disruptive innovation

Responding to disruptive innovation - Critical actions

A wave of innovations is breaking, driven by digital technology and tomorrow by other emerging technologies (the "NBICs"). (1)) This is creating new markets and disrupting the economy in many sectors. Faced with these disruptive innovations, the State must define its position: a wait-and-see bias would have a considerable economic and social cost and could lead to a loss of sovereignty. Adapting to new technologies or being subjected to them?
As part of its anticipation and consultation missions, France Stratégie is launching the 2017/2027 projectThe report, which aims to shed light on the issues at stake in the next presidential election, proposes an analytical note presenting two options for public authorities: to open up the field for experimentation, by setting the boundaries within which innovators can test their ideas with the support of public authorities, or to enact general principles (soft regulation) and let the companies get started. The second option may allow for more innovation, but it also carries more risk and responsibility for companies.
In all cases, information sharing with public authorities will be necessary to ensure compliance with fundamental rules (freedoms, security, etc.) and, after this initial deployment, to adapt regulations. 

Diagnosis

Ahe beginning of the 21st century is marked by the digital transition, a powerful wave of technological innovation that is likely to affect our societies in depth and in a very short space of time. Being able to seize this wave as an opportunity to transform ourselves, rather than being subjected to it, depends on our attitude to what is known as disruptive innovation. Faced with markets of radical innovation, where the first arrivals can acquire decisive dominant positions, and in the process make other markets and established economic players disappear, standing back and watching can entail considerable economic and social costs. Responding to disruptive innovation implies taking risks, thus accepting possible failures, dealing with their possible negative consequences and being able to learn from them. This positioning concerns citizens, companies and public authorities alike. If we do not proactively incorporate innovation, it will end up imposing itself even more disruptively.
 
Numerous examples, both recent and future, illustrate both the scale of the issues at stake and the difficulties encountered by public authorities in setting a line of response that enables all businesses, both those that bring innovation and those that suffer from it, to anticipate market developments and invest in a sufficiently predictable framework. Today, the new players see their growth hampered by a regulatory framework that struggles to integrate new organisational models that are still very much in the minority, in particular because of the resistance imposed by existing companies. On the other hand, it is facilitated by the presence of grey areas in the regulations that give them a competitive advantage over established players.
 
In the mobility sector, digital platforms such as Uber or Blablacar have considerably increased the range of services on offer, by widening the breach in the monopoly of taxis by chauffeured transport vehicles (+12,000 VTC in three years in Île-de-France) or by providing journeys neglected by the SNCF. Faced with these changes, the public authorities are oscillating between encouraging (opening up to VTC) and protecting existing players (Thévenoud report). [2]. In the end, the experiments were driven by the platforms, but in a chaotic way (jolts in the price of taxi licences, the UberPop service finally banned, tensions over the sharing of revenues between platform and drivers): the public authorities ran behind.
 
The driverless car has also benefited from a regulatory adaptation [3]. However, the real challenges are still to come and regulatory developments (liability in the event of accidents, labour law, taxation, etc.) will still be in great demand when autonomous vehicles revolutionise the goods transport or mobility sectors (road transport, taxis, buses, etc.). If we are not able to respond quickly enough to these needs for regulatory change, autonomous vehicles could mature more quickly abroad and penetrate the French market, jeopardizing the 200,000 direct jobs in the automotive industry.
 
For their part, UAVs were able to start developing in France because the regulatory framework was conducive to [4] before a more restrictive European framework is proposed, taking into account in particular the risk of collision. Today, however, development areas for the professional use of UAVs remain largely open.
 
The hotel and tourism sectors have also undergone several upheavals, the most recent being the development of competitive offers from private individuals (e.g. Airbnb, Abritel), which has considerably expanded the range of accommodation on offer (in 2015, Airbnb offers 176,000 accommodations in France and Abritel has 74,000, while the number of hotels is around 17,000, representing more than 600,000 rooms). Here again, sector regulation is adapting on a case-by-case basis to deal with the issues raised by these new players (e.g. collection of tourist tax, commission rates, clarification of the threshold for professional activity).
 
The banking and insurance sectors are only at the beginning of their transformation: by the multiplication of means of payment in the banking sector, by the increase in the sources of information on policyholders via connected objects in the insurance sector. As these services can be provided entirely online, there is a high risk that a significant proportion of business will disappear from France if innovative solutions are provided directly from abroad, especially in the United Kingdom, where the banking regulator has taken steps to promote innovation. [5]. The bank accounts for 2.7 % of value added and 2.3 % of salaried employment in France.
 
The health sector (nearly 12 % of GDP) will also undergo profound transformations, through the introduction of personalized and continuous patient monitoring. Already underway in the case of certain long-term illnesses, this transformation will overturn the medical system, particularly the profession of the attending physician, who today intervenes mainly on an ad hoc basis for curative treatment, but who will be able to intervene tomorrow on a more regular basis and play a more assertive preventive role.
 
