year, member states failed to achieve this objective and COMESA soon realized that in Africa only the South African government (ironically, a non-member) was in state to successfully pursue such goal. In 2012, the COMESA Committee of Ministers of Science and Technology recommended the creation of an Innovation Council and setting up an Innovation Fund, promoting efforts to harmonize intellectual property rights, and continued infrastructure development to facilitate regional trade. The creation of the COMESA Innovation Council in April 2013 evidenced a clear awareness of the importance of enhanced technological innovation for the competitiveness of African countries. This council was conceived mainly ‘to provide advice to member states relating to existing and new knowledge and innovations and best ways of applying it in the member states’.[1] The COMESA Innovation Council departed from the premise that the late adoption of technological innovation would be an advantage for cost effective developments due to the limited negative effects. Besides COMESA, other organizations have been supporting African countries investment in R&D. This is the case of UNESCO which has been coordinating the UN Science & Technology cluster and the African Union through the African Observatory of Science, Technology and Innovation (AOSTI).[2]

While an Innovation Council is much needed in Africa, the question that needs to be posed here is whether these countries really know what it takes to effectively promote innovation. Are African governments enacting the most adequate rules to foster investment and terminating the dispositions that contribute to the innovation chasm that characterizes a number of African countries?

While national governments have been trying to develop their own innovation policies and programmes, it has also been argued that innovation in Africa faces a significant hurdle:  donor nations are the ones setting the tone. Perhaps to ensure that African governments are able to define their own innovation priorities, the COMESA Innovation Council is solely composed by eminent scientists of member countries. However, this may not be enough. In the 2013 African Economic Outlook report,[3] it was underlined that despite Africa’s ‘impressive growth over the past fifteen years (…) institutions and regulations for private sector activity must be further improved. Addressing infrastructure bottlenecks increasing access to key public services (…) would put countries on a durable high growth path and reduce poverty and inequality’.[4] In the specific case of extractive-resource exploration and exploitation, this report explicitly states that more regulations that provide incentives for investment are needed. The 2009 African Economic Outlook had earlier verified that the ineffective African regulatory systems were one of the reasons why African was seriously lagging behind. This 2009 report concluded that ‘African regulators need more muscle’ and particular attention should be paid to telecoms regulators who tend ‘too often favor incumbent fixed-line operators, who have typically problems to make profits, over new entrants (…) [impeding] competition and private investment.’[5]

Willingness to innovate, investment and know-how are certainly essential elements of innovation, but any policy initiatives may be jeopardized by an ineffective regulatory framework. Stating that African regulatory systems must be improved seems to be stating almost the obvious. Explaining why may actually shed more light on how this should be done.  Does regulation really matter for innovation?

(ii) Innovation: law gives, and law may take it away

National laws and regulations can act as ‘licences to innovate’. But they can equally be regarded as obstacles to innovation, should they be excessive, costly and/or cause regulatory delays. Regulation and innovation can either be ‘friends’ or ‘foes’. Regulators can hinder it by imposing too many regulatory requirements with which companies must comply; or instead, facilitate it by providing a rapid and flexible regulation of innovations, and ensuring that novelties are quickly introduced in the market. The mentioned destinies depend notably on how well lawmakers know the nature and dynamics of the innovation process.[6] The relationship between law and regulations and innovation has often been underestimated in the literature and the study of the impact of the former on the latter is often vaguely justified and not supported by empirical evidence.[7] However, this is far from being an unimportant topic: regulation can impede or even facilitate innovation, depending on the type, timing, duration and the dispositions in question.

