1. Overview

The pace, scope and complexity of the changes caused by innovation, let alone the current societal and environmental changes afoot, are significantly affecting every facet of the economy and society. Indeed, innovation in the 21st century has led to the development of new products, services and business models that were unimaginable just a few years ago and keep evolving quickly. Prominent examples span a wide range of areas including digital technologies (e.g. artificial intelligence, Blockchain or the internet of things), biotechnologies (e.g. gene editing) and advanced materials (e.g. nanomaterials).

Changes derived from innovation have far-reaching consequences for the well-being and cohesion of society as a whole. Likewise, they impact our economy deeply through their effects on productivity, employment, skills, resource allocation, trade and the environment. As shown by the OECD Going Digital project and reflected in the associated policy framework, digitalisation in particular is leading to profound changes in the ways people interact, create, produce and consume (OECD, 2020[1]). Digitalisation has indeed created opportunities for promoting wider consumer choice, stronger competition, economic growth, freedom of expression, and brought people, firms and organisations closer across borders.

However, if insufficiently shaped by policy, digitalisation and transformative innovations more broadly can also entail high risks and potential adverse effects by inter alia disrupting labour markets, marginalising vulnerable populations, generating market power and increasing wealth concentration. Additional challenges relate to ethics, data privacy and ownership, digital security, potential bias and discrimination, minors’ protection and violent content, as well as the spread of misinformation and disinformation and their potential risks for democracy.

Through laws, regulations and other policy instruments, governments can have a major influence on the development of innovations, the realisation of their benefits for society, and the avoidance or limitation of associated risks. Regulatory quality is therefore a priority if key principles underpinning our way of life such as inclusiveness, resilience and sustainability are to be upheld in a context of high uncertainty and rapid change. Governments face several questions in this respect. How to enable innovation and accommodate technology-driven disruption while ensuring a sufficient level of regulatory protection for people and the public interest at large? How to reconcile the need for agile and flexible regulatory approaches with the need to provide stability and predictability for businesses? How to develop experimental regulatory approaches while continuing to ensure competitive markets and a level playing field? How to design, implement and enforce regulation effectively in the presence of innovations whose impact transcends administrative and jurisdictional boundaries? How can international regulatory co-operation support domestic regulatory approaches to phenomena that know no borders?

It is clear that sweeping technological advancements are creating a sea change in today’s regulatory environment. The pace of development of today’s technological innovations and the scope of the transformations they induce is indeed unprecedented. At times, regulatory frameworks are not agile enough to accommodate the fast pace of innovation and, as a consequence, existing rules become outdated and no longer relevant. Lack of knowledge of how innovations will affect markets and societies can make it hard for governments to keep pace in a way that avoids reducing the potential benefits of innovation, while also protecting the legitimate interests of all stakeholders. As a result, fundamental issues stemming from the widespread adoption of innovations have so far been left unaddressed, undermining public trust in governments and institutions. Governments are therefore facing a significant challenge to try to keep pace with the realities of this new economy in a way that does not hinder economic growth but that at the same time protects citizens from its most egregious effects. Beyond this pacing problem, innovations challenge how governments regulate in fundamental and interrelated ways: by blurring the traditional definition of markets, challenging enforcement, and transcending administrative boundaries domestically and internationally.

In addition, most technological innovations pose definitional challenges to policy makers. Due to the complexity, the pace and the increasingly pervasive nature of innovation, terminology and definitions are difficult to establish. The lack of agreed technical definitions raises several questions, including:

  • The fact that government agencies and regulatory bodies may face an overlapping (hence confusing) range of concepts, potentially affecting the quality of their rule-making activities;

  • The difficulty of finding relevant metrics to capture the pace and extent of the technological transformation;

  • The fact that jurisdictions may come forward with different definitions, undermining the quality of regulatory co-operation.

The COVID-19 crisis has magnified these challenges and forced governments to rethink how they regulate. The social and economic disruption that the pandemic has wrought further highlights the strategic importance of developing more agile and co-ordinated regulatory approaches to increase responsiveness and resilience in changing environments, harness the opportunities provided by innovations and protect the public interest. As governments rebuild afresh, they must ensure that the innovation that will power economic growth and solve the world’s most pressing social and environmental challenges is not held back by regulations designed for the past.

It must be stressed, however, that the disruptive nature of innovations also brings a number of opportunities for governments. These transformative changes can be harnessed to reform markets where there have been undue regulatory restrictions that impose a competitive disadvantage on incumbents rather than extend existing restrictions to new business models.

Against this background, a key challenge is to design governance and regulatory approaches (Box 1.1) that prevent or mitigate the potential unintended negative consequences of technological developments while reaping the opportunities they provide and not stifling innovation. The solution to this challenge is not rushing into regulation. Governments and regulators should, as a first step, have an understanding of the broad regulatory issues that these innovations pose when considering their approach to regulating them. Comprehending the changes underway is critical to better align policies with the many opportunities and challenges brought by innovations. Against this background, the aim of the report is twofold:

  • Identify the governance and regulatory challenges raised by innovations;

  • Document emerging regulatory approaches to address them.

This report draws on the insights derived by six case studies developed by the OECD and the Korea Development Institute (KDI). The case studies have been selected to span the different challenges raised by innovations and the diversity of regulatory responses that are being used. They cover the following areas:

  • Data-driven business models;

  • Digital innovation in finance;

  • Smart contracts;

  • Digital technologies for smart logistics;

  • Sharing economy.

