Research suggests government regulation can foster innovation

Decision and social sciences professor David Hounshell discusses the effects of government regulations on technological innovation in the private sector. (credit: Daniel Tkacik/SciTech Editor) Decision and social sciences professor David Hounshell discusses the effects of government regulations on technological innovation in the private sector. (credit: Daniel Tkacik/SciTech Editor)

Government regulation can actually foster technological innovation rather than hamper it, claims a study published this year by a team of researchers from Carnegie Mellon and Wayne State University. The findings further question the role the government should play in the inner workings of the private sector.

“We’ve done a whole series of studies looking at how government regulation forces technological change,” said researcher David Hounshell, a professor in Carnegie Mellon’s department of social and decision sciences. “A more conservative view is that government is not good at shaping technologies in any direct way, ... that the proper role of the government is to fund more basic research and to develop technologies that pertain to very explicitly stated functions of government — things like military technologies. [They] think that regulations are always a detriment.” Hounshell pointed to his team’s study to dissuade this popularly held view.

To conduct their study, the researchers focused primarily on the impact of what they called “performance-based technology-forcing” auto emissions policies from 1970 to the late 1990s. They gauged innovation in that area by the number of auto emissions patent applications successfully granted in a particular time period, while regulation was measured by the tolerance levels of government policies toward harmful automobile air emissions.

The team discovered that after the Clean Air Act of 1970 was passed — which placed emission limits on both stationary industrial factories and mobile vehicles — the number of successful U.S. patents went up significantly for the next few years as companies were forced to adhere to the new standards. These numbers dropped to unimpressive levels between the mid-1970s and mid-1980s in what Hounshell claims was the general absence of significant air emissions regulation.

However, the time period between the late 1980s and into the 1990s once again saw a large increase in patent counts as the U.S. government developed more policies toward reducing automotive air emissions and passed an amendment to the Clean Air Act, further tightening the already strict bottlenecks on tolerable air emissions levels for U.S. automobiles.

“The kind of analysis that we’ve done with respect to emissions control really indicates that companies do respond to stringent regulations,” Hounshell said. “They do turn out to innovate the technology and to achieve the kind of performance standards that wise regulation entails. If the government is prudent in selecting a performance standard … it can actually force companies to invest in research that otherwise they would not in the absence of regulation.”

The group’s findings also support what has come to be known as the Porter Hypothesis, an idea first postulated 20 years ago by Harvard-trained economist Michael Porter. It states that environmental regulations can foster innovation and commercial competitiveness.

It remains to be confirmed whether the theorem holds for other forms of regulation, but Hounshell reports that he and his colleagues have observed similar patterns elsewhere, such as in the standards affecting automobile safety technologies. Realistically, the researchers’ discoveries are unlikely to convince everyone that government regulation — in the automotive sector or otherwise — is for the greater good. As Hounshell indicated, some conservatives and business owners today think negatively of any form of government influence in the free market. Still, others push for what they dub a “smarter” kind of regulation, one that improves the coherency and transparency of the current rules.

“America’s CEOs are calling for smarter regulation –—the kind that will bolster business growth,” said Andrew Liveris, chairman and CEO of The Dow Chemical Company, according to a news release from Business Roundtable. “Unfortunately, the current U.S. regulatory regime tends to be so complex and inconsistent that regulations often do the exact opposite. We can turn that tide by ensuring pending and new rules are clear, consistent, and wise for the long term.”