The role of regulators in mitigating uncertainty within the Valley of Death
Introduction
The Valley of Death (VoD) is usually understood as a phase in the maturity of an emerging technology, after public sector investment in early proof of principle research, and before the private sector is willing to accept the level of uncertainty associated with proprietary application development and scale-up. (Butler, 2008; NRC, 2004; Weyant, 2011). One of the factors which may accentuate this uncertainty is the existence of a stringent and/or evolving regulatory framework, and the uncertainty about how to ensure the new technology can comply with existing and future laws and rules (Gallaher et al., 2007; Marcus, 1981). As regulatory uncertainty increases, venture capitalists may be less willing to invest, and often shift their interest to less uncertain endeavors (Fleming, 2015). Industries where regulatory uncertainty is an important driver of investment decisions include renewable energy (Mowery et al., 2010), telecommunications (Henisz and Zelner, 2001), life sciences (Oye, 2012; Pisano, 1997), and aviation (Nakamura et al., 2013).
Regulatory uncertainty affects firms’ investments in different ways. Firms might be aware of a potential change in regulations, but are unable to estimate the impact on their operations (Gerard and Lave, 2005; Milliken, 1987; Mowery et al., 2010). With pharmaceuticals or advanced equipment, rules determine market approval, but products need to undergo extensive real-life testing to assess compliance−some technological uncertainty can only be assessed in the later stages of development (Downer, 2007; Kola and Landis, 2004; Maine and Garnsey, 2006). With novel technologies such as nanotechnology or genome editing, existing rules might not be appropriate. If agencies hesitate to approve new products until new rules are written, this creates an important barrier to market entry (Jones, 2015; Oye, 2012; Rip, 2018).
Despite regulatory uncertainty being a well-known barrier for the commercialization of new products, the literature on the VoD has not incorporated those insights to explain variations in technology investments. Furthermore, the government's role in traversing the VoD has mostly been studied from a funding perspective. We extend the literature on the VoD by incorporating regulatory uncertainty as a factor complementary to funding. Our contribution is two-fold: first, we provide insights about how regulatory uncertainty affects the VoD, and how regulatory agencies can reduce such uncertainty. Second, acknowledging the diverse nature of regulatory uncertainty, we provide a taxonomy with three types of regulatory uncertainty in the VoD. We explain the different impact of each type on the VoD, and propose specific actions for regulatory agencies to help industry overcome existing uncertainty.
We study two different cases: the Critical Path Initiative (CPI) in the pharmaceutical industry, and Advanced General Aviation Transport Experiments (AGATE) in the general aviation industry. For both, we analyze the industrial context behind the creation of the consortium, its organizational structure, and the regulatory changes implemented to bridge the VoD. We gather data from 22 interviews and approximately 90 sources of archival data.
We find that regulatory agencies play an important role as innovation enablers, not only by creating or revising rules, but also by establishing strong collaborative networks with industry members to facilitate the two-way exchange of technical and regulatory information. Our findings can help agencies identify the major types of uncertainty, the stakeholders who can bring the technical knowledge required to reduce those uncertainties, and show how to align program outcomes with regulatory goals to accelerate the development and diffusion of emerging technologies.
Section snippets
Theoretical background: regulatory uncertainty affects the VoD
The term VoD refers to the dearth of investment in promising emerging technologies at an intermediate stage in their development, between proof of concept R&D and prototype demonstration and commercialization (Biemans and Huizingh, 2020). The technology has matured beyond traditional public sector funding for early-stage research, but is not mature enough for firms to invest in the development and scale-up of proprietary applications (Butler, 2008; NRC, 2004; Weyant, 2011). The ‘depth’ of the
Methods
We use grounded theory-building methods (Eisenhardt, 1989; Glaser and Strauss, 1967) to gain insight into the role of regulatory agencies in helping technologies bridge the VoD. They underline our aim to provide “tentative answers to novel questions of how and why … suggesting new connections among phenomena” (Edmondson and McManus, 2007, p.1158) and “clear enough categories and hypotheses so that crucial ones can be verified in present and future research” (Glaser and Strauss, 1967, p.3). We
Findings
For the sake of clarity, we present the CPI and AGATE cases separately in the following sections. For each consortium, we analyze regulatory agencies’ attempts to reduce uncertainty at industry, consortium, project, and rule levels. We compare the cases in section 4.3.
Theory-building: how regulatory uncertainty shapes the VoD
Studies about the VoD focused on overcoming existing financial barriers and establishing long-term policies to create a safer environment for firms’ investments (McIntyre, 2014; NRC, 2004; Weyant, 2011), often failing to highlight the diverse actions which could reduce regulatory uncertainty. Based on our comparison of AGATE and CPI, summarized in Table 4, we propose a theory for how the three types of regulatory uncertainty in our analysis can alter the shape of the VoD (Fig. 1).
The first type
Conclusion
This paper presents two case studies, the Critical Path Initiative and the Advanced General Aviation Transportation Experiments, to analyze the role of regulators in facilitating the translation of promising emerging technologies by decreasing regulatory uncertainty across the VoD. We analyze how regulatory agencies have addressed three different types of regulatory uncertainty to incentivize private investment in emerging technologies. Our findings suggest that government technology innovation
Acknowledgements
This work was supported by the Gatsby Charitable Foundation and the Portuguese Foundation for Science and Technology (FCT), under project reference CMUP-ERI/TPE/0011/2013. We would like to thank all the academics, regulators and industry members who took the time to answer our questions. We are especially grateful to the editors of this Special Issue, and the two anonymous reviewers, for their extensive and helpful comments.
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2022, Technological Forecasting and Social ChangeCitation Excerpt :Prolonged review process therefore fuels the perception of risk and uncertainty and the likelihood of market failure for the ‘non-tested’ product (Roca and O'Sullivan, 2020; Prieger, 2007). As a result, investor confidence may be distorted thereby leading to the innovating firm's inability to secure investment for subsequent NPI development (Roca and O'Sullivan, 2020; Hoerr, 2011). In a hypothetical illustration to show the impact of regulatory delays on investment, Hoerr (2011) revealed that the longer the review time the more the Internal Rate of Return (IRR) and Net Present Value (NPV) of the innovating firms’ investments continue to plummet.