AAT exclusive, collusion, East Africa, Extra-judicial Factors, innovation, Kenya, politics, Protectionism, Transportation, Unfair Competition

Kenyan cabbies complain: The Uber competition saga reaches East Africa

Uber Africa: Increased competitiveness not a boon for entrenched monopolies

new multi-part seriesContinuing our AAT multi-part series on innovation & antitrust we turn once again to the ubiquitous “Sharing Economy” we are witnessing not only in the United States and Europe but also on the African continent…

“The taxi industry is in the midst of a crisis. Once protected by a regulated monopoly of the commercial passenger motor vehicle transportation market, the industry now faces increasing competition from a new type of transportation service—ride-sharing. The emergence of companies like Uber, the most successful ride-sharing company, threatens to eliminate the taxi industry’s stronghold on the ground transportation market and possibly the industry itself.” (Erica Taschler, Institute for Consumer Antitrust Studies, in “A Crumbling Monopoly: The Rise of Uber and the Taxi Industry’s Struggle to Survive“)

April 14, 2015 Associated Press file photo, Nairobi, Kenya

Today, the Taxi Cab Association of Kenya announced protests against the “unfair competition” its members face from ride-sharing giant Uber, according to the organisation’s chairman, Josphat Olila.  This is no news for folks in London, Brussels, Hamburg, or Washington — places where the taxi-medallion-capped brethren of Nairobi’s cabbies have all long ago gone through the protest phase against the rising tide of the “new economy’s” novel way of hailing cars.  Examples abound, and all involve more or less refined antitrust arguments.

Andreas Stargard, an attorney with Africa competition advisors Primerio, sums it up as follows: “The pro-competitive notion of innovation-plus-price competition is perhaps best understood by looking at the views of two leading antitrust agencies, the FTC and the European Commission.   Both have articulated simple and sound arguments for striking the right balance between regulatory limits for the protection of passengers, as well as allowing innovative technologies to enhance the competitive landscape and thereby increasing transportation options for riders.  In antitrust law, more options usually equal better outcomes.

U.S.

Here is what the U.S. Federal Trade Commission had to say in 2013 about the D.C. taxi commission’s ‘unfair competition’ argument against ride-sharing services:

“The staff comments recommend that DCTC avoid unwarranted regulatory restrictions on competition, and that any regulations should be no broader than necessary to address legitimate public safety and consumer protection concerns.  … [T]he comments recommend that DCTC allow for flexibility and experimentation and avoid unnecessarily limiting how consumers can obtain taxis.”

Crucially, the Kenyan cabbies’ argument that Uber should be banned is based on price competition from Uber’s lower fares.  One of the main tenets of competition law is: lower prices are good for consumers (in general), as long as service quality remains the same.  With Uber in the mix, quality arguably increases beyond the sad status quo of smelly and difficult-to-hail cabs: for one, users now are able to know when and where their car arrives, quality control via Uber’s policies and check-ups is available, convenient electronic billing & dispute resolution exists, etc.

Let’s go back to the FTC’s public comments and see their take:

“Competition and consumer protection naturally complement and mutually reinforce each other, to the benefit of consumers. Consumers benefit from market competition, which creates incentives for producers to be innovative and responsive to consumer preferences with respect to price, quality, and other product and service characteristics. As the U.S. Supreme Court has recognized, the benefits of competition go beyond lower prices: ‘The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain – quality, service, safety, and durability – and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers’.”

EU DG COMP

Former Competition Commissioner Neelie Kroes would agree wholeheartedly with the above, and indeed said in 2014 that she was “outraged at the decision by a Brussels court to ban Uber.”  In her personal op-ed piece, published on the EU Commission’s web site under the catchy title “Crazy court decision to ban Uber in Brussels“, she poignantly had this to tell the Belgian Mobility Minister who signed off on the Uber ban:

“This decision is not about protecting or helping passengers – it’s about protecting a taxi cartel.  The relevant Brussels Regional Minister is Brigitte Grouwels. Her title is “Mobility Minister”.  Maybe it should be “anti-Mobility Minister”. She is even proud of the fact that she is stopping this innovation. It isn’t protecting jobs Madame, it is just annoying people!”

We wonder what would happen if Neelie Kroes were Kenyan government minister…

Kenya: Keep prices high and ‘foreign’ competition out?

