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of finance for innovators, insufficient cooperation between public and private parties, or excessive regulation and outdated regulations and procedures.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 launches multi-part “@innovation & #antitrust” series

Philips changed its company slogan from “We make things better” to “We create better ideas”

new multi-part series

Philips is but one of the companies – albeit a pioneer – that recognizes the crucial forward-looking importance of innovation.  Its CEO, Frans van Houten, 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.”

The U.S. Department of Commerce published a 2010 report claiming that 75% of U.S. economic growth since the end of World War II is attributable to innovation in technology.

Antitrust law is likewise cognizant of the uniqueness of ideas — the result of innovation — rather than old-fashioned brick-and-mortar “products & services”.  For instance, how do you define the relevant market for a merger of ideas-based companies?  The agencies have come to accept the existence of innovation markets almost two decades ago, in the mid-1990s (based on the original “R&D markets” concept of the 1980s, and driven in no insignificant part by the advent and meteoric rise of biotechnology patents).  The 2010 U.S. Horizontal Merger Guidelines now expressly incorporate the concept of innovating as a relevant metric of competitiveness into their language, notably at section 1 of the HMG: A transaction may have anti-competitive effects if it strengthens a firm’s market power by encouraging market participant(s) “to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.”

We at AAT are now previewing a series of posts on innovation & antitrust to be published during the spring and summer of 2014. They will be hash-tagged #AntitrustInnovation on Twitter.

You can read our first installment of the thematic collection here (last post on innovation, competition and IP in developing countries), written by contributing author and Tilburg University scholar Sofia Ranchordás.

We expect the series to engender active discussions with, and within, our readership, either via comments on this site or on Twitter.