This section briefly summarises the main transformative changes documented through the case studies (for a more detailed and comprehensive presentation of the impacts of innovation on economies and society, see, in particular, (OECD, 2018[3]), (OECD, 2019[4]), (OECD, 2019[5]) (OECD, 2019[6]), and (OECD, 2020[1])):

  • Competition: the development of technological innovations bears important consequence in terms of competition dynamics, in particular in data-driven markets. The economic properties of digital businesses can indeed give rise to natural monopoly conditions and create barriers to entry to competitors. It may also lead to new forms of anticompetitive strategies such as algorithmic collusion. It should be stressed that the unprecedented crisis resulting from the COVID-19 outbreak could increase the concentration in data-driven markets which, in turn, may exacerbate the regulatory challenges they bring;

  • New market failures: the rise of data-driven markets might entail new market failures such as implicit transactions, incomplete markets, information asymmetries, hold-up and locked-in phenomena;

  • Data privacy and security challenges: with more pervasive collection of data, digital technologies carry new risks in terms of data privacy and security;

  • Reduction in transaction costs: digitalisation can make markets work more efficiently by reducing transaction costs, leading to the development of new or transformed business models;

  • Development of decentralised exchanges: digital technologies facilitate or stimulate decentralisation, empower the "edges" and create new forms of intermediation. Consequently, they hold the potential to generate a shift from traditional regulation towards private governance;

  • Development of networks: as a corollary to the development of decentralised exchanges, digitalisation is leading to a wider development of networks., for market activities or in a social context, which challenges the traditional dynamics and structure of markets;

  • Shift towards services: digitalisation has further reinforced the transition to a service economy, which conveys a number of consequences for the structure of the economy (e.g. changes in the skill mix required and in the types of capital firms need);

  • Growing powers to consumers: digitalisation offers great opportunities to offer a wider range of products and services to consumers at lower costs. As more information becomes available as regard products or services quality, it also helps to reduce information asymmetries between businesses and consumers, thus contributing to enhance market efficiencies;

  • Socio-ethical challenges: the pervasive use of artificial intelligence is creating challenges in terms of consumer protection, transparency, bias and discrimination. The use of algorithms might exacerbate existing biases, amplify them, or create them. The development of data driven-markets and social media platforms in particular may also contribute to the spread of false, inaccurate or misleading information. This is raising strong concerns for governments as it holds the potential to decrease public trust in government, undermine the evidence-based democratic processes and decrease citizen participation.

The transformative changes brought by innovations put pressure on governments to establish a common and consistent regulatory space. The challenges to traditional regulatory frameworks can come in different forms:

  • Traditional regulation is often designed on an issue-by-issue, sector-by-sector or technology-by-technology basis and it may not be a good fit for the challenges brought about by technological developments. In many areas, innovations are indeed straddling or blurring the usual delineation of sectors. A number of economic regulators have for example been created to tackle the first convergence between the telecommunication and the media sectors. Yet, digitalisation has given rise to a new convergence in telecommunications, media markets and digital platforms, in which many components of the digital ecosystem are closely interrelated. This convergence raises questions about whether the existing regulatory mandates and remits are still fit for purpose. Digital-driven innovations in the financial sector are also blurring the boundaries across sectors and segments of the value chain, thus putting existing regulatory frameworks to the test. Examples include robo-advisors in banking, finance and insurance, as well as crowdfunding platforms. Technological innovations may also confuse the traditional distinction between consumers and producers, as is the case with the rise of individual ”prosumers” in the electricity market that both consume and supply energy to the network. These changes make it difficult to identify well-defined relevant markets and question the scope and mandate of regulators;

  • Network externalities, the capacity to scale without mass and the economies of scope that characterise data-driven markets can give rise to natural monopoly conditions and create barriers to entry to potential competitors (with substantial risks that excessive prices and lack of innovation will follow). At the same time, low marginal costs and non-rivalry of many digital goods also imply that new entrants can replace an incumbent firm in a relatively short timeframe simply by offering a qualitatively superior good. These features may confuse the rationale for regulatory intervention as any action will influence the nature of competition between the incumbent and the new entrants. On the one hand, regulators may be prompted to act to avoid market capture by one player. On the other hand, undue regulatory intervention may threaten the entry of new players. While competition policy has been initially used in many jurisdictions to address the challenges brought by multi-sided platforms, recent OECD work highlights that solutions limited to competition policy will probably not suffice by themselves (OECD, 2019[4]);

  • The economic properties of digital businesses also challenge the standard cost-based regulatory models as price formation in the digital economy obeys different rules. As highlighted by (Tirole, 2019[7]), “it is now common for a platform like Google or Facebook to set very low prices – or provide a service for free – on one side of the market and very high prices on the other side. This naturally creates suspicion among competition authorities. In traditional markets, such practices could well be regarded as a form of market predation that is meant to weaken or kill off a smaller competitor. By the same token, a very high price on the other side of the market could mean that monopoly power has been brought to bear. […] Two-sided markets are prevalent in the digital economy, and a regulator who does not adequately account for this unusual business model could incorrectly declare low pricing to be predatory, or high pricing to be excessive, even though such price structures have also been adopted by the smallest platforms entering the market”. The economics of digital business therefore raises the question of whether the paradigm and the empirical tools traditionally used to define markets, to assess market power and the effects of exclusionary conducts remain fit for purpose (OECD, 2018[8]);

  • The development of data-driven markets might have given rise to structural market failures that competition policy and data protection law may struggle to address properly. Such market failures may take the form of implicit transactions, information asymmetries or shortcomings in the definition of property rights related to data.