The Kenyan Taxi Association does not see it that way, just like its D.C. counterpart did not some 3 years ago.  However, D.C.’s streets are still full of old-fashioned cabs, and Uber — while popular — is still far from blowing out the light shone by the once-prized cabbie medallions…

Still, the Kenyan association claims that between 4,000 and up to 15,000 taxi drivers face job extinction due to lower prices charged by Uber, which has been active in Nairobi since the beginning of 2015.  Again, the “lower price” argument is a red herring under even the most basic application of competition economics, which shows that innovation-based price competition is ultimately pro-competitive and good not only for the end consumer but also the industry’s development as a whole.

Sadly, antitrust law — even in a fairly developed competition-law jurisdiction like Kenya — does not always prevail (again, see the occidental examples of Brussels, Hamburg, London, or even Baltimore, where the cabbies ironically sued Uber in an antitrust lawsuit, alleging that the so-called ‘Surge Pricing’ mechanism amounts to per se illegal price-fixing…).

The Kenyan taxi-cab organisation not only claims that the livelihoods of its members are at stake, but also “questioned the protocols followed by the foreign investors behind Uber, saying they were not consulted before the service provider entered the market,” according to an article in the Kenyan Daily Nation.  The association’s spokesman is quoted as saying: “We have loans to service, families to feed, children to educate and other responsibilities to cater for and we are not ready to leave the transport industry to a foreigner and render [ourselves] jobless while we are in a democratic republic.”

So in the end, the ‘unfair taxi competition’ argument devolves into xenophobia and mistrust.  Sadder yet, Kenya’s Uber fight has now taken a violent turn: Yesterday, an Interior Ministry spokesman said that there had been reports of attacks on Uber drivers, which are being investigated.

AAT of course deplores the resort to violence and trusts that neither it nor the upcoming protests will impede the progress of competitiveness in Kenya, a country that otherwise prides itself on encouraging competition (see CNBC Africa video on “East African competitiveness”).  The sole glimmer of hope we see consists of the closing line of the Daily Nation piece, which notes that “[t]he drivers have also promised to come up with their own version of Uber to connect taxi drivers in the country.”  That is what innovation is all about: Uber innovates, others copy (be it Lyft or the Kenyan cabbies), and everyone is better off in the final analysis.

 

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full article, innovation

#antitrustInnovation: Innovation crossing regulatory borders

new multi-part series

A continuation in our AAT multi-part series on innovation & antitrust as a thematic collection focusing on the concept of innovation markets and how competition and IP laws are able to address the, by definition, novel issues that arise.

By Sofia Ranchordás

In previous posts on the topic of Antitrust & Innovation, we discussed the definition of innovation, its relative character, and the role of regulation in its regulation and advancement, notably in developing countries. In Africa, the lack of a solid regulatory framework may, on the one hand, discourage foreign direct investment, and on the other, fail to stimulate local innovators to invent. However, there are more challenges regarding the advancement of innovation that are impeding a more effective ‘regulation of innovation’. In this short article, attention is paid to the regulatory borders that innovation seems to be crossing at the moment. The next installment shall be focused on two regulatory instruments that might facilitate the regulation of innovation in the dark, not only in Africa but also in other countries.

Democratizing access to finance

The regulation of innovation should start out with understanding the innovation process and its characteristics, notably its uncertain character; the need for diversity, sector-specificity, the complex access to finance, openness to changes and flexibility. An innovation-friendly environment does not exist in most African countries. The lack of flexible rules and the often somewhat inflexible interpretation of existing legal concepts are not helping either. While governments praise innovation as the highest salvation in times of crisis, the list of regulatory obstacles to innovation does not appear to be tackled. This is the case of the poor availability of finance for innovators, insufficient cooperation between public and private parties, or excessive regulation and outdated regulations and procedures.

Think about ‘kickstarter’: while there are already numerous crowdfunding projects supporting startups and non-profit projects in Africa, it is not easy for an African innovator to create this type of crowdfunding accounts from his/her own country and attract anonymous angels. In the case of ‘kickstarter’—one of the platforms with more visibility—this might even be limited to a number of countries (e.g. United States, New Zealand, Australia…) and be subject to specific requirements (e.g. permanent residence).

But what if you do not have a broad network and cannot contact someone reliable in one of those countries? I was recently contacted by a designer from Portugal who had developed an innovative device, but could not create a kickstarter account because he lives in one of the countries where you are not allowed to join this form of crowdfunding (www.dapowa.com). The same would apply to an innovator from an African country, only this one could probably be in a position where he would not even know anyone who would be willing to share his story with you.