Regulation as a ‘foe’ to innovation

Legislative or regulatory instruments have been traditionally regarded as obstacles to innovation: the bureaucratic impositions of law are quickly accused of stifling creativity and commercial success, contributing to the image of ‘law as the bogeyman’.[8] This is explained, for example, by the multiple regulatory burdens imposed by regulators that often outweigh the harms they intended to prevent. High compliance costs may have a negative impact on investment, particularly in the case of smaller innovators with more limited capital. In addition, regulation has been regarded as an impediment to innovation because ‘entrepreneurs and government regulators see the world quite differently’: while the first see flexibility and risk as parts of the business, regulators are often risk-averse, preferring stability and long-term predictable outcomes.[9]  Moreover, the lack of experience with the private sector, the growing bureaucracy and entrenchment in agencies led to the enactment of stricter regulation aimed to avoid future problems. This need to regulate the unpredictable generated uncertainty, conflicting regulations, and had counterproductive effects, since the very same rules which aimed at stimulating innovation ended up frustrating it. [10]

Although excessive regulation may stifle regulation, innovation cannot be left unregulated. Innovative products can potentially endanger a number of significant social and economic values (e.g. public health, environment, or fair competition). The regulation of innovation should perform multiple tasks: regulate the risks inherent to novel products and services; ensure that innovators do not innovate beyond and against law; facilitate and even promote the development and implementation of innovations, by creating a legal order adapted or adaptable to the characteristics of the innovation process.[11]

Regulation as a ‘friend’ to innovation

Regulators all over the world are aware of the importance of innovation for a country’s competitiveness and have tried to actively encourage firms to innovate. This was visible in the well-known case of the U.S. Department of Justice’s command on Microsoft to sell its Internet Explorer as a separate product from its Windows operating system.[12] This idea that authorities should actively intervene, can be indirectly derived from the ‘Porter hypothesis’,[13] according to which public authorities, and specifically competition authorities, should guarantee that market forces drive firms to innovate, notably through the implementation of stringent competition policy.[14] The concretization of legislative or administrative interventions in this field does not always need or can be reduced to an aggressive implementation of competition law.[15] Innovation is essential to increase the competitiveness of firms, but the regulation of the former goes beyond competition concerns and requires a comprehensive regulatory approach.

Legal rules do not necessarily stifle innovation, by discouraging entrepreneurs from investing in R&D. Instead, regulation can equally assume a paternalist role and have a positive effect on behavior—as argued by behavioral law and economics scholars—and ultimately influence (‘nudge’) entrepreneurs to make the desired investing decisions.  The general impact of legislation and regulation on human behavior has been studied in the last decades by the behavioral law and economics literature.[16] A behavioral approach to law and economics proceeds to a study of legal rules informed by knowledge about human behavior and attempts to discover how law can be used to achieve particular ends. Behavioral law and economics aims to ‘regulate so as to improve economic welfare by more closely aligning each individual’s actual choices with his “true” or unbiased preferences without reducing his liberty.’[17] There are reasons to believe that this behavioral approach has been shaping policy and rulemaking in the United States, notably under the Obama Administration,[18] which has been particularly interventionist as far as the advancement of innovation is concerned.[19] If this interventionist approach has been successfully implemented in different countries, one can and should ask whether African governments should not also try to ‘nudge’ innovation, exempting innovators from complying with unnecessary burdens, providing better legal protection to investments, and improving the overall transparency of its legal system.

(iii) A regulatory recipe for more innovation

The role played by regulation in the advancement of innovation deserves more attention from most African countries and international organizations operating in this continent. Governmental innovation policies and the regulation of innovation should be elected as priority concerns in the quest for more innovation. [20] African governments could try to combat the innovation chasm that characterizes their systems if they create ‘innovation-friendly’ regulatory frameworks that make their legal systems attractive to investors and innovators. I leave you with a draft of a partial recipe to this ‘friendship’:

1. A solid legal and procedural framework, characterized by transparent and accountable regulatory authorization procedures;

2. Bonuses and prizes for innovators;

3. Innovation waivers,[21] i.e., regulation can facilitate innovation, notably by granting entrepreneurs exemptions from complying with certain rules as long as these companies substantially invest in R&D or authorizing companies to develop certain activities without further requirements;

4. Tax credits for companies investing in R& D projects and cooperating with local universities;

5. Subsidies to R&D projects partially financed by international organizations;

6. Termination of unnecessary regulatory burdens by inserting sunset dispositions in a number of regulations regarding innovative fields;

7. Attractive start-up visa regulations for innovators with concrete business plans involving local natural or human resources that may result in the creation of jobs;

8. Development of clear competition policies and better enforcement of competition laws. This last suggestion shall be further developed in part IV of the Innovation & Antitrust Series.