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How can public policies better support innovation across the country? In recent years, agencies like the Commerce Department and National Science Foundation have stepped up their engagement with regional ecosystems across the United States to foster innovation and production of critical emerging technologies, such as semiconductors and biomanufacturing. The CHIPS Act, notably, has been a key driver, spurring an unprecedented push to stimulate chip manufacturing and research in numerous U.S. regions. The resulting activities, however, have also brought about a host of regulatory challenges surrounding issues related to power transmission infrastructure, clean energy permitting, water, and workforce requirements.
Often, these discussions are framed as a binary choice: regulation versus deregulation. Many assert that regulation stifles innovation and growth, while deregulation fosters the opposite. While there is no shortage of regulations that need reform, the regulation/deregulation dichotomy often oversimplifies the issue and can be misleading. A more constructive framing for balancing good governance and good business shifts the focus from “regulation versus deregulation” to “risk versus uncertainty.”
While it’s true that industry stakeholders generally push for deregulation to minimize compliance costs, there's a more nuanced reality at play. In the long run, it's the predictability and usefulness of rules, not their mere presence or absence, that drives successful investment and innovation. Businesses and investors often express frustration over arbitrary or unexpected regulatory changes—the sense of "being denied at the finish line" after substantial investments in research, development, and planning. This experience is common in areas such as licensing, permitting, intellectual property regimes, and export regulations, as well as their waivers and exceptions.
What firms seek, then, is not necessarily a complete absence of regulation but stability and predictability: firms are willing to live with a reasonable tradeoff between extra costs imposed by regulation in return for certainty in regulation that they can then plan and invest around. In other words, rules for innovation can be valuable—as long as those rules don’t keep changing mid-game.
From Regulation/Deregulation to Risk/Uncertainty
The economist Frank Knight, in his seminal 1921 work Risk, Uncertainty, and Profit, helpfully distinguished between risk and uncertainty: “Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk... the crucial difference lies in whether the outcome can be calculated and planned for, or whether it is inherently unpredictable.”
In other words, risk refers to situations where possible outcomes can be identified and probabilities assigned—think of financial investments, where markets allow for hedging or diversification. Uncertainty, on the other hand, refers to situations where possible outcomes are known, but probabilities are not—such as when political instability confuses policy trajectories or when future technological capabilities are unknown. (In some cases of emergent technological innovation, we may even move into a kind of uncertainty where possible outcomes, not to mention probabilities, cannot be identified.)
Knight’s insight is critical for understanding innovation policy: risk can be planned for; uncertainty cannot. Entrepreneurs, investors, and inventors can forecast, manage, insure against, and mitigate risk. But when uncertainty reigns, it becomes far harder for innovators to chart a path forward. When it comes to regulatory reform, then, a pro-innovation goal is not necessarily deregulation but minimizing regulatory uncertainty.
Reframing Regulation for Innovation
Undoubtedly, there are many opportunities where rethinking regulation can be helpful. There are often confusing and sometimes contradictory directives from federal, state, and local levels, as well as across federal agencies, worthy of reform. Contradictory or onerously overlapping standards for the same process or product can add unnecessary transaction costs, reducing both investment and income. And by no means is predictable bad regulation worth preserving solely for its predictability.
Instead, this distinction between risk and uncertainty can guide us towards a more nuanced approach to regulatory reform. Rather than focus solely on whether regulations should exist, we should consider how well-designed regulations can include stability and clarity for innovation. Many lessons can be learned, for example, from how DARPA leverages the Intergovernmental Personnel Act or how the Building Chips in America Act exempts certain projects from undergoing National Environmental Policy Act reviews to speed up federally funded fab construction.
In fact, regulation can serve as a demand signal that channels efforts towards high-priority innovation areas while also protecting firms’ ability to innovate. For example, clear guidance on chemical usage or energy efficiency performance standards can help coordinate efforts across industries such as semiconductor manufacturing, where companies must balance innovation with substantial long-term investments. Similarly, cybersecurity standards can ensure robust safeguards across competitors, while regulatory frameworks in biotechnology can help novel startups thrive despite unpredictability in funding from large pharmaceutical companies.
Furthermore, this risk/uncertainty distinction highlights how good industrial policy can help not only reduce risks for investors but also establish stable and conducive market foundations to foster innovation, ensure fair practices, and address societal goals like sustainability and workforce needs. It's a more comprehensive and nuanced approach to policymaking.
Ultimately, many debates over regulation versus deregulation miss a key point: Innovation frequently thrives not necessarily in the absence of regulation but in the presence of clear and predictable regulatory frameworks. As we work to revitalize regional economic development, we need a more sophisticated approach to regulation—one that strikes the balance between providing stability and incentivizing cooperation, while avoiding rigidity that stifles creativity and risk-taking—to serve the public interest.
Julie Heng is a research associate of Renewing American Innovation at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