There are multiple platforms of crowdfunding that are available worldwide, but the point that I would like to make is that regulators should start paying more attention to this form of democratization of finance. There are obviously risks and controversies behind crowdfunding, but, in a time when we need so much innovation, isn’t it about time we stop adopting an all-or-nothing perspective and rethink the regulatory framework of access to finance? Laissez-faire is not an option, certainly not in the case of finance. Shouldn’t developing countries have more flexible structures allowing their innovators—with properly developed business plans but with a limited social network—to improve access to finance? Funding projects should not necessarily be seen as a mere form of charity. It is a form of philanthropy that should be regarded as a stepping stone for the development of African economies and a complement to foreign direct investment.

Crowdfunding is simply one of the innovations that is putting regulation to the test and making us question the interpretation of existing legal concepts and institutions. Other examples—still less common in Africa—are present in the case of ‘share economy’ (e.g., Uber, Lyft, Airbnb). While ‘share economy’ and crowdfunding are innovative and valuable ideas, they bring along a number of serious risks for consumers (e.g. how many Airbnb houses comply with fire safety regulations? Will the money invested be used for the due purposes?). A ‘laissez faire’ approach might not be enough to conquer the trust of risk-averse consumers, but a stringent regulation of these new forms of democratization of access to finance and facilities will not either.

In this short article, we pose mere questions and alert for the need to think about regulatory solutions for the described democratization. Self-regulation, soft law and experimental regulations might be options to explore. The first step is however to start thinking about this topic, questioning the need for more transparency, and the need for rules. Crowdfunding and share economy will work while they are based on the bona fides of users. However, one incident might be enough to put an end to it all. Rules are created for a purpose and today’s challenge is to make sure that, on the one hand, ‘too much [law] will not kill [innovation]’, ‘if regulators can’ t make up their minds’ and, on the other, ‘too little law’ does not ‘leave [innovation] behind’.

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AAT, full article, healthcare, innovation, Kenya, mobile payments

Philips & innovation in Africa: Driving worldwide growth

Philips’ CEO Frans van Houten recognizes untapped potential, invests in Africa

new multi-part series

In February, AAT launched its multi-part series on innovation & antitrust as a thematic collection focusing on the concept of innovation markets and how competition and IP laws are able to address the, by definition, novel issues that arise.  Recently, and timely so, Philips has joined this debate.

Philips & the future of African innovation: From “things” to “ideas”

For one, Frans van Houten, its President and CEO, has been quoted as saying: “Innovation is our lifeblood and will be the main driver of profitable growth going forward. … I intend to drive innovation with more intensity to help us win new customers.”

Notably, Philips changed its official company slogan from “We make things better” to “We create better ideas.

Mr. van Houten (source: Philips)

Even more pertinent, Mr. van Houten not only recognizes the crucial forward-looking importance of innovation.  Unlike many Western corporate leaders, he positively links it with the economic growth prospects of Africa.  In an insightful piece entitled “How Africa’s innovation will change the world” (published on the Davos World Economic Forum blog), Mr. van Houten discusses the promises, challenges, and realities of African innovation and resulting economic growth.

The article highlights the intuitive, yet elusive, insight that challenges become opportunities when looked at with an inventive spirit.  It also addresses the importance of multi-disciplinary approaches (such as the one at the foundation of our #AntitrustInnovation series, combining law, economics, and business innovation) and that of partnerships:

Seven years ago, millions of Kenyans were struggling to access basic financial services such as a bank account; they were unable to transfer money or receive microcredit. Then, a locally developed mobile payment system called M-Pesa [see AAT coverage here; — Ed.] radically changed everything. Today, more than two-thirds of Kenya’s population uses M-Pesa to make and receive payments and an estimated 43% of the country’s GDP flows through the system. This is transforming life in the country, increasing income in rural households and spawning a range of start-ups.

This speedy adoption of mobile payments captures the enterprising spirit of African innovation. It reflects the resourcefulness with which people in Africa find local solutions to local issues. It also shows how Africa’s challenges are opportunities in disguise and how the continent can bypass development stages without paying for their replacement. Mobile phones, for example, were rapidly adopted in Africa because of the lack of fixed telecom infrastructure. And solar panels are being adopted faster than in other parts of the world, because kerosene is so expensive that the payback time for investments in solar power is months rather than years.

