The Impact of Policy Innovation

In 2006 I had a massive conference/research trip. I started with a stop in London to visit the Innovation Group at Imperial College, then I went to the DRUID Summer Conference in Copenhagen, the International Schumpeter Society Conference in Nice, and the Academy of International Business Conference in Beijing. One thing that was striking on that trip was the presence (and absence) of hybrid or electic transportation in each location.

In Nice, there were a bunch of hybrids (mostly Priuses), and also a huge number of low-emission vehicles like Smarts. The numbers in both categories were striking. And quite a contrast to the other three locations – where such vehicles were essentially non-existent. Lots of bicycles in Copenhagen and Beijing, lots of public transportation in all three, but not much in the way of hybrids.

That’s changed though. Last year I was back in France, and there were even more hybrids and Smarts than in 2006. And on my current trip, I’ve been astonished at how many hybrids are driving around London now – they appear to be more common here than they’ve been anywhere else I’ve been.

What’s changed?

The big change is the congestion charge in London. This was introduced shortly after my 2006 visit to reduce traffic to the central business district during the working day. It’s been successful in that. However, there are a number of vehicles that are exempt from the charge:

To be eligible to register for the alternative fuel vehicle discount, your vehicle must be powered by an alternative fuel, bio fuel or dual fuel and not solely by petrol or diesel. Electric vehicles must be powered entirely by stored electricity and defined as ‘Electric’ by the DVLA.

This policy innovation has clearly had a substantial impact on behaviour.

But what about the impact of policy on innovation? Every time there is a discussion of environmental regulation, the entrenched firms in affected industries always argue that this will restrict innovation. There is an overwhelming amount of research evidence that shows that this is not only untrue, but the opposite of what happens. Stricter environmental regulations consistently lead to higher levels of innovation.

The Denmark example is interesting here. What’s the biggest innovation in cars these days? Probably the Better Place electric car scheme. It is an enormously innovative business model – and one that has been enabled by policy changes in Israel and Denmark. Both countries have put in gigantic purchase-tax breaks on fully electric vehicles. This enables innovations like Better Place’s – but it not only helps them, it helps any firm developing electric vehicles. The tax policy change leads to innovation.

Then there’s China. I haven’t been back since that last trip, but Mark just went to the Expo in Shanghai. I asked him yesterday about electric vehicles there and he said that they are all over the place now. Apparently,

Shanghai is filled with electric scooters, like this:

Next week at the Expo there is a three day exhibition of electric vehicles developed in and for China. There are reportedly over 500 firms in China developing fully electric vehicles right now.

What’s driving this? A government initiative to have 500,000 ‘green’ vehicles (like the BYD6) on the road by the end of next year. Targets for the following years are even more ambitious. Soft targets like this are one form of policy innovation. There’s also speculation that at some point in the reasonably near future petrol-powered cars could be banned entirely in parts of China, like Beijing.

We’re about to see an explosion in alternate-fuel powered vehicle innovation in China. Well, actually, the innovation explosion is already taking place – it’s just that the evidence will become increasingly apparent to all of us.

Why does regulation drive innovation? Because innovation thrives on constraints. Constraints force us to be more creative – and environmental regulations create constraints.

This doesn’t mean that all government policies regulating business are necessarily good. But the knee-jerk argument that regulation inhibits innovation is simply false. Regulation creates a constraint, and constraints spur creativity – they actually encourage innovation.

This explains why when the electric cars start showing up wherever you are, there’s a pretty good chance they’ll be coming from China, not Detroit.

Student and teacher of innovation - University of Queensland Business School - links to academic papers, twitter, and so on can be found here.

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4 thoughts on “The Impact of Policy Innovation

  1. Interesting… although electric cars may be an innovative step in the wrong direction. While it reduces automotive fuel consumption, it is likely to lead to an increase in fossil fuel consumption for electricity generation, making it almost a zero-sum-game.

    Another issue to consider is China’s authoritarian regime, where it is easier to create the ‘circumstances’ to implement such policies.

    In my opinion, the innovation is in recognising that other (developed) countries are not taking sufficient action, and that there is a market for electric cars to be sold globally – Ford could probably tell a story about that.

  2. The point on electricity is an interesting one Alex. In Australia that’s certainly the case. On the other hand, Better Place is setting up their own electricity generation as part of their project, and it’s all sustainable – solar in Israel and Australia, wind in Denmark. China is more of a 50/50 proposition – they do at least have some hydroelectric…

    I agree with you about the value of demonstrating the market for alternate fuel vehicles – it’s a critical issue.

  3. I believe that even though China is becoming industrialized now, it would be so hard for them to patronized western products.

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