Failing to address these questions could expose innovators to a series of uncertainties regarding the regulatory landscape:

  • Complexity of existing regulations and guidance;

  • Difficulties in identifying and interpreting applicable regulations, in particular when innovation is straddling or blurring the boundaries of traditional categories and definitions;

  • Belief that the interpretation of the applicable regulation may change as the innovation scales up.

Such legal uncertainties and added compliance costs may lower incentives to further develop innovation and create new markets, particularly for small businesses. This could, in turn, impede useful innovation. In addition, a regulatory landscape that is not adapted to a particular situation can generate failures to mitigate downside risks brought by innovations.

Innovations are challenging regulatory enforcement in several ways. One of the issues has to do with the fact that traditional notions of liability may no longer be fit for purpose due to difficulties in apportioning and attributing responsibility for damages caused – for instance, in accidents involving AI-embedded machines or devices. Since damages resulting from the use of innovations can occur across jurisdictions, coordination on enforcement among governments or agencies can be particularly challenging - either because diverging regulatory approaches (e.g. due to different cultural or political priorities) or because of difficulties in apportioning liabilities across multiple jurisdictions. This problem is exacerbated by the fact that some technological developments such as smart contracts allow economic agent shift away from traditional liability regimes, making difficult for governments to enforce them.

More generally, innovations challenge regulatory enforcement because categories, which underpinned regulations, and specific rules, which are supposed to be verified and enforced, are often not strictly applicable to new situations, products, and services. Depending on legal frameworks and enforcement approaches, governments can end up either cracking down indiscriminately on innovations that do not fit previously existing categories, or powerless to respond to emerging risks – or both at the same time.

In addition, the digital technologies may also facilitate the development fraudulent activities and law avoidance. Money laundering can for example be facilitated by the complex cross border data flows surrounding the development of data-driven activities and the possibility of using the Internet to conceal certain activities or transactions.

As technological innovations can span multiple regulatory regimes, the usual institutional framework underpinning regulations – around line ministries and agencies – is also showing its limits when dealing with the transversal challenges raised by digitalisation. The fact that, in most cases, innovations have no regard either for national or jurisdictional boundaries puts increasing strain on regulators operating within the limits of their own jurisdictions. This feature enables companies to “forum shop” and/or avoid compliance by choosing the jurisdiction most advantageous to them and potentially avoid compliance with certain regulatory requirements, their internal tax policy, and their policy for data protection or other regulated areas. It should be noted that these transboundary challenges are exacerbated by the pacing problem: the fact that regulatory frameworks lack the agility to accommodate the increasing pace of technological developments extend the avenues for regulatory arbitrage.

The traditional institutional frameworks underpinning regulations are no longer adapted to address or effectively keep up with innovations. The mismatch between the transboundary nature of digitalisation and the fragmentation of regulatory frameworks across jurisdictions may undermine the effectiveness of action and therefore people’s trust in government. It may also generate barriers to the spread of beneficial digital innovations. As such, technological innovations raise a strong need for international regulatory co-operation to deliver better results for citizens around the globe.

None of the above regulatory challenges is not fundamentally new in itself. Policy makers and regulators had indeed to deal with innovations and new technologies for a long time and have to some extent factored these into their rule-making activities. What is new, however, is the unprecedented pace, scope and complexity of technological developments, which magnify the regulatory challenges described above. Part of the reasons why government struggle to keep pace with these transformative changes owe to the complexity associated with a number of innovations.

The disconnect between the pace of technology and the pace of regulation raises several potential concerns:

  • Failures to deal properly with the unintended consequences of the innovation. This problem is particularly critical when the technological development hold the potential to create changes that are not (easily) reversible (e.g. gene editing);

  • Barriers to the entry of new services (or increased entry costs) due to the uncertainties surrounding the regulatory landscape;

  • Creation of uneven playing-fields, where new entrants face regulatory barriers to entry (or, conversely, where incumbents face higher burdens than new business models).

Regulatory approaches can range from explicitly preventing the development and adoption of digital technologies, to adopting a “wait and see” approach to discover which perceived risks materialise, or piloting of innovative approaches such as the adoption of fixed-term regulatory exemptions (e.g. regulatory sandboxes) for innovative entrants that uphold protection for citizens and the environment.

Yet, due to the fact that an accepted conceptual taxonomy is lacking, governments often face a widespread variation of terminology about regulatory instruments. Drawing on the insights from the case studies, the following developments propose a simple classification of regulatory approaches that have been implemented or contemplated by governments.

The rapid pace of innovation means that governments need to develop anticipatory governance approaches to allow for an earlier identification of risks and opportunities brought by technological developments (OECD, 2021[9]) and (Tõnurist and Hanson, 2020[10]). This can notably be achieved by means of structured horizon scanning, scenario planning and earlier and more active engagement with stakeholders, including innovators – all of which can also help governments prioritise innovations where regulatory reform is needed to unlock their benefits for society or minimise associated risks. A number of jurisdictions have developed institutional mechanisms to advise regulators on the innovation pathways and the associated risks and opportunities. Sweden’s Committee for Technological Innovation and Ethics (KOMET) and the Canada’s External Advisory Committee on Regulatory Competitiveness.

A rather common reaction at the beginning of the technological development consists in observing how the technology develops without taking any regulatory action (during this period, innovators operate within the existing regulatory regime). While such an option could be a wise choice in the early stages of the technological development, this should be replaced by formal regulatory strategy once the evidence have been collected (through public and stakeholder engagement in particular).

