Cybersam's Blog - Increasing value of proprietary technology through regulation

Friday, October 06, 2006

Increasing value of proprietary technology through regulation

One of the classes that I am taking this semester is ESD.103 - Science, Technology, and Public Policy, a course that applies theories of political economy to explore the issues at the intersection of technology, public policy, and business. This course is taught by Prof. Ken Oye who is very articulating and has been providing great cases and examples in class. I find this class very insightful although I wish he could structure his frameworks with the cases in a more concise and coherent way.

Yesterday, Prof. Oye made an interesting case in class on how regulation can actually improve on competitiveness in the economy. As someone who is keen on apply public policy and economics in the private business sector, I find this case very intriguing. In particular, Prof. Oye mentioned that regulations can increase the value of proprietary intellectual properties of private firms. Here is the case, which we discussed yesterday: suppose company X developed and patented methods to improve its products as a matter of good corporate citizenship and to get a head of anticipated regulatory standards. Its competitors, mostly from overseas, found it difficult to meet the new tightening standards although they have been enjoying high profit margin on their products because of lower costs. It now seems likely that the regulators will raise standards and require every manufacturer to produce products that meet this new standards. If you were in company X situation, what would you have done?

A. Resist tighter standards.
B. Indifferent about the whole matter.
C. Support more stringent standards.

Choice C is the rational choice. In reality, however, most companies tend to support status quo industry association position and resist tighter standards.

10/6/2006 6:08:08 PM (Eastern Daylight Time, UTC-04:00) Comments [2] Business

10/6/2006 9:43:12 PM (Eastern Daylight Time, UTC-04:00)

This happens all the time. Let Microsoft = Company X, let Microsoft Office = the proprietary high-profit-margin product. The majority of businesses and governments in the world require their IT departments to put MSOffice on the standard computer they give employees. And voila...

No wonder Microsoft resists things like the Open Document Format (ODF) regulation. It's a topic that still evolving (se e for example this article from earlier this week: http://www.infoworld.com/article/06/10/03/HNfrenchodf_1.html) but they've spent a lot of time, money, and energy resisting.

Yoav Shapira |yoavsAT NOSPAMcomputer dot org

10/7/2006 1:46:38 PM (Eastern Daylight Time, UTC-04:00)

Yoav, the example you gave is a de facto standard, which is a standard commonly accepted "in practice." The standards that I mentioned is de jure, which means "by law." Regulatory standards fall into the category of de jure.

Congress enacts statues that set the direction and tones of policies to be used primarily to protect its citizens, and to ensures that the economy functions in a fair and efficient manner. Agencies like FDA, FCC, EPA, SEC, etc then apply the statutes by setting regulatory standards and enforcing these standards.

In most cases, the problem with regulations is, like they say in Game Theory, a zero-sum game which states that one group benefits at the expense of the other. Naturally, there are parties in the economy that resist the enactment of regulations because they perceive them as a cost liability. But tighter regulatory standards are not necessarily detrimental to businesses. Higher regulatory standards can be used to level the playing field so that all companies in a given market follow the same rules to compete. In such environment, companies with better technology of meeting the regulatory requirements may actually give them a better advantage.

Here is one example. In the late 80's, Xerox has lower margin on their copiers than foreign copier manufacturers. To reproduce finer images, the trend in the industry was to produce smaller toner particles. However, inhaling finer toner particles poses health risk. Consequently, EPA stepped in and contemplated developing tighter standards for particle characteristics and exposure to reduce risk. Xerox may not have the profit margin that its competitors enjoy but it possesses the patents of meeting the standards. So what would you do if you are Xerox?

I have babbled enough... ;-)

Cybersam