What Sapiens Suggests on Rulemaking and Innovation

Human progress began with the use of fire and progressed to the invention of civilizations using writing and other critical technologies. The first Industrial Revolution happened in the 18th century, and now humankind is in the middle of the fourth Industrial Revolution, where new products and services are continually produced using emerging technologies such as artificial intelligence, robotics, the internet of things (IoT), 3D printers, and nanotechnology.

The diffusion of these products and services can help improve conventional industrial processes and quality of life. But the more they emerge, the more likely they are to involve new risks and uncertainties regarding safety, raising questions about their relationships with existing institutions and institutional frameworks, especially regulations, when they are implemented in society. In other words, those new products and services may be prevented from being smoothly introduced into markets because it is difficult to determine how existing regulations are applicable or because applicable regulations do not exist in the first place. Furthermore, global markets make the situation more complex since different countries have different regulations. Meanwhile, the rapid spread of new products and services can be seen in some emerging countries as they leapfrog stages of technological development that were experienced by developed countries and move directly to advanced technologies, actually facilitated by the fact that they never possessed the urban infrastructure or related institutions or regulations in the first place.

People are therefore increasingly discussing the current situation of the digital era, where existing regulations cannot address the market introduction of large volumes of new products and services, and are attempting to utilize various theoretical and practical initiatives to address the issue around the world.

Sapiens: A Brief History of Humankind (Harari, 2014) ¹ argues that not only legends and myths but also institutions, laws, and even nations are all fictitious and that the key to the prosperity of Homo sapiens is the ability to create these fictions and believe in them. Generally, institutions and regulations are defined in each country and have a path dependency rooted in their social and cultural background. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Hall and Soskice, 2001) ² discusses the diversity that exists between different capitalist economies against the background of rapid globalization in the 1990s and points out that there are multinational companies using institutional arbitrage to transfer certain activities to countries whose institutions are preferable. (A typical example is that a company transfers its base to a tax haven country to reduce their tax burden.) Institutional arbitrage by companies is still observed today, when further globalization and the fourth Industrial Revolution are underway, and it is likely to be used even more frequently in the future.

Shifting the focus from corporate activities to nations, Why Nations Fail: The Origins of Power, Prosperity and Poverty (Acemoglu and Robinson, 2013) ³ shows that the long-term development of nations depends on the difference in political and economic institutions, including regulations. According to The Entrepreneurial State: Debunking Public vs. Private Sector Myths (Mazzucato, 2015) ⁴ nations need to take risks first and play active roles to achieve innovation-driven economic growth. In fact, in this fourth Industrial Revolution, each country is working harder to implement advanced products and services, such as automated driving and flying cars, by attracting companies to their shores; it's like a global competition between institutions (The Economist, 2019) ⁵.

According to the above idea in Sapiens, we could say that arbitrage enables companies to choose fictions that are advantageous to them and that, in turn, it is important for nations to be able to provide fictions that will be chosen by those companies. That said, there is no single solution to how to balance rules and innovations. Rulemaking may sound simple, but establishing effective rules is the result of utilizing a wide variety of complicated tools and combining them appropriately. That is what makes rulemaking a strategy. Therefore, it may be helpful to conduct case studies and examinations on leading innovations of the fourth Industrial Revolution in Japan and abroad, including automated driving, drones, flying cars, and the sharing economy.

In my paper titled "Global Rulemaking Strategy for Implementing Emerging Innovation," I cited an example of the world's first wearable cyborg-type robot "HAL®" developed by Cyberdyne. As a pioneering achievement in Cybernics, a new comprehensive discipline combining brain science, neuroscience, robotics, IT, and system integration technologies, HAL® is a perfect example of a product leading the fourth Industrial Revolution. HAL® has a range of use fields from medical and welfare, to heavy lifting in factories, and rescue activities during disasters, but the major focus is on medical/healthcare uses for the robot in medical and welfare fields, where safety assurance is important. Although rapid market introduction of HAL® was pursued both inside and outside Japan, it was found difficult because HAL® was still at the early stage of the innovation lifecycle (the dawn of the industry) and, as the world's first such product, it suffered from a lack of precedents regarding safety assessments, clinical evaluation methods associated with the approval of new medical equipment, and related personnel familiar with the implementation of new-concept technologies. The fact that Cyberdyne has been successful despite these obstacles presents lessons that we can all learn from.

The first notable lesson from the case study of HAL® is that Cyberdyne compared existing institutions and regulations globally and then adopted an optimization strategy (institutional arbitrage) in order to ensure safety and realize quick market introduction. Secondly, we can learn from the rulemaking process taken by Cyberdyne when specific regulations didn't exist. Cyberdyne itself became a rule-maker for international standards by establishing systematic safety standards through demonstration projects based on overseas partnerships and projects based in International Strategic Comprehensive Special Zones and National Strategic Special Zones.

There is no one-size-fits-all solution to how nations can provide appropriate "fictions" that will be chosen by multinational corporations. But let me provide some policy implications.

First, from the perspective of governance, it is difficult to put appropriate and comprehensive regulations in place in advance because emerging technologies develop so fast. So, in terms of institutional design and governance, it is commonly understood that flexibility, adaptability, and agility are of vital importance.

Also, under the fourth Industrial Revolution, the times have changed from the days when value was generated from a single thing or object. Today, the combination of multiple elements such as the link between things and between things and human beings constitutes a system from which new value is created. In these circumstances, system- or architecture-based thinking, rather than component-based thinking, has been increasingly required with regard to the design and management of products and services and related rulemaking.

More players are now participating in the rulemaking process. For example, we see more organized efforts to actively shape rules. Business operators and lawyers are taking active roles in supporting the lobbying activities of venture companies along with public policy departments within companies. As the field of public-private co-creation is expanding, we may need to consider again how public and private sectors can cooperate so that innovation-driving companies can work effectively as rule-makers or key actors in institutional arbitrage.