Innovators often face difficulties in identifying and interpreting applicable rules, in particular when innovation is straddling or blurring the boundaries of traditional market definitions. In this context, governments can rely on soft law mechanisms such as regulatory guidance to help innovators understand how the regulatory framework applies for a specific technological development and reduce the potential regulatory uncertainty as to how to comply with existing requirements. It is important to note that guidance often occurs as a complement to wait and see approaches. Indeed, when a government formally decides to wait before issuing a regulatory decision, businesses may face regulatory uncertainties (e.g. on how to navigate the interdependences between the regulatory regimes) undermining incentives to innovate. Issuing guidance may help overcome this drawback by providing clarification and insights on how the regulatory landscape applies (governments could also use guidance to warn business about potential enforcement action in certain conditions are not met). Two main types of guidance could be distinguished: informal guidance on case-by-case basis (such as preliminary warnings, informal statements, and initial guidance on existing regulations in relation to the technology and no-action letters) and formal guidance. The latter relies of more formalised mechanisms to clarify the broader application of existing regulatory frameworks. It relies on a wide array of vehicles ranging from principles, policy guidance documents, best practices or white papers. It must be stressed that both approaches could be considered as ‘soft law’ and, as such, they might be subsequently challenged by the judiciary. As illustrated by the technological innovations in the financial sector, a number of governments do rely on innovation offices to provide guidance to businesses and help them mitigate the costly and time-consuming efforts to understand the regulatory landscape.

As noted by (OECD, 2009[11]), “self-regulation typically involves a group of economic agents, such as firms in a particular industry or a professional group, voluntarily developing rules or codes of conduct that regulate or guide the behaviour, actions and standards of its members. The group is responsible for developing self-regulatory instruments, monitoring compliance and ensuring enforcement”. In the EU, self-regulation has been defined as “the possibility for economic operators, the social partners, non-governmental organisations or associations to adopt amongst themselves and for themselves common guidelines at European level”.1 Examples of self-regulation include code of conducts or voluntary adoption of standards. When used in the right conditions, such approaches offer a number of advantages (e.g. greater flexibility and potentially lower compliance costs) that can help deliver policy objectives more effectively than regulation.

Self-regulation practices can be triggered by the existence of reputational incentives, in platform economies in particular. (Cantero Gamito, 2017[12]) states, for example, that “by providing feedback and rating the services they have used or the products that they have bought, platforms' businesses and users are 'spontaneously' generating new rules”. In this perspective, the reputational incentive can act as a complement to the traditional regulation of market failures such as information asymmetries.

It must be underlined that self-regulation does have a number of limitations, notably because it may lack transparency and fail to reflect properly the preferences of economic agents. In addition, in the absence of a common regulatory framework, competition issues may arise: first, it may raise the need for case-by-case analysis to address competitive concerns, which is probably not desirable from an industry and government perspective given the associated cost and uncertainties. Second, businesses might self-regulation mechanisms to develop barriers to entry, asking for example new entrants to comply with excessive and burdensome rules (which could be partly designed on purpose). In this context, the success of this approach critically hinges on the capacity of governments to “closely monitor practices and engage in regular reviews of technical standards and codes of practice in an open and inclusive way to avoid inappropriate market distortions(OECD, 2021[13]). (Cusumano, Gawer and Yoffie, 2021[14]) also suggest that, to yield positive outcomes, self-regulation regimes should be combined with credible threats of governments intervention.

An approach that can be used to circumvent part of the difficulties associated with self-regulation is co-regulation. In the EU, it is for example defined as a mechanism whereby “an [EU] legislative act entrusts the attainment of the objectives defined by the legislative authority to parties which are recognised in the field (such as economic operators, the social partners, non-governmental organisations, or associations)”.2 As an intermediate solution between pure self-regulation and traditional command and control mechanisms, co-regulation brings two main opportunities: first, it offers a certain degree of flexibility under the control of governments, which is desirable to deal with the pace of technological developments. Second, it relies on a close collaboration between business and governments, which creates avenues for access to first-hand and detailed evidence on technological developments and makes sure that it complies with general public policy objectives. Governments can therefore harness this approach to better understand the risks and opportunities brought by the innovation and adapt the chosen regulatory option as necessary.

A number of jurisdictions are experimenting with innovative regulatory approaches such as regulatory sandboxes to support the testing of new technologies and foster policy learning on how the regulatory framework may need to adapt. A regulatory sandbox generally refers to fixed-term regulatory exemptions associated with a number of safeguards to uphold public protection. At the end of the trial period, innovators may apply for an authorisation to develop the innovation outside the regulatory sandbox. Due to the cross-cutting nature of innovation, recent initiatives have been explored for the development of cross-sector and/or multi-jurisdiction regulatory sandboxes. The objective is to promote regulatory harmonisation, reduce the potential for regulatory arbitrage and facilitate the development of innovations in different markets and jurisdictions.

