Tech regulation: Barrier or catalyst to innovation?
Does tech regulation hold back tech innovation?
At the AI Action Summit in Paris earlier this year, U.S. Vice President J.D. Vance said, “We believe that excessive regulation of the AI sector could kill a transformative industry just as it’s taking off.”
Regardless of your politics, his comment points to fundamental questions in tech policy: Does regulation always hinder innovation? Or are there certain conditions where regulation can enable innovation?
In this week’s newsletter, we examine the relationship between tech regulation and tech innovation.
// The Europe example
As we explored in last week’s newsletter, the EU’s approach to tech regulation and innovation highlights the nuances of the regulation-innovation tension.
On one hand, Europe’s regulatory environment has made it harder for smaller, homegrown tech companies to compete against global rivals. It’s led to a brain drain of EU’s top technologists and companies, and it’s contributed to a growing concern amongst policymakers that Europe has lost its digital sovereignty.
On the other hand, it’s incorrect to conclude that tech regulation in Europe always equates to less innovation. In one 2023 study of the effects of the General Data Protection Regulation (GDPR) from 2018, researchers found that GDPR didn't reduce innovation but changed its form.
They wrote, “GDPR stimulated firms to re-organise their data management in a more profound way than they would have done in the absence of the regulation, opening up opportunities for improving existing products. The additional resources needed for complying with the GDPR limited their capacity for developing entirely new products.”
// For & Against
The current regulation-innovation debate is not new. It’s a dynamic that has shown up in various industries and markets worldwide. Here are a few examples of the relationship between regulation-innovation:
- Regulation can hinder: In most countries, regulations vary based on firm size. The bigger the company, the greater the regulation. Researchers found that companies in France that were nearing a 50-employee size (a headcount threshold that leads to greater labor regulations) innovated less.
- Regulation can enable: Section 230 in the U.S. gave online platforms legal immunity for user content moderation. This protection allowed countless online business models to flourish and is credited with helping create today's internet (for better and worse).
- Regulation can hinder: America’s Nuclear Regulatory Commission has been recently criticized for regulatory overreach. Those who see nuclear energy as necessary to build a clean-energy economy believe “crushing regulation” has made it virtually impossible for new nuclear reactors to be built in the U.S. (Only three new reactors have been completed in nearly three decades, reflecting widespread criticism of regulatory overreach.)
- Regulation can enable: Antitrust regulation to break up monopolies has created a level playing field upon which new technologies could emerge. Two separate antitrust lawsuits against IBM in 1969 and AT&T in 1974 helped create the conditions for Microsoft and Apple to launch the personal computer revolution.
There are countless other examples highlighting the complex relationship between regulation and innovation, from net neutrality laws in the U.S. to environmental rules that incentivized the formation of new industries like carbon capture, to government regulation that contributed to a boom in domestic manufacturing (in the case of China’s electric vehicle sector).
// Conclusion: It's complicated
The short answer to the regulation-innovation debate is that it depends on multiple factors. Far from being some immutable law where more regulation always means less innovation, the relationship is nuanced.
And yet, perception can become reality—particularly when global superpowers perceive themselves to be in a race to develop a technology like artificial intelligence. Despite evidence that the relationship between regulation and innovation isn’t zero-sum, the geopolitical race to own and control the most advanced tech (and its supply chain) can lead to conclusions that any AI regulation can become a self-imposed handicap. The perception of an all-out AI race between nations could erode the political will to pass thoughtful AI regulations of any kind (currently there is no federal AI law in the U.S.). And for the AI companies themselves, there may be a temptation to cut corners around safety or the protection of intellectual property to stay one step ahead of the competition.
There are roadmaps and precedents for how regulation and innovation can coexist. Here are a few principles for smart, balanced policies.
- Market Certainty: Thoughtful regulations can create market certainty and reduce investment risk, making the private sector take on major capital expenditures like investing in R&D and building factories and data centers.
- Cross-Sector Spillover: Regulations in one area can stimulate demand for new products and services in another. Europe’s GDPR led to a burgeoning data privacy industry globally.
- Competition & Fairness: Antitrust regulations can level the playing field between startups and large incumbents, creating a robust market that Big Tech doesn’t dominate.
- Regulatory Flexibility: Implementing flexible regulations instead of overly prescriptive ones has been shown to better stimulate innovation.
It’s also helpful to move beyond “hard law” (enforceable regulations) and embrace “soft law”—the standards, principles, and guidelines that aren't legally binding but still shape outcomes.
One example is the OECD’s AI Principles, which have guided over 40 countries in adopting ethical frameworks for AI. Like many soft-law standards, they align governments and industries without courtroom enforcement, enabling collaboration, innovation, and accountability.
Similarly, open technical standards like WCAG, HTML5, and internet protocols such as HTTP and SMTP function as digital public infrastructure—creating interoperability, distributing power, and fostering innovation at scale..
A prime example of a roadmap for an economy that balances regulation and innovation is Project Liberty’s Blueprint for a Fair Data Economy. It comprises 17 priorities that align: 1) entrepreneurship and new business models, 2) next-generation digital infrastructure, 3) strategic capital allocation, and 4) policy innovations and frameworks.
// Finding the middle ground
It’s unclear how AI might be regulated by nations around the world, whether AI technologies will continue to develop at their breakneck pace, and what a world of AGI could look like. But if we move beyond the false dilemma of regulation vs. innovation, we can begin designing policies that balance progress and protection—building not just faster technologies, but a fairer internet for all.
.jpg?upscale=true&width=1160&upscale=true&name=newsletter_5_May2%20(1).jpg)
