Jan 7, 2019

Innovation Arbitrage and Export Controls

Adam Thierer Senior Research Fellow

Policy incentives matter and have a profound affect on the innovative capacity of a nation. If policymakers erect more obstacles to innovation, it will encourage entrepreneurs to look elsewhere when considering the most hospitable place to undertake their innovative activities. This is “global innovation arbitrage,” a topic we’ve discussed many times here in the past. I’ve defined it as, “the idea that innovators can, and will with increasingly regularity, move to those jurisdictions that provide a legal and regulatory environment more hospitable to entrepreneurial activity.” We see innovation arbitrage happening in high-tech fields as far-ranging as dronesdriverless cars, and genetics,among others.

US policymakers might want to consider this danger before the nation loses its competitive advantage in various high-tech fields. Today’s most pressing example arrives in the form of potentially burdensome new export control regulations. In late 2018, the US Department of Commerce’s Bureau of Industry and Security announced a “Review of Controls for Certain Emerging Technologies,” which launched an inquiry about whether to greatly expand the list of technologies that would be subjected to America’s complex export control regulations. Most of the long list of technologies under consideration (such as artificial intelligence, robotics, 3D printing, and advanced computing technologies) were “dual-use” in nature, meaning that they have many peaceful applications.

Nonetheless, the Trump Administration is plowing forward with the inquiry following the passage last summer of the Export Control Reform Act of 2018, which required that the President formulate an interagency process to coordinate export control rules with the goal of creating, “a regular and robust process to identify the emerging and other types of critical technologies of concern, as defined in United States foreign direct investment laws, and regulate their release to foreign persons as warranted regardless of the nature of the underlying transaction.” As part of this process, the Commerce Department is to create a list “of foreign persons and end-uses that are determined to be a threat to the national security and foreign policy of the United States . . .  and to whom exports, reexports, and transfers of items are controlled.”

As Jennifer Skees and I wrote at the time, if restrictive export controls were imposed on a broad class of dual-use emerging technologies, it would likely undermine US innovation and competitiveness. More people are waking up to that reality, as well as the specter of global innovation arbitrage kicking in if such heavy-haded regulations are imposed.

Commenting on the impact that these new export controls might have, Cade Metz of the New York Times suggested this week that “[o]verly restrictive rules that prevent foreign nationals from working on certain technologies in the United States could also push researchers and companies into other countries.” Metz also quoted international trade lawyer Jason Waite of the firm Alston & Bird who said of the rules, “It might be easier for people to just do this stuff in Europe,” if controls were imposed by the US.

That, in a nutshell, is how global innovation arbitrage works in practice. Anti-innovation policies create incentives for entrepreneurs to behave more “evasively” and shop around for better places to engage in creative endevours. You can be certain that innovators and especially investors are watching these developments closely. When policymakers are debating the imposition of burdensome new rules, it sends a clear signal to markets about where to put their money. As venture capitalist Marc Andreessen explained back in 2014:

"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."

Investors like Andreessen will place their bets on technologies and innovators which have the best hope in thriving in such an open environment, wherever that may be on the planet. Let’s hope that continues to be the US. If burdensome exports control regulations are imposed on America’s best and brightest entrepreneurs, that will not likely be the case.
 

Photo credit: Chip Somodevilla/Getty Images

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