Outcome-based regulation “usually defines measurable outcomes that regulated firms must achieve. In focusing on outcomes rather than on inputs, it offers flexibility to businesses on how to meet to objectives, as long as they can demonstrate that the desired outcome has been achieved. Such approach theoretically allows regulated entities to choose the most efficient way to achieve the regulatory goal, while lowering compliance costs” (OECD, 2021[15]). As for self-regulation and co-regulation approaches, outcome-based schemes appear well-suited to address the dynamic and the uncertainties of technological developments by providing flexibility to innovators. Given the pace of innovation, prescriptive regulation might indeed become rapidly outdated or excessively burdensome. Outcome-based regimes may also place fewer obstacles on the development of interoperable regulatory frameworks across countries. It must be stressed, however, that performance-based solutions are certainly not a panacea in all cases. Recent examples show that it can work poorly, especially when performance cannot be adequately defined, measured, or monitored (Coglianese, 2017[16]). A series of questions should be carefully addressed to implement such approach successfully: is the performance observable and measurable? How far does the performance target is reflecting a public policy goal? What is the relevant unit of regulation (e.g. should it be individual or aggregated)? How to allocate the burden of proof (if demonstrating compliance is too costly, it could severely undermine incentives to innovate)? What standard of proof is required? How many dimensions of the performance should be taken into account? How to rank them? As for any type of regulatory approach, failing to design properly an outcome-based scheme can prove costly, ineffective, or even counterproductive.

Means-based regulation stands in contrast to outcome-based regulation: under this approach, governments define how businesses must act (presumably to achieve a certain level of performance). This approach is also known as technology-based regulation, command-and-control regulation, specification standards, design standards or perspective standards. Information disclosure regulation, that requires regulated entities to disclose their performance levels, is a type of technology-based regulation (unless it requires firms to achieve a defined level of performance).

A number of disadvantages have been identified in the literature. (Coglianese, 2016[17]) states for example that “for some regulated entities, the mandated means may not prove as effective as other means. Second, for some regulated entities, the mandated means may prove to be more costly than other equally effective means. Finally, by specifying how to act, means standards can inhibit innovation in finding better or cheaper ways to achieve the same outcomes”.

As the final step of the regulatory spectrum, governments may decide to implement an outright (or effective) ban, either to protect existing markets through regulation or to protect citizens against the potentially negative consequences of a technological development.

A couple of issues should be mentioned when it comes to the choice of regulatory approach:

  • As highlighted by (Department for Business, Energy & Industrial Strategy, 2020[18]), a useful distinction could also be made between economic and social regulation to help governments navigate through the various options available:

    • “Social regulation” covers liability law, labour market regulation, bankruptcy law, intellectual property regulation, product quality and safety regulation, environmental regulation, worker health and safety regulation, data protection regulation and information security regulations, and;

    • “Economic regulation” gathers abuse of dominance and antitrust regulation, market entry regulation, mergers and acquisition regulation, price regulation, quantity regulation, as well as the economic regulation of natural monopolies and public enterprises.

  • Despite the broad enthusiasm outcome-based regulation has recently garnered across governments, it must be underlined that none of the above-mentioned regulatory approaches are optimal per se. The relative efficiency of each regulatory solution depends, inter alia, on the expertise of governments, the ability to measure performance, the innovation stage and the pace of the technological development. Against this background, governments should carefully scrutinise the different alternatives, paying close attention to the strengths and weaknesses of each option.

  • Given the dynamics of digital transformation, regulatory responses cannot afford to be static and need periodic adaptations to keep pace with technological transformation. Continuous monitoring of the stock of regulations could help governments assess whether regulation remains fit for purpose and undertake regulatory revisions when necessary. In this regard, the International Risk Governance Council suggested that governments could engage in “Planned Adaptive Regulation” (PAR), i.e. a “continuous or iterative re-evaluation” of regulations (International Risk Governance Council, 2015[19]). In that perspective, governments should develop “intentional and precursory design of institutions and processes to review and update policies in light of evolving scientific knowledge and changing technological, economic, social and political conditions(International Risk Governance Council, 2015[19]). Adaptive regulation might however raise challenges for governments and business as it may reduce the stability and the predictably of the rules which, in turn, might inhibit innovation. Given this potential drawback, the IRGC stated that adaptive regulation is reserved for specific cases where:

    • There is a prior commitment, planned early in the policy’s design, to subject the policy to periodic re-evaluation and potential revision, and;

    • There is a systematic effort or mechanism, planned early in the policy’s design, to monitor and synthesise new information for use in re-evaluations.

  • This continuum of regulatory approaches should not be considered as a compilation of stand-alone blocks. As pointed out by (Coglianese, 2016[17]), regulations often combine different types of approaches. Given the sheer pace and the cross-cutting nature of technological changes, it is even more likely that the appropriate response will require a mix of regulatory approaches. As an example, self-regulation might well go hand in hand with co-regulation or guidance to provide some frameworks to business and mitigate the potential risks raised by the technology. Self-regulation can even be mandated by regulators through a regulatory measure. Governments might also want to publish guidance or code of practices to complement performance-based approaches. Similarly, it could be useful to combine regulatory sandboxes with regulatory guidance to reduce the level of uncertainty faced by business when launching a technological innovation.

The traditional regulatory policy tools provide important opportunities to pause, consult, question and test the approaches that may help achieve general policy objectives.

Given the level of technical expertise involved, the uncertainty surrounding certain digital developments and the overwhelming pace of digital transformation, governments critically need to engage a broad range of stakeholders (including regulated entities, citizens, universities, innovators, local governments, other regulatory agencies) for two main reasons:

  • Creating regulatory solutions that are evidence-based and leveraging the expertise of external actors affected by the innovations and their implications. This is especially important where governments face technological developments with wide-ranging and cross-cutting implications and/or where they do not have technical knowledge or in-house capacities to deal with the regulatory challenges;

  • Helping citizens understand the regulatory issues at stake, broadening the range of perspectives represented and, in turn, better delineating citizens’ expectations as regard regulation. Failing to do so could potentially undermine public trust in governments and generate barriers to the spread of beneficial innovations.

