Have Drone Will Travel: Slow-Moving Regulators Force Innovation Overseas

from the letting-innovation-fly-away dept

Drones are leaving the U.S. for greener pastures, according to several media outlets (e.g., WSJ and Bloomberg). In response to slow-moving U.S. domestic policy on commercial drone use, innovators are moving abroad, to jurisdictions where regulations have been updated to delineate when drones may be used in the commercial context. (Keep in mind, we are not talking about fixed wing Predator drones with Hellfire missiles, but aircraft that are already available commercially with much of the same technology already incorporated into our mobile phones.) Besides smaller companies actually moving abroad to places where they can sell their wares, even the likes of Google and Amazon have moved their drone testing to Australia and India, respectively.

Making matters worse, export control policies are poorly targeted, and prevent some drones made with widely available technology built in the United States from being sold overseas. In fact, according to the Wall Street Journal, 3D Robotics — a San Diego-based company that specializes in drones with video capability — was only allowed to resume selling some of its products in a number of countries because the drones were manufactured in Mexico:

Export rules prompted 3D Robotics to temporarily halt shipments to 44 countries this spring. It has since secured a new classification from the U.S. Commerce Department, in part because it manufactures its drones in Mexico, allowing it to resume foreign sales.

And for those inclined to view this as a minor development in a niche market, at least one study predicts that allowing commercial drone use in the United States could create 100,000 new jobs and $82 billion in economic impact over the course of the next decade.

A lot of smart people have already said a lot of smart things about the drone situation, so I won't delve too deeply into the nuances of streamlining commercial drone policy making. Clearly, there are good reasons why commercial drones can't take to the sky without some rules, but it is imperative that regulators move efficiently to establish a framework where, for example, a real estate agent or a surveyor can survey a property with a drone (in the same way it is currently legal for a non-commercial user to fly an off-the-shelf drone in her backyard). That is not happening now. According to the Department of Transportation's own Inspector General, the FAA is likely to miss its Congressionally mandated deadline in coming up with rules that allow for the expansion of commercial drone use.

There's a general point here worth expanding on: even if a country does everything right, creating a fertile environment for research, investment, and innovation (aka the hard stuff), innovation will nevertheless move overseas if outdated regulations impede the lawful sale or use of a product or service. It does not matter if the United States has the brightest minds, best expertise and easiest access to venture capital; if you can't sell, test or export drones here, then we will see those jobs and that talent go overseas to more fertile ground. In fact, this is already happening. And even if the FAA eventually comes up with a workable set of regulations that allow commercial drone activity, in fast moving industries — where first mover advantage is enormous — bureaucratic delays can be terminal.

Take Japan in the 1990s. Japan was a high-tech giant. In the early 1990s, both the U.S. and Japan had companies interested in innovating in online search engines. However, Japan's highly restrictive set of copyright laws meant that in order to index a website you had to get the website owner's permission first. When there are a couple hundred or a couple thousand websites, this is feasible. But clearly, this does not scale. Fortunately for U.S. innovators, the U.S. had copyright "fair use" enshrined into law, which allowed transformative uses of copyrighted content. This paved the way for U.S. search engine entrepreneurs, while the Japanese search sector never got off the ground. Even though Japan eventually updated its copyright law to make search engines legal (in 2007!), it was too late. As of today, U.S. search providers (Yahoo Japan and Google) have well over 90% of the Japanese search market.

The "crypto wars" of the 1990s are also a place to look for a parallel to the drone fight. Until 1992, the U.S. government imposed very strict export controls on cryptography. Although the export of strong encryption technology was viewed by many in the law enforcement and national security communities as detrimental to their missions, the rise of electronic commerce greatly increased the need for robust encryption in commercial products and Internet services. What followed was a long drawn out battle in which encryption proponents focused on several key arguments, including the logistical problems with trying to prevent the export of programming concepts, the widespread availability of cryptography internationally and free speech concerns. Another angle, which tied in with the ease of moving cryptographical research overseas, was that innovation in the U.S. would be harmed as much software engineering would be forced to move overseas in order to get around the onerous U.S. restrictions — restrictions that would have little actual effect on the worldwide availability of cryptography. Jon Peha, a professor at Carnegie Mellon who would later go on to be the Assistant Director of the White House's Office of Science and Technology policy, outlined some of the competitiveness concerns in a paper he wrote on encryption policy in 1998:

Industry critics argued that the restrictions accomplished little, since 128 bit encryption without key escrow is already readily available outside the US. An April 1998 report from the Economic Strategy Institute concluded that the policies imposed at that time (i.e. the 1996 interim policy) would cost the US economy between 35 and 96 billion dollars between 1998 and 2002. Some US companies have overcome these limitations by purchasing foreign products or shifting development activities overseas. For example, in March 1998, Network Associates announced that it would begin contracting all encryption development to a Swiss company.

By 2000, U.S. restrictions were sufficiently relaxed and the sale of software with encryption technology in it was made significantly easier. However, in certain situations export controls still apply, and the process for complying with them is still relatively byzantine. (And, with the recent NSA scandal and the fallout, we might be heading towards the Crypto Wars II.) To this day, there is still significant discussion on how the remaining export controls affect national competitiveness. (See European Commission Document on Export Controls, page 7.)

Churning out smart engineers and cultivating venture capital is not enough to succeed in a competitive globalized world. Policy bandwidth needs to be devoted to clearing unnecessary hurdles to commercializing and exporting the fruits of that innovation. Although Europe's "innovation policy" is lagging the U.S., countries like Germany are ascending to the lead in drone innovation because people can actually use drones commercially and export them to other countries. If a company cannot achieve the sales base necessary to scale their business, then they cannot continue to innovate.

Going forward, we should not just think of the other domestic policy fights in a vacuum. Take Tesla, for example. They are succeeding in producing commercially attractive electric vehicles where so many other companies have failed: a public policy and economic triumph that has been nearly universally lauded. Yet, they face sales bans or restrictions in over half of the states in the U.S based on a set of outdated and widely criticized auto dealer regulations. As the company continues to scale, and as foreign markets grow and more consumers worldwide fall into the crosshairs of Tesla's salespeople, an unnecessarily restrained domestic market will only force the company to locate more infrastructure and talent overseas than they otherwise would in the first place.

In the Tesla and drone cases, we got the hard stuff right. The United States fostered an innovative and dynamic economy that unleashed a wave on entrepreneurship and innovation. Now, much like the situation in immigration policy where we are pushing some of our best and brightest minds overseas, slow moving regulators and policymakers are forcing some of our nation's most dynamic companies overseas as well.

Reposted from the Disruptive Competition Project

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Filed Under: competition, drones, innovation, regulations