Removing Roadblocks to Innovation

The United States is the top global destination for developing and bringing to market innovative technologies and processes because of its market-based economy and culture of entrepreneurship and risk-taking. Unfortunately, outdated regulation threatens U.S. competitiveness. Regulation must be agile and light-touch as well as clear, precise and enforceable to accommodate a rapidly changing technology landscape. At the same time, regulation must be predictable to avoid creating uncertainty and undermining the investment environment. 

The United States needs to create a regulatory environment that enables and supports innovation. The United States should consistently attain a top ranking for its regulatory transparency and flexibility, preserving its status as the top global destination for innovation. 

Reform Regulatory Systems for Innovation

While the United States is still the top global destination for developing and bringing innovative technologies and processes to market — thanks to its diverse market-based economy and culture of entrepreneurship and risk-taking — inefficient and outdated regulation threatens U.S. competitiveness. Regulatory fragmentation, outdated and redundant standards, lack of clarity, impediments to testing and deployment, and cumbersome rules all stand as serious barriers to innovative activity. They undermine the nation’s ability to set the “rules of the road” and drive up costs and uncertainty in a way that can deter investment.

The United States needs to embrace a portfolio of new approaches to modernize its regulatory system for the innovation age. Regulation must be agile and light-touch, as well as clear, predictable and enforceable to accommodate a rapidly changing technology landscape. Given the importance of early adoption and widespread deployment, speedy reform is key to unlocking the transformative market potential of new technologies and establishing U.S. competitiveness across a wide spectrum of innovative technologies and industries with high growth potential.

The rapid pace of technological change stands in stark contrast to an often-sluggish regulatory process.

  • In 2012, rule-making that required notice and comment periods took an average of 18 months to complete — exactly the same amount of time Moore’s law states that it takes to double the number of transistors that can fit on a computer chip.[i]
  • Other developed countries have recently overhauled their regulatory systems and outrank the United States in terms of regulatory quality management. The United States now ranks 15th in the Organisation for Economic Co-operation and Development in terms of the frequency with which it updates regulations.[iii], [iv] [chart 3.2]
  • For example, more than half of the standards referenced in federal auto safety regulations date back to 1980 or earlier, which is a barrier to autonomous vehicle deployment.[v]

Persistent regulatory challenges flowing from a failure to reconceive the U.S. regulatory model threaten innovation-intensive industries.

  • The Global Innovation Index ranks the United States 17th in regulatory quality, behind countries such as Singapore, Germany and the United Kingdom.
  • Financial technology (“fintech”) firms report that costs to obtain state licenses necessary for operation can range from $1 million to $30 million and that regulatory complexity has delayed or prevented the launch of fintech products in the United States.
  • Drone regulations in the United States are advancing toward the long-term goal of commercial integration. However, recent progress still falls short of matching the deployment goals and regulatory conditions in many other countries, creating an opportunity for regulatory arbitrage and incentives for firms at the edge of drone innovation to test and deploy their technologies elsewhere. [ii]
  • Currently, only 20 states have explicit provisions (enacted via legislation and/or executive orders) intended to create the necessary conditions for companies to test or operate autonomous vehicles. While these provisions vary somewhat across states, the near-term focus should be on advancing similar provisions in more jurisdictions and for a wider range of emerging technologies.[iii]

Harmonize Approaches to Data Privacy and Security

Overstating the role of data in driving innovation and unlocking economic productivity is impossible. However, the proliferation and importance of data to the innovation economy is also reshaping thinking about privacy, security threats, and regulatory and legal framework requirements. The need for new frameworks that address questions around the governance of data, including privacy and cybersecurity, is clear and urgent.

The wrong regulatory solutions to these challenges can be costly. Fragmentation of privacy requirements creates inconsistent protections for consumers and unpredictability for American companies that must innovate and create new products and services to compete. Getting this piece of the regulatory puzzle right is a critical enabling condition for sustaining and building on U.S. innovation leadership.

Existing privacy and cybersecurity regulations consist of a sector-specific and fragmented patchwork of rules that are a poor fit for the cross-cutting nature of the digital economy and new technologies. 