In this respect, a number of jurisdictions have started putting a strong emphasis on stakeholder engagement to respond to the opportunities and challenges arising from digital technologies. As an example, the Digital Charter published in 2018 by the UK Department for Digital, Culture, Media & Sport brings together the tech sector, businesses, civil society and other interested parties to build solutions to the challenges associated with innovations. Through the Digital Charter, the government is committing, in particular, to make it as easy as possible for citizens and others to give their views and harness the ingenuity of the tech sector, and is looking to them for answers to specific technological challenges, rather than government defining precise solutions itself. This rolling program also relies on an ex ante assessment of new regulations to design effective regulations. The government committed to consider the full range of possible solutions, including legal changes where necessary, to establish standards and norms for the digital economy.

Another initiative has been developed by Canada through its 2019 Digital Charter, which outlines the key issues to address to create a “new, transparent and accountable digital policy”. The digital charter, which has been informed by a broad public consultation in 2018, features a set of ten principles to guide the federal government's work. The principles cover a number of areas, including safety, security, transparency, portability, interoperability, enforcement and accountability.

Given the cross-cutting nature of innovations, regulatory co-operation between government agencies is also critical. Relevant initiatives in this area are emerging, as illustrated by the call for input on cross-sector sandboxes launched in 2019 by the Financial Conduct Authority (FCA). The FCA states that cross-sector regulatory sandboxes would bring a number of opportunities, including:

  • Developing shared learnings on the risks and opportunities raised by a specific emerging technology;

  • Contributing to the definition of a consistent and robust regulatory approach across government agencies;

  • Improving the efficiency of the regulatory process for innovative firms in providing a unique and co-ordinated entry point to firms.

Another interesting example in this areas is the Regulatory Practice Initiative (G-REG) developed by the New Zealand’s Ministry of Business, Innovation and Employment. Under this initiative, a network of central and local government regulatory agencies has been established to co-operate on regulatory initiatives.

Canada has also created an External Advisory Committee on Regulatory Competitiveness to advise the Treasury Board by “supporting the modernization of Canada’s regulatory system into one that further enables investment and innovation”. An objective is to provide guidance on how regulatory frameworks are necessary to deal with innovations, as well as “champion the use of pilots”. Via its Centre for Regulatory Innovation, which aims at promoting a whole-of-government approach to regulatory experimentation to support innovation and competitiveness, the country has also carried out targeted regulatory reviews to address barriers to innovation in areas including agri-food, biosciences, transportation, clean technology and digital technologies.

As mentioned above, it is vital for governments to anticipate risks and opportunities early on, by means of structured horizon scanning, scenario planning and earlier and more active engagement with stakeholders (including the business community). While regulatory foresight is still the exception, some governments have developed specific initiatives in this area such as the Regulatory Horizons Council (RHC) established by the Department of Business, Energy and Industrial Strategy (BEIS). The RHC acts as an expert committee to identify the implications of technological innovation with high potential benefit for the economy and society, and advise the government on regulatory reform needed to support its rapid and safe introduction. It has commissioned relevant research including on the use of innovations for regulation and will also be focusing on the role of standards in promoting innovation.

Singapore has also created the Center for Strategic Futures (CSF) whose mission is to “position the Singapore government to navigate emerging strategic challenges and harness potential opportunities by:

  • Building capacities, mindsets, expertise and tools for strategic anticipation and risk management;

  • Developing insights into future trends, discontinuities and strategic surprises; and

  • Communicating insights to decision-makers for informed policy planning”.3

Another interesting initiative in this area is Policy Horizons Canada, a federal government organisation that conducts foresight with a view to helping the Government develop future-oriented policy and programs that are “more robust and resilient in the face of disruptive change on the horizon”.4 To fulfill this mandate, Policy Horizons Canada carries out the following tasks:

  • Analyse the emerging policy landscape, the challenges that lie ahead, and the opportunities opening up;

  • Engage in conversations with public servants and citizens about forward-looking research to inform their understanding and decision making;

  • Build foresight literacy and capacity across the public service.

The European Commission has also decided to embed strategic foresight into its working methods. Strategic Foresight will inform the design of new initiatives and the review of existing ones in line with the revamped Commission Better Regulation toolbox, and help “strengthen the Regulatory Fitness and Performance Programme, which identifies opportunities to reduce Europe’s regulatory burden, and informs the assessment of whether existing EU laws remain ‘fit for the future’”.5 In addition, the mandate of the Commission’s regulatory oversight body, the Regulatory Scrutiny Board (RSB), has been expanded to include foresight.

Innovations also raise a pressing need to evolve existing practices with regards to regulatory impact assessments. The Danish Business Authority has, for example, launched a set of key principles to follow during rule-making. These principles aim to develop targeted regulations that support companies' ability to test, develop and apply new digital technologies. They promote, in particular:

  • Ex ante assessment policies to clearly define the objective of any regulatory policy proposals and develop simple and fit-for-purpose regulation, making effective use of benchmarks among different jurisdictions;

  • Interagency co-ordination to ensure the consistency across administrations’ approaches;

  • Stakeholder engagement to understand and identify user needs and ensure user-friendly digitalisation.

