The Catch 22 of the Technology Industry in a Nationalistic Age

President Trump announces the United States will impose tariffs on steel and aluminum. He concurrently pushes an agenda of deregulation and uses the State of the Union to highlight an entrepreneurial and innovative America. French Finance Minister Bruno Le Maire announces the European Union’s plans to tax large global technology companies. At the same time, France works to become a “scale up nation” and make domestic technology companies world wide leaders. From the Americas to the Middle East to Asia and everywhere in between, countries vie for the best and the brightest to develop the next breakthrough in artificial intelligence. In parallel discussions, the leaders of these same countries express concerns about the potential threat automation could pose to domestic jobs and look to lock down immigration across their borders.

Welcome to the bipolar world of the Fourth Industrial Revolution where we all have a ringside seat to the unfolding battle over the impact that technology, and its associated policies, will have on how we live, work and relate to each other.

There is an almost universal acknowledgement that a strong innovation sector is a key factor to securing a dominant position in the global economy. At the same time, countries struggle to understand how the digital revolution impacts their populations, consumers and workforce alike. As they navigate these questions, politicians increasingly espouse and receive popular support for paternalistic policies designed to foster local innovation and protect domestic interests. The punchline talking point for these policies tend to be, “big is bad but growth is good.” While seated in admirable intentions, the ironic consequence is a growing morass of regulations and policies that only the largest of companies or focused of academics can understand or navigate. This can, and does, impact the ability of the innovation economy to grow beyond national borders, limiting product availability and the jobs growth supporting it.

A clear pattern is emerging amongst established economies of using protectionist policies to propel domestic technology growth. This is occurring at the very time that growth, security, and, yes, innovation in the industry depends on policies that take into account the global perspective. This is not to say that the industry should grow legally unencumbered. But its global acceleration reflects an urgent and compelling need to replace currently reactive views with proactive and holistic mindsets worldwide. Put simply, it is imperative that our leaders understand how and when regional regulation could impede international innovation.

The internet itself, the cornerstone innovation around which much of the technology industry has grown, was born out of international cooperation. The industry flourished in environments where risk was valued and resources, both talent and funding, were plentiful. It expanded in a world where few borders existed. Growth was limited by internal infrastructure rather than societal values or national boundaries.

There is no doubt that this is what has allowed the American technology industry to gain the position it now holds in the world. It did not grow because the US government set a design to be the world’s leader in the space. Rather, it grew because governments, both in the US or abroad, didn’t stand in its way. Silicon Valley became “Silicon Valley” because of the wealth of talent it had in its backyard, admittedly a backyard that stretched from sea to shining sea or Stanford University to Harvard University to be more specific, and a regulatory environment that provided for flexibility in risk financing. There were significant failures along the way, most notably the “dot-com” bubble of the late 90s and early 2000s, but the successes have become the model that many startups today seek to emulate.

Interestingly, the Chinese technology industry grew as a result of similar factors, though arguably for different reasons. The presence of ambitious and highly educated talent, many of whom returned home after being educated in the United States, and the (relative) relaxation of rules around foreign domestic investment created an environment out of which a generation of internationally competitive technology companies have emerged. Though perhaps less well known than their American counterparts, neither their founders or China have made a secret of their intent to be the world’s economic and technology leader. With an expanding network of investments in markets around the world, first and third alike, and the government-backed “Made in China 2025” initiative, their plan is aggressive and well under way.

Relatively recently, though, the global success of the technology industry, or, more specifically, of individual companies operating within it, now provides the rationale for arguably protectionist and internationally focused measures. Discussions around the ownership and distribution of data, data flow, privacy, and nature of investment serve as thin veils to competitive concerns with existing and potential trade partners. The net effect of these concerns is to increase the legal and other costs of expansion, often to the detriment of the very citizens and goals that drove their creation.

One need look no further than the European Union’s General Data Protection Regulation (GDPR), taking effect on May 25th of this year, and proposed investment-screening laws to see these discussions unfold in real time. While passed as an initiative to ensure that any company doing business within the EU abides by a consistent level and quality of data protection, political leaders throughout the GDPR implementation process underpin the importance of the law to provide small and growing European companies a competitive advantage over their larger American counterparts. At the same time, draft legislation introduced by the European Commission in direct response to the increased Chinese investment in the Continent could limit foreign direct investments that might threaten “critical infrastructure” or “critical technologies.”

While proposals such as these might provide a short term benefit to a growing European technology industry, many expect they will likely only further entrench existing market powers in the long term. Investment analysts already forecast that, though initially burdensome, large companies will be able to navigate the GDPR’s requirements relatively easily due to the significant financial, legal, and engineering resources already at their disposal. By contrast, smaller, regional companies could encounter issues growing and sustaining an expanded consumer base under the law. To address potential regulatory and engineering issues, these smaller companies will need capital, capital that could be harder to secure from partners outside of the European Union.

Without global cooperation and consistency, the level playing field of early technology is being replaced by niche regulations at the same rate as market growth. This self-regenerating, arguably symbiotic, phenomena is a catch 22 for companies and countries alike, with short term advantages potentially presenting long term obstacles.

Interestingly, though, emerging countries and regions are taking a different tact to foster their own growth: by welcoming others in, not by keeping them out. The African Union’s draft report on migration policy focuses on curbing a “brain drain” and attracting both domestic and international talent in related science and technology fields. Investment in African startups nearly doubled in 2017. After years of working with some of the largest technology companies in the world, the Middle East is paving the way for its own industry. An example is the United Arab Emirates’ efforts in artificial intelligence, releasing a strategic plan and appointing its first Minister of State for Artificial Intelligence. Latin America has signaled it is open for business, and investment, with countries across the region hosting multi-stakeholder forums to discuss development of the market and companies hosting hackathons throughout the region.

All nations face the challenge of wanting to both foster and control the future of technology. Currently, though, policies reflecting a nationalistic desire to control both the industry and the laws governing it could come with a cost of the very economic growth underpinning the initiatives. Born out of international cooperation, the industry thrives best when able to adapt and innovate in a global market with an ideally internationally harmonized, but at the very least predictable legal environment. It is imperative that our international leaders and policymakers bear this in mind as they address the technological shifts and associated issues that will continue to arise in the Fourth Industrial Revolution. They must take a broader view of growth and seek to have a more complete understanding of the “push-pull” presented by regulation. The policies shaping the future of the industry must reflect the consideration of not only immediate opportunities and priorities of concern, but also of potential vulnerabilities and obstacles to expansion. It is only with this global perspective that our international leaders will be able to craft coherent policies that address the needs of both their domestic workforce and consuming public to fully adapt while also allowing for the international growth of the digital economy.

Longtime Washingtonian turned expat in Paris working CET->PST on international policy trends in a tech dependent world — canaryglobalstrategic.com

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