Healthcare is another exciting area. According to a report from the World Economic Forum, Africa faces 28% of the global disease burden with only 3% of the world’s healthcare workforce. In response, Africa is adopting new operating models and technologies. By training health extension workers to focus on education, family planning and sanitation, Ethiopia achieved a 32% drop in child mortality and 38% drop in maternal mortality. In Kenya, e-learning has taught 12,000 nurses how to treat major diseases such as HIV and malaria, compared to the 100 nurses a year that can be taught in a classroom.

Africa is also embracing new business models that tap into the vitality of the country’s communities. Philips, for example, teamed up with Inyenyeri, a Rwandan NGO, to give families access to an innovative cookstove. Crucially, the cookstove is given away for free and families pay for the stove by harvesting twigs, leaves and grass. This biomass is compressed into fuel pellets, half of which are returned to the family for personal use and half of which are sold by the NGO. The cookstove is produced in Africa, highly energy efficient and, because it is smoke free, significantly healthier.

This example also shows the power of partnerships, without which many African innovations would not come to fruition. Solar-powered light centres, for example, increase the social activity and productivity of communities by generating light after sundown. These communities, however, are often unable to invest in a light centre, so this technology is rolled out through NGOs and governments. Sometimes these light centres are used to power medical equipment such as an ultrasound, or refrigerators that store vaccines. This type of cooperation ensures that innovation generates both financial and social value.

The complexity of Africa’s challenges also requires a multidisciplinary approach to innovation. Kenya, for example, is investing in systems that encourage open innovation. This sees local universities and small and medium enterprises join forces with NGOs, governmental organizations and foreign multinationals such as IBM and Philips, which have set up regional research and innovation centres in Nairobi. Nairobi is also home to iHub, a booming community of local entrepreneurs, investors and some of the world’s leading technology firms.

For innovation to really succeed in Africa, other factors need to be addressed, too. There is a lack of prototyping equipment and workshops, so local innovators depend on Europe or China, making the process costly and cumbersome. And while there are good patent laws in place, there are still too many counterfeit versions of successful products. Also, international firms should source locally and work with local distributors, whenever possible. And governments should focus their development money on stimulating entrepreneurship and innovation.

While in Africa millions of people still live on less than $2.50 a day, the continent looks set to have a brighter future thanks to local solutions for finance, healthcare and energy that could become globally relevant. M-Pesa, for example, has already been rolled out in other African countries, India, Afghanistan and Eastern Europe. Perhaps sooner than we think, African innovations will help the rest of the world create lasting social and economic value.

[Frans van Houten, President and CEO, Royal Philips, emphasis and links added, How Africa’s innovation will change the world” published on Davos World Economic Forum blog.]

Investment: done

More than just writing op-ed pieces, Philips’ leadership has put its money where it matters: On March 20, 2014, the company (with 23-plus billion Euros in annual revenue) announced that it was establishing a “Research & Innovation Hub” in Nairobi, Kenya.  The full Philips statement says:

  • The Philips Africa Innovation Hub in Kenya will be the center for developing innovations “in Africa-for Africa” in the areas of healthcare, lighting and healthy living

  • Hub underlines Philips’ commitment to invest in Africa and provide Africa-relevant innovations to address key challenges facing the continent

 Nairobi, KenyaRoyal Philips (NYSE: PHG, AEX: PHIA) today announced the establishment of its Africa Innovation Hub in Nairobi, Kenya, which underlines the company’s commitment to invest in Africa. The Philips Africa Innovation Hub will work both on the creation of new inventions, as well as bringing these inventions to the market.

The Philips Africa Innovation Hub will do application-focused scientific and user studies to address key challenges like improving access to lighting and affordable healthcare as well as developing innovations to meet the aspirational needs of the rising middle class in Africa.

The Philips Africa Innovation Hub will be located at the Philips East African Headquarters in Nairobi, where African talents and international researchers will operate on the concept of “open innovation” and will work in close collaboration with the R&D ecosystem of Kenya and Africa. Philips is in discussions with local organizations and Universities on R&D collaborations to co-create meaningful solutions for Africa.