Another critical need brought by innovations is to review the stock of regulations to identify those which are ill-fitted, incomplete, redundant or overlapping. Initiatives are emerging across countries, such as the publication of the “Future of Urban Mobility Strategy” in March 2019 by the United-Kingdom. In an effort to take full advantage of the opportunities offered by new urban mobility technologies, the government has established a wide-ranging programme of work, with a regulatory review at its core. The government launched an in-depth review of existing regulations, through a broad programme of work across the different transport modes, from maritime autonomy to micromobility. It considers that it is highly likely that this undertaking will necessitate new primary legislation to address the challenges identified. Priorities for the review have been given to specific areas according to their degree of importance and urgency that is by the scale and proximity of the potential impact if regulatory issues are not addressed. The following areas of focus for the regulatory review have been identified: micromobility vehicles, mobility as a service, transport data and modernising bus, taxis and private hire vehicle legislation. This will complement the regulatory review already conducted by the Department for Transport in four areas: zero emission vehicles, self-driving vehicles, drones and future flight and maritime autonomy.

Interesting responses to the transboundary challenges are also appearing. While challenging, international co-operation is critical to ensure the effectiveness of regulatory action and reduce the burden that multiple regulatory regimes may impose on businesses and citizens. Given the strong cross border effects of the digital economy, it is clear that strict domestic solutions will not suffice.

A main objective of international regulatory co-operation is to avoid arbitrages, protect privacy and consumer rights effectively and promote interoperability across regulatory frameworks, whilst creating a favourable environment for the digital economy. A number of benefits could be expected from international co-operation including:

  • Help delineate common definition and guidelines for different regulatory regimes;

  • Support cross-border information sharing, regulatory learning and adaptation in response to innovation. International regulatory co-operation can facilitate the sharing of knowledge and helps governments meet the challenges that others may have already encountered;

  • Help overcome regulatory divergence, reduce the regulatory burden for licensing or approval and, as such, facilitate the development of beneficial innovation. The fragmentation of regulatory frameworks across jurisdictions may indeed generate barriers to the spread of beneficial digital innovations as it can be particularly difficult for business to navigate jurisdictional complexities. As underlined by (Department for Business, Energy & Industrial Strategy, 2020[20]): “harmonised regulatory requirements directly translate into financial savings for companies and resources that could then be put back into research and development activities or other business functions”. Regulatory convergence can allow businesses to scale more quickly and to attract more foreign investments and talents. Regulatory convergence may also help reduce the adverse effects of regulatory competition, where jurisdictions “race to the bottom” to gain short term advantages.

  • Promote the quality of services and products: extending the evidence base through international co-operation increases the opportunities to identify flaws or inefficiencies associated with an innovation (e.g. Fintech trials conducted by the Global Financial Innovation Network);

  • Improve consumer satisfaction: harmonisation can allow consumers better and earlier access to innovations.

While international co-operation brings clear potential benefits as regards innovation, it also raises a number of challenges (Department for Business, Energy & Industrial Strategy, 2020[20]):

  • The scope of the co-operation should be large enough to avoid the creation of regional silos that could potentially become incompatible with each other;

  • International co-operation might be difficult when interests and regulatory landscapes are too different and when countries with more developed economies strive for exerting undue influence;

  • Regulatory co-operation could risk a regulatory ‘lock-in’, whereby co-operation efforts leads to complex and slow-moving systems that are not agile enough to accommodate the fast pace of technological developments.

In the face of these challenges, governments will need to make the most of the wide range of possible approaches (unilateral, bilateral, and international) and the various modalities (e.g. work-sharing, harmonisation, collective experimentation, etc.).

A good example of initiative in this regard is the creation of the Agile Nations. On December 2020, seven governments (Canada, Denmark, Italy, Japan, Singapore, the United Arab Emirates and the United Kingdom) announced the creation of the Agile Nations, the world’s first intergovernmental alliance aiming at fostering co-operation across borders towards more agile, flexible and resilient governance and regulatory practices to unlock the potential of innovations. The Agile Nations Charter6 sets out each country’s commitment to creating a regulatory environment in which new ideas can thrive. The agreement paves the way for these nations to co-operate in helping innovators navigate each country’s rules, test new ideas with regulators and scale them across the seven markets. Priority areas for co-operation include the green economy, mobility, data, financial and professional services, and medical diagnosis and treatment.

International organisations can also foster various forms of international regulatory co-operation among governments at a multilateral level, ranging from exchange of information to the development binding international treaties, thus fostering a common approach with a broad set of actors. Recognising needs to adapt to new forms of governance required by innovations, international organisations are exploring different avenues for multistakeholder dialogue. The International Telecommunication Union develops for example standards in a variety of areas related to innovations, including on e-health, working towards safeguarding privacy and security in the use of digital technologies for health. On this specific issue, they collaborate in particular with the World Health Organisation, which supports policymakers at the local, regional and national level to ensure the sustainable, safe and ethical use of technology.

The role of the OECD is also key in this area, by enabling cutting edge policy analysis, exchange of experiences as well as the adoption of international instruments and guidance in a broad range of policy areas related to innovations. Recently, its Members adopted for example a Recommendation on Artificial Intelligence (OECD, 2019[21]) to support governments in designing national legislation for the responsible stewardship of trustworthy AI. Beyond OECD members, other countries including Argentina, Brazil, Costa Rica, Malta, Peru, Romania and Ukraine have already adhered to the AI Principles. The Global Partnership on AI, bringing together 25 members to promote responsible development of AI, has been created around a shared commitment to the OECD Recommendation on Artificial Intelligence.

Interestingly, some governments are also developing initiatives to unilaterally align with other governments’ regulatory approaches or adopt international standards. As an example, the Danish Business Authority’s one-stop shop for new business models conducts “neighbour checks” to understand how innovations are governed in neighbouring jurisdictions.