Moreover, many sectors will be affected by the deployment of artificial intelligence, which is currently taking place without any particular legal framework, except for the exploitation of personal data. However, the use of artificial intelligence is not without risks. Although large companies have set up an "ethics committee", this private initiative cannot eventually replace a legal framework.
 
In the end, innovations are deployed and experiments take place, sometimes even on French territory on the fringes of legality. However, many of the innovations mentioned are carried by foreign platforms, which acquire considerable market power in the process. However, this state of affairs is not set in stone. Uber will be able to be uberised as soon as decentralised transactions are made possible in a secure manner, in particular thanks to blockchain technology. Fostering innovation is also a means of ensuring the transition to the next innovation.
To guarantee equal opportunities in the face of the digital revolution, the solution is not to close our economy and society to innovations but, on the contrary, to confront them, providing them with tools so that these innovations can be developed, incorporated and disseminated. Whether it is a question of sectoral or cross-cutting regulations, public authorities must take the measure of the changes to come and respond constructively on the basis of explicit principles and a clear process.
 
Different control modes are possible. In France, at the very beginning of the 19th century, questions of "industrial risks" - assimilated to public order disturbances - were the responsibility of local authorities and the police. In order to avoid any problems with the population, local authorities often preferred to prohibit these new installations, which had the effect of blocking the development of French industry. In 1810, a law was passed to set up a standardisation of regulations throughout the territory - verified by an inspection body - which contributed to the development of industry. This systematic control regime was relaxed in 1866 with the creation of a simple declaration system, where responsibility was shifted back to the industrialist.
 
How to deal with disruptive innovation refers to how to apply the precautionary principle, which requires systematic vigilance with regard to the potential risks associated with a decision. To this end, a risk assessment procedure must be put in place through supervised research programmes and experiments, as well as provisional and proportionate measures to counter possible damage.

Both options

In order to ensure a capacity for innovation at the national level and facilitate the adoption of new uses, the State needs to develop mechanisms to respond to disruption. The objective is to give visibility to entrepreneurs, existing actors and citizens by bringing a pro-innovation policy to all levels of public action decision-making. There are two main options and there is no reason why one should not be adopted rather than the other, sector by sector, depending on whether the emergence of innovative goods and services is deemed to be more or less complex or to require more or less rapid adaptation. However, whatever solution is adopted when an innovation is first deployed, its mass diffusion will ultimately require a new, stabilised regulatory framework.
 
OPTION 1: USE EXPERIMENTATION: A TRIAL-AND-ERROR TRANSFORMATION
 
Because innovation takes various forms and has great capacity for adjustment and customization, experimentation, in a framework controlled by the public authorities and limited in time, would make it possible to test different solutions, to identify their positive and negative effects, and ultimately to promote large-scale deployment under the best conditions. This flexible mechanism would lead to the introduction of new goods and services on the market but, in the face of the disruptions they may cause, it would give the State, through the exchange of information, the means to react in order to take the necessary corrective measures.
Such experimental schemes already exist in France: implementation of derogatory local public policies by local authorities. [6] France Experimentation initiative [7] which allows derogations from certain binding regulations within the framework of a call for projects; ad hoc legislative act for a given sectoral perimeter (for example, experimentation with driverless vehicles is authorised by an ordinance [8] or those on the use of frequencies, allocated by ARCEP, are reinforced by the law for a Digital Republic).
The idea here is to ensure greater responsiveness on the part of the public authorities and to open up more systematic recourse to experimentation, by adopting a law, or even amending the Constitution, to set the framework for its application. In this scheme, a project leader would identify the laws, standards and regulations from which he or she would like to be able to derogate in order to test his or her innovation, as well as the geographical extension and the duration envisaged. The project would also include the modalities by which the information necessary for the technical and socio-economic evaluation of the experimentation would be transmitted. The selection of projects would be made on a case-by-case basis by an ad hoc committee responsible for informing the monitoring and evaluation bodies concerned.
 
In a framework of this type, support for experimentation with innovations would therefore be integrated into the missions of the administrations. [9...which would encourage their appearance in France and their dissemination. Admittedly, the exemption scheme, which would allow certain firms to opt out of sectoral and cross-sectoral regulations, would give rise to a risk of distortion of competition. But this risk would be limited, as the scope of the experiment would remain limited in space and time.
For example, with regard to the autonomous vehicle, the innovations would be tested on certain duly identified roads, after informing the authorities concerned.
 
