Does EU regulation hinder or stimulate innovation?

Abstract

'Does EU regulation hinder or stimulate innovation' is a frequently heard query in the EU, but there is little systematic analytical literature on the issue. Fragmented evidence or anecdotes dominate debates among EU regulatory decision-makers and in European business, insofar as there is a genuine debate at all. This CEPS Special Report focuses on the multi-faceted, ambiguous and complex relationship between (EU) regulation and innovation in the economy, and discusses the innovation-enhancing potential of certain regulatory approaches as well as factors that tend to reduce incentives to innovate. We adopt an 'ecosystem' approach to both regulation and innovation and study the interactions between the two ecosystems. This general analysis and survey are complemented by seven case studies of EU regulation enabling and disabling innovation, two horizontal and five sectoral ones. The case studies are preceded by a broader contextual analysis of trends in EU regulation over the last three decades. These trends show the significant transformation of the nature as well as improvement of the quality of EU regulation, largely in the deepened internal market, which tend to have a favourable and lasting effect on the rate of innovation in the EU (other things being equal). Our findings include the following: Regulation can at times be a powerful stimulus to innovation. EU regulation matters at all stages of the innovation process. Different types of regulation can be identified in terms of innovation impact: general or horizontal, innovationspecific and sector-specific regulation. More prescriptive regulation tends to hamper innovative activity, whereas the more flexible EU regulation is, the better innovation can be stimulated. Lower compliance and red-tape burdens have a positive effect on innovation. We recommend incorporating a specific test on innovation impacts in the ex-ante impact assessment of EU legislation as well as in ex-post evaluation. There is ample potential for fostering innovation by reviewing the EU regulatory acquis.