  • Every state has enacted its own security breach notification legislation, resulting in differing and sometimes incompatible provisions.
  • Additional state-level data privacy proposals — following in the footsteps of legislation in California — threaten to increase complexity.
  • The technology landscape is marked by blistering growth in new applications and devices. By some estimates, there could be 50 billion internet-connected devices globally by 2020.

Policy Recommendations

  1. Undertake a thorough review process of the regulatory system. Congress should direct federal agencies to review regulatory processes and procedures and pursue reforms to improve the clarity, speed and agility of regulation. Reforms should ensure that regulations are risk based and facilitate the commercialization of innovative technologies. The review should solicit robust input from industry and research universities.
  2. Consider the impact of new and existing regulations on innovation. Congress should require regulatory agencies, including independent agencies, to analyze the costs and benefits and the impact on innovation of new major regulations and tailor new rules to minimize unnecessary burdens on the economy before they are enacted.
  3. Prioritize risk-based, light-touch approaches to regulation wherever possible. Congress should direct federal agencies to prioritize risk-based approaches to regulation, requiring them to assess real-life risks under a variety of scenarios and transparently communicate the results. Innovation is not possible without taking informed risk. In many cases, performance standards or voluntary best practices may be sufficient to achieve regulatory objectives.
  4. Determine whether some technologies require national standards. Policymakers should work with regulatory agencies to identify certain emerging technologies — for example, autonomous vehicles, fintech or drones — that may benefit from national standards to promote innovation, investment and commercialization and to ensure an even playing field. In these select cases, federal regulatory agencies should develop and implement carefully scoped enabling regulations.
  5. Avoid conflicting regulations. Congress and the Administration should harmonize the patchwork of regulations governing innovation by identifying and eliminating conflicts in federal law and pre-empting state laws governing emerging technologies such as autonomous vehicles and artificial intelligence so innovators face stable and predictable requirements.   
  6. Establish a national privacy law. Congress should pass a national privacy law that fosters innovation and economic competitiveness, includes robust protections for personal data, harmonizes regulatory approaches to consumer privacy, and achieves global interoperability between U.S. and foreign privacy regimes. These objectives can be achieved only through a national privacy law that avoids a state-by-state approach to regulating consumer privacy.
  7. Align cybersecurity requirements. Congress and the Administration should seek to align federal, state and international cybersecurity requirements for a more efficient, effective and consistent approach to cybersecurity. The Administration should promote the alignment of cybersecurity regulations and frameworks in ongoing and upcoming trade negotiations to reduce regulatory fragmentation.
  8. Create test-beds and regulatory sandboxes. Federal and state governments should balance the need for experimentation and testing with the safety imperative by creating technology test-beds (e.g., those established for unmanned aerial vehicles) for testing and deployment of emerging technologies such as autonomous vehicles, blockchain, artificial intelligence, internet of things and smart cities. Federal and state governments should structure test-beds as regulatory sandboxes to allow businesses to test products, services and business models without excessive legal risk.[iv]
  9. Grow technical capacity at regulatory agencies. Policymakers should grow technical expertise at federal and state regulatory agencies by establishing an exchange program that leverages industry and academic subject-matter expertise to support and modernize the regulatory process, in the same way that the Presidential Innovation Fellows program uses private-sector professionals to help modernize federal technology and processes.
  10. Promote innovation in government. The federal government should be an early adopter of new technologies, such as artificial intelligence, blockchain, internet of things, autonomous vehicles and next-generation broadband internet. The government should apply new technologies to solve real-world public policy challenges, such as strengthening open data initiatives and modernizing citizen-centric services.


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Notes

[i] These are rules that fall under Section 553 requirements, which govern the process by which federal agencies make policy choices. The median completion time was 12 months.

[ii] For example, other countries permit delivery by drone in some or all areas.

[iii] Note: Excludes legislation about platooning.

[iv] Test-beds are platforms or sites for deployment and experimentation of new technologies and applications. Test-beds create real-life environments for companies to implement specific user scenarios and business processes to verify functionality or identify flaws and new requirements. To truly remain innovation test-beds, sites must remain available for future experimentation rather than be converted to operations.