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contributor perspectives

Jun 2, 2017 | 18:01 GMT

5 mins read

Searching for the Next Silicon Valley

Board of Contributors
Sangeet Paul Choudary
Board of Contributors
A picture of a futuristic-looking drone
(COWARDLION/Shutterstock)
Contributor Perspectives offer insight, analysis and commentary from Stratfor’s Board of Contributors and guest contributors who are distinguished leaders in their fields of expertise.

Over the past five years, Domino's Pizza has grown faster than most technology firms. The company has worked extensively on revamping its ordering, logistics and customer relationship management, often operating more like a technology company than a food and beverage brand. In its quest for further growth, the firm has even begun testing a drone delivery service overseas, teaming up with another U.S.-based firm, Flirtey, to deliver pizzas via unmanned aerial vehicle in New Zealand. It plans to someday expand this service across Australia before heading to Europe. 

Why would two U.S.-based companies choose to launch a new service in multiple foreign markets before trying it at home? The answer might surprise you: regulation. It's not uncommon to hear the argument that innovation often leads the way as regulation struggles to keep up; platforms like Airbnb and Uber are a testament to that, blazing new trails amid their rapid expansion well before the laws were in place to regulate them. But now this well-established relationship has begun to reverse itself: Friendly regulatory practices have started to redraw the map of global innovation.

In the past few years, innovation has been pulled to places with fewer regulatory hurdles.

For instance, Uber recently chose Pittsburgh as the testing ground for its driverless car, despite the city's uneven topography. More important to the company than ideal geography were Pittsburgh's friendly regulations. Otto — the self-driving vehicle company's name before Uber purchased it — followed a similar practice, piloting its projects in states with favorable laws. By contrast, competitor Comma.ai hit a number of roadblocks as it tried to do business in its home market.

Access to talent and funding has long been touted as the primary driver behind the rise of innovation hubs like Silicon Valley — and as the reason other locations lacking these advantages have failed to replicate its achievements. But as the regulatory landscape grows increasingly uneven worldwide, companies may have to consider a third key to success. In stark contrast with California's restrictive regulations on self-driving cars, for instance, Singapore has worked to position itself as an ideal testing ground for autonomous mobility.

And where the laws lead, innovation will follow. Startups are relocating to places where they aren't hemmed in by regulation. Large corporations are likewise shifting their home bases to friendlier territories. Amazon, which has famously continued to emphasize its U.S. activities even as other tech giants have quickly gone global, is testing new delivery models — including the use of drones — in the United Kingdom instead of the United States. 

Policymakers have a unique opportunity in front of them as well. As new technologies emerge, they will have to choose which ones to govern and which ones to avoid. These choices, in turn, will spur greater fragmentation across the global regulatory landscape. 

Some countries may even attract and foster an entire ecosystem of innovation on the strength of favorable regulation alone.

Genetic testing startup 23andMe, for example, has moved to the United Kingdom after repeatedly encountering FDA barriers in the United States. Innovators who feel constrained will no doubt do the same, migrating to regions that best support their vision. And these areas may ultimately set the standard for governments elsewhere. Ride-sharing rules that are currently being framed in several countries may determine how Uber competes globally. Similarly, payment companies in India are poised to see rapid growth on the back of favorable regulation put in place following the country's recent demonetization measures. Should these changes lead to the emergence of a budding innovation hub, other developing countries may soon follow India's lead.

Over-the-top (OTT) services — those that distribute audio, video and media content online without the help of a multiple-system operator, such as WhatsApp, Skype and Snapchat — have been able to flourish in a regulatory vacuum while telecommunications and internet service providers have had to contend with licenses and rules centered on ensuring quality of service. However, that may not be the case for much longer. Telecommunications companies have historically invested in networks and cables, but the incentives to do so diminish as OTT firms siphon off their revenue. Recognizing the detrimental impact this could have on data infrastructure, countries such as France and Spain have moved to block OTT providers that offer voice calls over the public switched telephone network. 

Meanwhile, data residency laws will start to determine the effectiveness of digital business models in the future. As enterprises move to the cloud, cloud providers that ensure compliance with data residency rules may be better able to compete with existing giants like Amazon Web Services. Moving from bits to atoms, favorable regulations in much the same way may determine how global supply chains restructure themselves in an increasingly protectionist world.

All of these changes suggest that the shifting regulatory landscape could directly impact the competitiveness of entire countries. Nations with friendlier trade climates may have an easier time attracting the flow of bits — and physical goods — into their borders, perhaps to the detriment of those without such climates. Policymakers who fail to understand this new reality, in turn, might craft regulations that are ideal at the local level but come at the cost of global competitiveness. And as international regulation becomes ever more disjointed, the winners of the new world could well emerge in the most unlikely of places. 

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