Can too much regulation affect innovation?
This is a timely subject for both cryptocurrency And Generative artificial intelligenceWith political decision-makers who find it difficult to establish railing around very popular innovation while continuing to stimulate development.
Technologists may be justified to consider regulations with caution: a new working paper Because the National Bureau of Economic Research shows that regulations can mitigate innovation. More specifically, companies hesitate to invest in their operations when hiring more employees increases regulatory monitoring.
The results of the results paper by John Van Reennea digital scholarship holder at MIT initiative on the digital economyand co-authors Philippe Aghion And Antonin Bergeaudwhich has created a model that can be used to assess the impact of market regulations, even in countries whose regulations differ from those of the United States.
In most countries, including the United States, regulations vary depending on the size of the company. If the number of heads of a company remains below a certain number, it is generally not subject to stricter regulations, said Van Reenne. In the United States, for example, if a company has at least 50 full-time employees, the company is considered large applicable employer and is subject to the provisions of shared responsibility for employers and the provisions of information report on employers.
In a recent conversation With the co -director of the IDE Andrew McAfee, Van Reenen explained that he and his colleagues have chosen France to test their model, since the country has some of the most difficult employment regulations in the world. According to data from the Organization for Economic Cooperation and Development, France and Belgium are ranked in terms of regulation.
“In France in particular, when companies reach a certain size – 50 employees – a variable tsunami of labor market regulations descend on them,” said Van Reenen in a presentation. More specifically, companies must:
- Create a works council with the representation of employees.
- Offer a union representation.
- Create a profit sharing program.
- Spend a minimum percentage of training income.
The authors wondered about the impact of the increase in the number of heads: did companies not want to develop when they knew that having more than 50 employees would mean more regulations?
They analyzed a set of data extending over 1994 to 2007 containing corporate tax files, in order to identify French companies and their related employment information. They then corresponded to the results with a global set of patent application data for this same period, which they used as an innovation indicator. Finally, they corresponded to patents to French companies using an automatic learning algorithm and measured market size using French customs data to characterize the export markets, student 182,348 companies distinct.
Regulations affects innovation
Van Reennen and his co-researchers discovered that two groups of companies were particularly affected.
- Companies close to the brand of 50 employees innovated less. “As you arrive at the 50 mark, there is this real slowdown” in patent innovation, and it is 50 years old, said Van Reen. “There is an innovation valley just before this 50 threshold, in accordance with the idea that companies innovate less because they are afraid of crossing the threshold. Companies of less than 50 employees react less to promising market opportunities because they know that they will have to pay an additional cost. »»
- Large companies are also affected. The innovation innovation decreases as companies grow because they know that each time they innovate, they are imposed on profits. (The authors were able to assimilate the regulations to the tax using their model. They concluded that the impact of the regulation is equivalent to a tax on the profit of approximately 2.5%, which reduces the overall innovation of approximately 5.4%.)
In addition, researchers have noted that market size affects innovation: companies innovate more as market size is increasing. The higher the market, the more companies are innovating to obtain profits from this market.
“As market size grows, companies are innovating more,” said Van Reenne. “They can distribute R&D costs over more units, so you see more innovations.” The authors do not immerse themselves deeply in the sectors, but noted that the export of the manufacturing sectors was more at high patent intensity than the others.


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How companies try to mitigate the regulations
Van Reennen said that if a company wanted to develop without facing increased regulatory monitoring, it could adopt more digital technologies instead of employing more workers.
A company could also ask employees to work longer hours instead of hiring more people to do work, or count on more qualified workers rather than unskilled workers, assuming they are also workers more smart.
In fact, Van Reennen said that research has shown that some companies are carrying out some of these changes as we approach the threshold of 50 people.
“There are a whole variety of things that people do to try to replace around the regulations that are happening,” he said. “The problem is that these things are not perfect substitutes. Digital is not a perfect substitute for work. You cannot work workers for an infinite number of hours. »»