To outpace China, US should put money into high-tech and medical innovation
Motivated by China’s rise as a high-tech leader, policymakers have recently shown renewed interest in a national strategy to strengthen US technological superiority and spur innovation. Accordingly, a bipartisan effort was passed in the Senate to increase public investment in research and development, with particular interest in advanced pharmaceutical, medical device and semiconductor manufacturing.
However, this plan fails to recognize that more innovation first requires real structural changes in the environment for America’s emerging technology companies. It’s no secret that regulations affect business. But my new research shows how technology startups are hindered by particularly strong regulation in the high-tech and medical industries.
In a study recently published by the Fraser Institute, Paola Suarez and I examined around 15,000 tech startups headquartered in the United States between 2012 and 2019. We have found that US industries with more stringent regulations are associated with higher failure rates of technology startups.
We’re also finding that more regulated industries have fewer new tech startups. In particular, a 1 percent increase in the regulatory burden in an industry is associated with a decrease in the birth rates of technology startups by around 2 percentage points.
Take, for example, that the scope of regulations for the chemical industry – which also includes pharmaceuticals and pharmaceuticals – increased by almost 100 percent from 2000 to 2017, as measured by the RegData of the Mercatus Center. Data processing and hosting, on the other hand, saw an increase of 37 percent over the same period. Our study could help explain why more technology startups are working with social media, clouding or web hosting services and less with pharmaceutical or medical technologies.
The connection between regulation and technology startups is also reflected in another study. As part of a John Templeton Foundation grant, my research team interviewed and surveyed more than 500 representatives from US technology startups. The results of our online survey suggest that around 70 percent of respondents believe they work in a heavily or moderately regulated industry, and around 77 percent of them in medical technology or biotechnology.
In fact, field research interviews with medical technology companies have revealed the barriers to entry they face. They also showed how the amount and complexity of regulation leads to high compliance and operating costs – forcing many to change their ideas or innovation margins, or to move into a different industry with less regulation.
Not only medical technology companies are struggling. Other highly regulated technology industries are clean air, airspace, and financial services. Our study recounts how the co-founder and former CEO of an airspace services startup in California said, “I wouldn’t [run a startup] again in a highly regulated industry. ”Due to regulatory difficulties, the respondent was forced to close the company. Several other executives directly stated that industry regulations hamper their ability to innovate and do business further.
In contrast, representatives of many software startups openly discussed how relatively easy it was for them in terms of regulation. A founder and CEO of a business-to-business software startup in Boston said, “No aspect of our software is regulated. . . We don’t really have a lot of regulatory concerns. “
Our survey also asked executives at technology companies which government regulation had the greatest impact on their business. About 70 percent said federal regulations are most important.
Both studies show how a high level of regulation discourages innovative activities – even in areas and industries in which politicians want more growth. If the federal legislature and the Biden administration want to promote major technological developments, particularly in the pharmaceutical and medical industries, the answer is not complicated. You should aim to tighten or remove regulatory barriers.
To foster innovation, the US must first create a better environment in which innovators can grow and thrive.
Liya Palagashvili is Senior Research Fellow at the Mercatus Center at George Mason University, author of a new research paper on “Exploring How Regulations Shape Technology Startups” and co-author (with Paola Suarez) of “Technology Start-ups and Industry-Specific Regulations”. ”
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