Global Innovation Arbitrage: Commercial Drones & Sharing Economy Edition

by on December 9, 2014 · 0 comments

Capital moves like quicksilver around the globe today as investors and entrepreneurs look for more hospitable tax and regulatory environments. The same is increasingly true for innovation. Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity. I was reminded of that fact today while reading two different reports about commercial drones and the sharing economy and the global competition to attract investment on both fronts. First, on commercial drone policy, a new Wall Street Journal article notes that: Inc., which recently began testing delivery drones in the U.K., is warning American officials it plans to move even more of its drone research abroad if it doesn’t get permission to test-fly in the U.S. soon. The statement is the latest sign that the burgeoning drone industry is shifting overseas in response to the Federal Aviation Administration’s cautious approach to regulating unmanned aircraft.

According to the Journal reporters, Amazon has sent a letter to the FAA warning that, “Without the ability to test outdoors in the United States soon, we will have no choice but to divert even more of our [drone] research and development resources abroad.” And another report in the U.K. Telegraph notes that other countries are ready and willing to open their skies to the same innovation that the FAA is thwarting in America. Both the UK and Australia have been more welcoming to drone innovators recently. Here’s a report from an Australian newspaper about Google drone services testing there. (For more details, see this excellent piece by Alan McQuinn, a research assistant with the Information Technology and Innovation Foundation: “Commercial Drone Companies Fly Away from FAA Regulations, Go Abroad.”) None of this should be a surprise, as I’ve noted in recent essays and filings. With the FAA adopting such a highly precautionary regulatory approach, innovation has been actively disincentivized. America runs the risk of driving still more private drone innovation offshore in coming months since all signs are that the FAA intends to drag its feet on this front as long as it can, even though Congress has told to agency to take steps to integrate these technologies into national airspace. 

Meanwhile, innovation in the sharing economy is at risk because of incessant bureaucratic meddling at the state and especially the local level across the United States.  My colleagues Matt Mitchell, Christopher Koopman, and I released a new Mercatus Center white paper on these issues yesterday (“The Sharing Economy and Consumer Protection Regulation: The Case for Policy Change“) and argued that most of the rules and regulations holding back the sharing economy are counter-productive and desperately in need of immediate reform. If policymakers don’t take steps to liberalize the layers of red tape that encumber new sharing economy start-ups, it’s possible that some of these companies will also start to look for opportunities offshore. Plenty of countries will be eager to embrace them, which I realized as I was reading through another report recently. The UK’s Department for Business, Innovation & Skills recently published a white paper called, “Unlocking the Sharing Economy,” which discussed how the British government intended to embrace the many innovations that could flow from this space. The preface to the report opened with this telling passage from Rt. Hon. Matthew Hancock, MP and Minister of State for Business, Enterprise, and Energy:

The UK is embracing new, disruptive business models and challenger businesses that increase competition and offer new products and experiences for consumers. Where other countries and cities are closing down consumer choice, and limiting people’s freedom to make better use of their possessions, we are embracing it.

That really says it all, doesn’t it!  If other countries, including the US, don’t clean up their act and create an more welcoming environment for sharing economy innovation, then the UK will be all too happy to invite them to come set up operations there.The offshoring option is just as real in countless other sectors of the modern tech economy. As Marc Andreessen, co-founder of the venture capital firm Andreessen Horowitz, noted in Politico oped this summer:

Think of it as a sort of “global arbitrage” around permissionless innovation — the freedom to create new technologies without having to ask the powers that be for their blessing. Entrepreneurs can take advantage of the difference between opportunities in different regions, where innovation in a particular domain of interest may be restricted in one region, allowed and encouraged in another, or completely legal in still another.

Similar opportunities for such “global arbitrage” exist for the Internet of Things and wearable techintelligent vehicle technologyadvanced medical device techrobotics, Bitcoin, and so on. The links I have embedded here point back to other essays I have written recently about the choice we face in each of these fields, namely, will we embrace “permissionless innovation” or “precautionary principle” thinking. This matters because — as I noted in recent essays (1,2) as well as a book on these issues — economic growth depends upon policymakers promoting the right values when it comes to entrepreneurial activity. “For innovation and growth to blossom, entrepreneurs need a clear green light from policymakers that signals a general acceptance of risk-taking—especially risk-taking that challenges existing business models and traditional ways of doing things,” I noted in a recent essay on the importance of “Embracing a Culture of Permissionless Innovation.” Or, as the great historian of technological progress Joel Mokyr has concluded: “technological progress requires above all tolerance toward the unfamiliar and the eccentric.” To sum up in two words, incentives matter.  “[E]conomic and social institutions have to encourage potential innovators by presenting them with the right incentive structure,” Mokyr notes. Thus, when the economic and social incentive structure discourages risk-taking and experimentation in a given country or even entire continent, we can expect that global innovation arbitrage will accelerate as entrepreneurs look to find more hospitable investment climates.



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