“We welcome the establishment of Philips’ Innovation Hub in Kenya; Philips is a globally recognized innovation powerhouse and their selection of Nairobi as the site to establish their African Innovation hub is a testament to the Kenyan government’s commitment to nurture the drive for research and innovation in the region”, says, Hon’ble Adan Mohammed, Cabinet Secretary for Industrialization. “We lend our full support to the investment being made by Philips and look forward to the outcomes of their Africa-specific research and projects that can contribute to transforming society, business and government across the continent”.

JJ van Dongen, Senior Vice President & CEO Philips Africa states: “Philips is passionate to invent, apply technology and partner to help people succeed. Our ambition is to create impactful innovations that matter to people and address the key challenges that confront society. With Kenya as a leader in the continent in science and entrepreneurship as well as a hub of collaboration on technology and innovation, Nairobi, is the ideal location to establish Philips’ African research presence. We want to tap into the city’s vibrant R&D eco-system and contribute to the process of co-creating new solutions, new business models and meaningful partnerships to provide innovations that make an impact.”
Enhancing people’s lives in Africa though meaningful innovations
Some innovations that Philips was already working on have now become part of the Innovation Hub, hence, the Philips Africa Innovation Hub will kick-off with ventures that are under development as well as in the pilot phase; these include:

Respiratory rate Monitor to support pneumonia diagnosis: Pneumonia is the leading cause of death among children under the age of five, resulting in 1.1 million deaths worldwide annually¹. Of these, 99% of deaths occur in developing countries in low-resource settings, which typically entail rural areas with very limited or poor healthcare facilities or with low-skilled health workers. The current diagnostic tools in such settings are not easy to use, can easily distract the workers from an accurate conclusion, and thus lead to a poor diagnosis.

The Innovation hub is working on the development and clinical testing of a robust and affordable Automated Respiratory Rate Monitor that aims to support the diagnosis of pneumonia among infants and children, using smart sensing technology on the body which is intended to be more accurate and reliable compared to manual processes being currently observed. This device will be specially designed for use by community health workers and nurses in rural areas. In Kenya, discussions are on with the Kenya Medical Research Institute (KEMRI) to further develop this project and co-create an effective solution tailored to circumstances in rural Africa.

Community care services: The development and testing of a work-flow innovation designed to reduce the number of avoidable maternal and child deaths. The purpose of the workflow is to enable remote area health centers to diagnose, triage, treat, stabilize and (prepare for) transport expectant mothers that come in for a check-up and treatment.

Smokeless cook stove: Philips has designed and is manufacturing this innovative stove to improve the lives of those who rely on wood or biomass for their daily cooking. These specially designed stoves are extremely efficient and significantly reduce the use of wood as fuel. The cook stove can reduce smoke and carbon monoxide emissions by more than 90% compared to an open fire² thus reducing the health risks of indoor cooking. The contribution of the innovation hub is to create new go-to-market models for these stoves.

Consumer solar solutions: Today an estimated 560 million Africans live without electricity; Philips is committed to improving access to lighting in Africa, for the majority of the population that lives in off-grid communities. The Innovation hub is designing and developing new consumer products using the combination of solar power and energy efficient LED technology. New go-to-market models are also being established to ensure these solutions become accessible to people that would not be able to afford them otherwise.

The Philips Africa Innovation Hub while headquartered in Kenya, will be responsible for pan-African research and projects and will have operations across Africa, linked to the Philips regional offices across the continent; the hub will be headed by Dr. Maarten van Herpen and will work in close collaboration with the Philips research labs in Bangalore, Shanghai and Eindhoven.

¹ Source : Unicef  www.unicef.org/media/media_70890.html
² Reference source:  Water boiling test version 4.2.2 done at accredited stove laboratory, Aprovecho Research Center, Oregon, USA.

 

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BRICS, full article, innovation

Regulation & Innovation in Africa: A licence to innovate?

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?

 new multi-part series

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.

