Government Regulation And Innovation Commerce Essay


In the paper I will focus on the realism that governmental regulations do lead to an increase in innovations as corporate business need to meet a set standard. I will propose four main arguments from managements point of view, regulation is the mother of innovation, FDA Updated Oversight that Encourages Innovation, and an example from Brazilian petroleum. Innovation costs business capital to produce and without some assistance from governmental legislators, corporations would never consider making new innovative products that could possibly help the environment, while hurting their pocket books.

Does Government Regulation Encourage or Discourage Innovation

Government regulations play an important role in society and help influence innovations in companies. Regulations imposed by legislators in the United States believe that strong enforcement of protective rules help businesses leap to innovations and technological wonders far exceeding their time. The government can enact these rules of law to help protect the economy, workers, the environment, and other aspects of this capitalistic society. When regulations are enforced, businesses have either two choices. Their first choice is to acknowledge the importance of a new regulation and update their facility to match safety standards. On the other hand, they can risk the punishment in typically the form of a bunch of fines and pay the expenses of not upgrading. This could also include a reaction by the federal government in shutting down the company. There are rare cases in which companies actually promote active investing so that they are over prepared for possible regulatory requirements. However, this counter measure is a risk because you are draining capital into a possible future regulation before it has even occurred; this is just like purchasing insurance. The cold hard truth is that government regulations leads to innovations as business actively invest in new ideas to protect themselves against federal enforcement.

Motivating Management

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When we discus motivating management we need to remember that publically traded companies goals are to provide a successful year by eliminating excess costs and providing the largest return for their investors. This philosophy frequently leads to an inadequate investment in R & D (Research and Development), so to help promote a more active program the government can enact new legislative regulations to increase innovation. Regulations are specifically important when we talk about a green, healthier planet. Businesses are not motivated to decrease their carbon footprint as this usually leads to a more expensive cost in refinement of their products. The federal government, to combat these issues employed a concept known as general deterrence, an enforcement of strong legal punishments for serious violators. Corporations are like "amoral calculators that take costly measures to meet public policy goals only when (1) specifically required to do so by law, and (2) they believe that legal noncompliance is likely to be detected and harshly penalized." (Gunningham, Thornton, & Kagan, 2005) An example, the U.S. adopted regulations on renewable energy. This regulation approved, cars are required to run on more bio fuels by year 2020. Engineers are now hard work to develop new innovate engine designs to meet these requirements. The backlash for not meeting the federal standard is that those companies will not be able to sell their cars in the US. This forces car manufactures to change, innovating new ideas to meet the new set standards.

Innovation in companies comes at a price and a fine placed on a company is definitely a motivating factor. Companies hire teams of legal reviewers to come and audit their company to ensure that they are meeting all of the legal requirements set forth by the federal government. Why would a company go through so much money and work? When your investors walk into a board meeting and announce, "If we get a fine your raise is gone- there's a direct relationship. It's a good way to make it hit home." (Gunningham, Thornton, & Kagan, 2005) Therefore, the pressure of ensuring compliance in regulatory requirements has a direct effect on individuals in the corporation. Top executives will continue innovations to ensure that they receive their bonuses and without government pressure employing regulations, these innovations would not be going through testing. The innovations that I am discussing are ones that companies would not implement on their own because they do not have any effect on the product. Instead, these innovations would be for new clean air policies in the production process.

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EPA Requirements

The EPA has played a huge role in innovations and their main tactic is through intimidation of regulation requirements and the enforcement of heavy fines. An electroplating facility shares their experience with the EPA and remarks that whatever the inspectors required we implemented:

They [EPA] came in and said we want this, this and this done. In addition, they wanted to see the improvements.

They [the regulators] are making platers do things more ethical. Everything used to go down the drain… They made us put in a treatment system. Now we are careful not to have chemicals lying around. We are careful about drip and run off from tanks, and we make sure there is no spillage. We have improved because we are annually inspected. (Gunningham, Thornton, & Kagan, 2005)

As the company stated, the changes that have occurred are improving the environment and enforced through management's concern with meeting government regulation. They are constantly innovating and improving their system to meet new regulations coming in the future or those already here. As stated early management is constantly trying to improve their factories to stay within standards, or their pay/ bonuses will be affected by enforced fines for non-compliance with the law.

Regulation as the Mother of Innovation

What we learn is that regulations support more in the form of economic incentives in which the company can see a true benefit in their financial statements rather than a command and control regulation. As the article explains:

The dominant viewpoint on regulation and innovation is arguably that of supporters of "economic incentives" such as emissions trading and taxes, who claim that such instruments induce innovation to a greater extent, and more continuously, than "command-and-control" regulation. Supporters of economic incentives link the allocated efficiency of this type of instrument to the flexibility the instrument allows firms in making compliance technology choices; the assumption is that command-and-control regulation is less flexible and therefore provides less incentive for innovation. (Taylor, Rubin, & Hounshell, 2005)

CAC & Market Oriented Regulations:

A command-and-control regulation is direct regulation on an industry or activity by legislation. They determine permitted and illegal activities in industry. Although CAC regulations are not always preferred, they are still required and used heavily in certain cases. This type of regulation is important where the risks from noncompliance are high, as in the regulation of a clean water treatment center. CAC regulations would be possibly the only viable option to ensure a constant upgrade in new safe innovations.

A market-oriented regulation is shown to be a cheaper and a less expensive way to regulate the market than a command and control regulation. This regulation provides greater flexibility and encourages innovation. This allows the market to decentralize, placing change in the hands of the private market based on demand, instead of the government who moves at a flat rate. Ultimately, the government still places a time limit on the completion of the regulations for the private sector to follow. This is a reward able goal for companies to strive for and can lead to government contracts in the future.