OPTION 2: STATE THE MAIN PRINCIPLES: FLEXIBLE REGULATION (SOFT REGULATION) THAT LEAVES THE INITIATIVE TO THE INNOVATORS
 
In this second option, in order to leave the widest possible scope for innovation and to encourage risk-taking, the State would not carry out detailed a priori controls but would enact principles enshrined in an innovation code, which, if respected, would allow companies to implement their innovations under their responsibility without any time limit.
 
The missions of the administrations would evolve, including the publication of opinions and guidelines on the sectors under their jurisdiction. These opinions could be requested directly by businesses, with a rapid response time imposed on administrations, using a mechanism similar to the rescrit fiscal or social [10]. 10] If a company did not respect these principles, the traditional control mechanisms would be put in place (administrative control, by the judge, etc.). If flexible regulation proved to be deficient, the return to the legislative arsenal could always intervene.
In return for this flexibility, companies would be subject to a reporting regime, identifying the legislative or regulatory fields impacted, so as to share the relevant information with the administrations concerned on a regular basis, as in the case of the experiment. In this way, the administrations would be able to monitor the implementation or marketing of the innovation, to take into consideration its effects and, if necessary, to make changes to the regulations.
 
This solution would delegate some of the rule-setting to the level of individual companies or industries. However, it would imply a change in the way administrations operate - so that they would be able to quickly provide expertise to innovators - and it would also change the division of responsibilities: as they would no longer be covered by detailed regulation, companies would be more exposed to legal action and payment of damages in the event of incidents related to the implementation of their innovations.
 
For example, with regard to the autonomous vehicle, as long as responsibilities are clarified and certain technical standards are established to ensure that the courts have the necessary elements to decide in the event of a dispute (black box), the movement of unmanned vehicles would not be subject to any particular restrictions and could be deployed in line with technological advances.
 
FINAL STEP: ADAPTING THE REGULATIONS
 
These options describe two distinct processes for responding to and accompanying disruptive innovations. The right to experimentation provides a framework to limit the risks to society and business within a limited time frame before considering the deployment of innovations on a large scale. This option seems more suitable for sectors that endanger human life or affect fundamental rights. Soft regulation, on the other hand, gives free rein to innovators, with only the fundamental principles as a framework, with no predefined time limit.
 
The two options converge on the sharing of data with administrations, which is essential for the evolution of regulations, necessarily entailing an adaptation of the functioning of the latter, which will be led to exchange and collaborate more closely with businesses.
Indeed, whatever option is chosen to accompany disruptive innovations, the process would inevitably lead, at the end of this deployment phase, to the adaptation of regulations. Depending on the case, and depending on the information gathered, this would be done in such a way as to encourage the fastest possible dissemination of the innovation, or in such a way as to better control it.
For example, with regard to the autonomous vehicle, new safety standards would eventually be established, which could have a decisive effect on the diffusion of the vehicle not only to individuals, but also in economic sectors such as the transport of persons or goods.
 
Julia Charrié and Lionel Janin - France Stratégie
 
1. Nanotechnologies, Biotechnologies, Computer Science, Cognitive Sciences (artificial intelligence).

2. On 24 April 2014, Thomas Thévenoud submitted to the Prime Minister the report of the taxis-VTC consultation mission entitled Un taxi pour l'avenir, des emplois pour la France (A taxi for the future, jobs for France), which makes thirty proposals for the supervision of taxi and VTC activities.
3. Order no. 2016-1057 of 3 August 2016 relating to the testing of delegated driving vehicles on public roads https://www.legifrance.- gouv.fr/eli/ordinance/2016/8/3/DEVR1615137R/jo/text
4. 4. Classification of these devices as recreational with few restrictions on flying conditions.
5. The UK financial regulator (Financial Conduct Authority) has opened an "innovation hub" to advise Fintech start-ups.
6. Since 2003, local and regional authorities have had a right to experimentation enabling them to adapt national laws and regulations to local situations by introducing a provision in the Constitution (article 72, paragraph 4).
7. Launched in June 2016.
8 Ordinance on "Experimentation of vehicles with driving delegation on public roads", presented to the Council of Ministers on August 3, 2016.
9. As has already been done on certain subjects, for example by the Electronic Communications and Posts Regulatory Authority via its white paper "to prepare for the revolution of the Internet of Things" to encourage experimentation.
10. The rescrit fiscal is a formal statement by the tax authorities to which a taxpayer has referred a matter. In the event of a question on the taxation applicable to a specific situation, the rescript procedure makes it possible to obtain a precise and definitive answer that can be invoked against the administration, even if the solution given is contrary to the law. The tax rescript thus gives the taxpayer's legal security precedence over the principle of legality and hierarchy of norms. The social rescrit allows a contributor to obtain an explicit decision on "any request that raises a new and not without serious character, the purpose of which is to know the application to a specific situation of the legislation relating to social security contributions and contributions controlled by the URSSAF".

 
 

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