It is well understood that regulatory schemes have an influence on the rate of new innovations in an industry. [1] What is unknown is to what extent regulatory schemes influence the rate of new venture creation by industry actors. In order to study this question, it is necessary to define the nature of the diffusion of new innovations and to consider the reaction of market participants in their acceptance of new innovations in the face of regulatory schemes and extrapolate from this reaction how they will react to the same regulatory schemes with regard to forming new ventures.
Diffusion of Innovation defined:
Diffusion of new innovations can be tracked by plotting a graph of an innovation’s rate of adoption by the marketplace; this graph produces an S-shaped curve whereby a more gradual slope suggests a slower rate of adoption and a more inclined slope suggests a faster rate of adoption. [2] Within the marketplace, there are five categories of adopters:
1) Innovators – who are daring, can absorb possible losses, understand complex, technical knowledge, and can cope with high degrees of uncertainty
2) Early Adopters – who are part of a local social system, have great degree of opinion leadership, serve as role model’s for society, are respected by peers, and are successful
3) Early Majority – who interact frequently with peers, seldom hold positions of opinion leadership, are 1/3 of society, and deliberate before adopting a new idea
4) Late Majority – who are 1/3 of society, are skeptical, cautious, and adopt out of peer pressure and economic necessity
5) Laggards – who possess no opinion leadership, are isolated, have their point of reference in the past, are suspicious of innovations, have a long decision-making process and have limited resources [3]
Regulatory Effects:
Government regulations can have both positive and negative effects on the innovation process in our free market. [4] On the positive end, regulation can spawn new industries such as the “environment industry”, focus industry research efforts, generate openness or competition, and ensure a level playing field for market participants. [5] On the negative end, regulation can erect barriers to new innovations, distort research choices, and increase the cost and uncertainty of development. [6] What follows from this is that if regulation has certain effects on industries and corporations regarding innovation, then it should have similar effects on individuals regarding their choice to innovate or not and to form new ventures or not.
Effects on Innovators:
When AT&T had monopoly power due to governmental regulatory schemes, innovation was stifled and innovators looked for profitable projects in other areas. [7] Of all the classes of adopters, innovators have the most freedom because of their technical understanding, high risk tolerance, and low financial constraints; due to this, innovators are less likely to be affected by regulation because they can focus their energies on unregulated industries. Thus, the rate of innovation and new venture creation should remain constant with regard to innovators.
Effect on Early Adopters:
When regulatory schemes affect early adopters ability to consume new innovations, this group often turns to Internet piracy. [8] Rather than be frustrated by regulation, this group turns to online civil disobedience. [9] What this suggests is that this group’s rate of innovation and new venture creation is likely to have a positive relationship to the level of regulation. Early adopters, without the freedom of innovators, will innovate to generate new opportunities that skirt around or overcome the cost of regulatory schemes.
Effect on the Early Majority:
Early majority members accept new ideas slower than innovators and early adopters and are seldom leaders in the area of new innovations. [10] It follow then that regulation will have a negative relationship with innovation and new venture creation among early majority members because their attributes (low risk tolerance, follower mentality) suggest increases in uncertainty and cost will place higher barriers to entry on this class than innovators or early adopters.
Effect on the Late Majority:
Late majority members accept new ideas even slower than the early majority but tend to adopt ideas due to peer pressure and economic necessity. [11] This suggests a negative relationship between regulation and innovation and new venture creation among the late majority. However, since this group adopts due to economic necessity and adopts only when a new idea is the norm, this may suggest a higher rate of new venture creation in lower-risk industries such as franchising.
Effect on Laggards:
Laggards have limited resources to expend on new ideas and generally have a viewpoint existing in the past. [12] This suggests a neutral relationship between regulation and innovation and new venture creation because innovation is likely to be nearly non-extant in this group. However, it may be inferred that this group – having the strongest ties to the old technology – may be pushed to improve pre-existing technologies and business methods in the face of innovation-limiting regulations.
Synthesis:
Though government regulation can produce positive or negative results in an industry or market in the aggregate, the effect is dissimilar with regard to individual market participants with regard to where they are on the S-Curve for a technology’s rate of adoption and this placement affects the rate of new venture creation accordingly. [13]
End Notes:
[1] Ben S. Bernanke, Chairman, Fed. Reserve Sys., Address at the Federal Reserve Bank of Atlanta’s 2007 Financial Markets Conference, Sea Island, Georgia (May 15, 2007), available at http://www.federalreserve.gov/newsevents/speech/Bernanke20070515a.htm.
[2] Dr. John D. Leckenby, Diffusion of Innovation Theory, Ctr. For Interactive Adver., October 28th, 1998, available at http://www.ciadvertising.org/studies/student/98_fall/theory/hornor/paper1.html.
[3] Id.
[4] Regulatory Reform and Innovation, Org. for Econ. Co-Operation and Dev., January 1st, 1996, available at www.oecd.org/dataoecd/23/61/2102514.pdf.
[5] Id.
[6] Id.
[7] Lawrence Lessig, Innovation, Regulation, and the Internet, The American Prospect, November 30, 2002, http://www.prospect.org/cs/articles?article=innovation_regulation_and_the_internet.
[8] Early Adopters: In Pirates We Trust, Firing Squad Matrix, February 2007, http://firingsquad.com/matrix/blog.asp/61888/79/Early_Adopters:_In_Pirates_We_Trust.
[9] Id.
[10] Robert Paterson, The Dummies Guide to Change, Diffusion, and the Tipping Point, Robert Paterson’s Weblog, July 10th, 2004, http://smartpei.typepad.com/robert_patersons_weblog/2004/07/the_dummies_gui.html.
[11] Id.
[12] Id.
[13] Leckenby supra note 1.