FDA Updated Oversight, Encourages Innovation

In the View from Washington, they focused in on a new FDA mandate that has made some regulatory changes in the way clinical trials are held. The Food and Drug Administration and other governmental agencies are having an extremely difficult time funding and mandating their biomedical research department. These studies deal with complex therapies, medical devices, and a slew of other products that require human test subjects. This new regulation needs to meet the demands of the numerous gigabytes of data that are flowing into their system for analysis. Therefore, the FDA is launching an initiative to update their human subject protection and bioresearch-monitoring program.

FDA's efforts to update clinical trial oversight and policies for which its broader campaign to spur the development of more innovative treatments under its Critical Path Initiative. To this end, the center for Drug and Evaluation and Research established a new office of translational Sciences last May to coordinate CPI activities and other crosscutting science initiatives. Last March, there was an outline of 76 projects that could speed the pace of turning biomedical discovers into new therapies. Since then, FDA has announced several new consortia for developing predicative biomarkers plus efforts to develop new statistical approaches and designs for trials. (View From Washington, 2006)

This regulation was required with a changing enterprise and required clearer policies and more effective regulatory tactics. With these new approaches and regulation for a more sophisticated way of monitoring their systems, they have created numerous new projects that are leading the way in untapped therapeutic benefits. This discovery now reached because of the regulatory requirement to update their policies protecting their patient's needs.

Environmental regulation and innovation in high pollution industries

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This article demonstrates the usefulness of environmental regulations and promotes environmental technology and learning. Innovations decrease pollutants and have provide a special awareness to the country of Brazil and other nations. With drying oil markets and a push for innovation, these regulations were required necessities. Past regulations have truly changed the oil industry; those include the "Clean Water Act, Clean Air Act, Oil pollution Act, Resource Conservation and Recovery Act, Safe Drinking Water Act, Comprehensive Environmental Response, Compensation and Liability Act and Toxic Substances Control Act." (De Azevedo A, 2010) These acts have all made tremendous improvements in living conditions for nations that have adopted them. There are two techniques that refining regulations aim to enhance. "The first goal is to reduce the local environmental impacts of refineries, minimizing solid, liquid, and gaseous wastes, as well as saving water and energy. The second goal is to produce less-polluting fuels, in order to reduce the pollution caused by vehicles exhaust gases." (De Azevedo A, 2010)

In Brazil, a petroleum company established its main goal of driving out their competition by investing their resources into purchasing fuel rights all over the country. They now hold 98% of the countries fuel reserves and are dedicated to updating their machinery and plant safety equipment. Typically, when companies compete in a fair market they are able to keep one another in check with environmental impacts because they will release negative publicity to the public if their competitor are over polluting. However, when you dominate an industry and hold 98% of the market you have an overriding presence that only the government can suppress. Replan the largest of all the plants and the one who pollutes the most is responsible for "93% of carbon monoxide emission, 96% of hydrocarbon emission, 52% of nitrogen oxide emission, 78% of sulfur dioxide emission and 28% of particulate material emissions." (De Azevedo A, 2010) Replan also leads the country in consumption of natural resources by inhaling a staggering "1870m3 of water per hour, which is equivalent to 42,000 inhabitant's consumption of water according to the refinery staff." (De Azevedo A, 2010) With such a large environmental impact, implementation of a policy need to occur to mitigate the negative effects that this dominant company is placing on the citizens of Brazil.

In Brazil, environmental regulations are public policies and are determined through command-and-control instruments, forcing companies to comply with a preset standard. Despite general requirements in air and water pollutants there are most importantly permits that are the major factor in determining whether your able to operate or not. With strict regulations and policy codes, if one permit is not approved the whole plant can be shut down until all of the issues have been dealt with. Replan has been out of date since 1999. There were a number of investments that came pouring into Replan to ensure that the new regulations where met and that the plant was up to standards. With $22 million US dollars invested these investments dealt with the local environmental problems of pollution that the company was promoting. New regulations increased innovations and helped Replan meet new public policies of Brazil.

Twenty-one technical solutions aiming to reduce local impacts have been identified. Twelve of these technologies were adopted to save water resources, corresponding to 38% of the total investments. Five technologies were adopted to reduce air pollution, representing 40% of the total invested capital. Four technologies aimed to reduce soil contamination, representing 22% of total investment. Petrobras has developed twelve of these technologies (22% of the total invested). (De Azevedo A, 2010)

Without the tightening regulations, these vast improvements and innovations would have never taken place because of the large capital expenditures that endured. However, the environmental impact before was substantial and now has improved the overall wellbeing of Brazil. With governmental regulation, not only have they improved the production of the factory, but also the innovations and technological leaps as explained by the author:

From the data presented here, we are able to conclude that environmental regulation can be used as an instrument of science and technology policy, directing companies' technological efforts towards the adoption of techniques, which reduce the environmental impacts of the production activities, especially in the case of high-pollution industries. (De Azevedo A, 2010)

Gathered by the evidence from my research, I can conclude that some governmental regulations can lead to the innovation of new products, furthering the expansion of a business's overall performance. Regulations can come in many different forms from command-and-control, to market oriented regulations. Market oriented regulations are where the private sector has a time limit to find the cheapest solution to the adoption of a regulation. As both cases have their time to shine, I think it is easy to conclude that government regulations help innovate products. Furthermore, without government regulations, companies would not invest in cleaner, safer, environmental friendly alternatives as expenses rise and profit gains hinder. Certain regulations can help promote new innovative ideas that help solve key problems in society.