FOOTNOTES:


[1] Press release of the Office of the Prime Minister of Uganda, April 12th, 2013, available at http://www.opm.go.ug/news-archive/comesa-innovation-council-inaugurated.html

[2] See African Observatory of Science, Technology and Innovation, Assessing Best Practices of Science, Technology and Innovation, AOSTI Working Papers, No.1 (African Union 2013), available at http://aosti.org/index.php/working-papers/finish/6-working-papers/9-aosti-workingpapers1-executivesummary/0

[3] The African Economic Outlook is an initiative funded by a number of international organizations, including the African Devepment Bank Group, the OECD, the UN Economic Commission for Africa and the UN Development Programme for Africa. For more information, see http://www.africaneconomicoutlook.org/en/

[4] African Economic Outlook 2013, Special theme: Structural Transformation and Natural Resources, pocket edition, available at http://www.africaneconomicoutlook.org/fileadmin/uploads/aeo/PDF/Pocket%20Edition%20AEO2013-EN.web.pdf

[5] See African Economic Outlook 2009, summary available at http://www.africaneconomicoutlook.org/en/in-depth/ict-africa/

[6] For an interesting overview of the dynamics of innovation throughout time, see François Caron, Dynamics of Innovation: The Expansion of Technology in Modern Times (Oxford: Berghahn Books, 2013)

[7] This concern is far from being a recent one, see Wesley A. Magat, ‘The effects of Environmental Regulation on Innovation’ (1979) 43 Law & Contemporary Problems 4.

[8] Wolfgang Hoffmann-Riem, Rechtswissenschaftliche Innovationsforschung als Reaktion auf gesellschaftlichen Innovationsbedarf, Überarbeite Fassung eines Vortrages aus Anlass der Überreichung der Universitätsmedaille am 19.12.2000 in Hamburg, available at <http://www2.jura.uni-hamburg.de/ceri/publ/download01.PDF>.

[9] James T. O’Reilly, ‘Entrepreneurs and Regulators: Internet Technology, Agency Estoppel, and the Balance of Trust’ (2000) 10 Cornell Journal of Law & Public Policy 63.

[10] Aryeh S. Friedman, ‘Law and the Innovative Process: Preliminary Reflections’ (1986) Columbia Business Law Review 1.

[11] Robert Cooter, Aaron Edlin, Robert E. Litan, George L. Priest, ‘The importance of law in promoting innovation and growth’ in The Kauffman Task Force on Law, Innovation and Growth, Rules for Growth (Kauffman 2011) 6.

[12] Lawrence B. Landman, ‘Competitiveness, Innovation Policy, and the Innovation Market Myth: A Reply to Tom and Newberg on Innovation Markets as the “Centerpiece” of “New Thinking” on Innovation’ (1998) 13 Saint John’s Journal of Legal Commentary 223.

[13] Michael Porter, ‘The Competitive Advantage of Nations’ (1990) Harvard Business Law Review April-March 75.

[14]For a critical perspective on the Porter’s hypothesis, see Lawrence B. Landman, ‘Competitiveness, Innovation Policy, and the Innovation Market Myth: A Reply to Tom and Newberg on Innovation Markets as the “Centerpiece” of “New Thinking” on Innovation’ (1998) 13 Saint John’s Journal of Legal Commentary 223, 231-232.

[15] This topic shall be thoroughly analyzed in part IV of Innovation & Antitrust Series.

[16]For an overview, see Christine Jolls, Cass R. Sunstein, Richard Thaler, ‘A Behavioral Approach to Law and Economics’ (1998) 50 Stanford Law Review 1471.

[17] Joshua D. Wright, Douglas H. Ginsburg, ‘Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty’ (2012) 106 Northwestern University Law Review 1033.

[18] Joshua D. Wright, Douglas H. Ginsburg, ‘Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty’ (2012) 106 Northwestern University Law Review 1033, 1053.

[19] See the September 2009 Strategy for American Innovation, combining a number of programs focused on the promotion of innovation and Obama’s speech, available at Speech of Barack Obama, August 5, 2009, available at http://www.whitehouse.gov/blog/Spurring-Innovation-Creating-Jobs. A Strategy for American Innovation: Driving Towards Sustainable Growth and Quality Jobs, White Paper, 2009, available <http://www.whitehouse.gov/administration/eop/nec/StrategyforAmericanInnovation>

[20] Stuart Minor Benjamin, Arti K. Rai, ‘Fixing Innovation Policy: a Structural Perspective’ (2008) 77 George Washington Law Review 1.

[21] Wolfgang Hoffmann-Riem, ‘Rechtswissenschaftliche Innovationsforschung als Reaktion auf gesellschaftlichen Innovationsbedarf’, Überarbeite Fassung eines Vortrages aus Anlass der Überreichung der Universitätsmedaille am 19.12.2000 in Hamburg, available at <http://www2.jura.uni-hamburg.de/ceri/publ/download01.PDF>.

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