The regulatory enforcement challenges brought by innovations also warrant the development of new enforcement strategies to promote compliance while upholding public protection. New (digital) technologies provide, in particular, interesting avenues to enable more efficient, resilient and responsive enforcement activities. By providing better evidence, new technologies can help governments predict risk trends, target the most effective use of resources and enhance risk assessment. As part of the roll-out of Japan’s “Society 5.0” governance model, the Ministry of Economy, Trade and Industry has been for example undertaking pilot studies in different sectors which involve the use of technology for compliance monitoring purposes. A promising development in this context involves a public-private action plan formulated towards the promotion of a smart industrial safety in petroleum and chemical plants. It is predicated on the premise that the introduction of IoT, AI and other new technologies can help operators address structural challenges, such as aging facilities and a shortage of labour.

The European Commission is also using satellite data and data from in-situ sensors (e.g. ground stations, airborne sensors, and sea-borne sensors) from the EU Copernicus system to monitor a number of policies related to land use and climate change among others. Although it relies on Member States’ reporting on compliance and enforcement, satellite data and other data generate through observation systems are increasingly used for the analysis of infringement cases (e.g. environment).

While these examples highlight that important steps have bene taken to address the regulatory challenges, more would need to be done to strengthen and systematise the use of regulatory policy tools. As highlighted in the OECD Recommendation on Agile Regulatory Governance to Harness Innovation (OECD, 2021[13]), this could involve, in particular:

  • Developing more flexible, iterative and adaptive ex ante and ex post assessments, capitalising on the opportunities provided by digital technologies to improve the quality of evidence;

  • Fostering coherence and joined-up approaches through effective co-operation between the supra national, the national and sub-national levels of government;

  • Developing governance frameworks to enable the development of agile and future-proof regulation such as outcome-based regulations (e.g. data-driven regulation and rules as code (Mohun and Roberts, 2020[22]), fixed-term regulatory exemptions (e.g. regulatory sandboxes), co-regulation and non-regulatory approaches such as voluntary codes or standards. As highlighted by the OECD Global Conference on Governance Innovation7 and a recent survey developed by the OECD for the G20 Digital Economy Task Force (OECD, 2021[23]), governments and regulators are increasingly considering innovative regulatory approaches to harness innovation;

  • Develop new enforcement strategies to promote compliance: governments should privilege responsive and compliance-promoting approaches to regulatory delivery that are focused on outcomes and based on risk-proportionality rather than focusing primarily on the letter of the rules.


[17] Bignami, F. and D. Zaring (eds.) (2016), Performance-based regulation: concepts and challenges, Edward Elgar Publishing, https://doi.org/10.4337/9781782545613.00028.

[12] Cantero Gamito, M. (2017), “Regulation.com : self-regulation and contract governance in the platform economy : a research agenda”, European journal of legal studies, Vol. 9/2, pp. 53-68.

[16] Coglianese, C. (2017), “The Law of the Test: Performance-Based Regulation and Diesel”, Yale Journal on Regulation, Vol. 34/1, pp. 33-90.

[14] Cusumano, M., A. Gawer and D. Yoffie (2021), “Can self-regulation save digital platforms?”, Industrial and Corporate Change, https://doi.org/10.1093/icc/dtab052.

[20] Department for Business, Energy & Industrial Strategy (2020), “Regulator approaches to facilitate, support and enable innovation”, BEIS Research Paper series number 2020/003.

[18] Department for Business, Energy & Industrial Strategy (2020), “Regulatory types and their impacts on innovation: a taxonomy”, BEIS Research Paper series number 2020/004.

[24] Finck, M. (2017), “Blockchains and Data Protection in the European Union”, Max Planck Institute for Innovation & Competition Research Paper, Vol. 18/01.

[19] International Risk Governance Council (2015), “A short introduction to ’Planned Adaptive Regulation’”.

[22] Mohun, J. and A. Roberts (2020), Cracking the code: Rulemaking for humans and machines, https://dx.doi.org/10.1787/3afe6ba5-en.

[23] OECD (2021), “G20 Survey on Agile Approaches to the Regulatory Governance of Innovation”, Report for the G20 Digital Economy Task Force.

[15] OECD (2021), OECD Regulatory Policy Outlook 2021, OECD Publishing, Paris, https://dx.doi.org/10.1787/38b0fdb1-en.

[9] OECD (2021), OECD Science, Technology and Innovation Outlook 2021: Times of Crisis and Opportunity, OECD Publishing, Paris, https://dx.doi.org/10.1787/75f79015-en.

[13] OECD (2021), “Recommendation of the Council for Agile Regulatory Governance to Harness Innovation”, OECD/LEGAL/0464.

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[27] OECD (2020), Tax Challenges Arising from Digitalisation – Economic Impact Assessment: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/0e3cc2d4-en.

[4] OECD (2019), An Introduction to Online Platforms and Their Role in the Digital Transformation, OECD Publishing, Paris, https://dx.doi.org/10.1787/53e5f593-en.

[5] OECD (2019), Going Digital: Shaping Policies, Improving Lives, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264312012-en.

[21] OECD (2019), “Recommendation of the Council on Artificial Intelligence”, OECD/LEGAL/0449.

[6] OECD (2019), “Vectors of digital transformation”, OECD Digital Economy Papers, No. 273, OECD Publishing, Paris, https://dx.doi.org/10.1787/5ade2bba-en.

[25] OECD (2018), “Tax and digitalisation”, OECD Going Digital Policy Note, https://www.oecd.org/tax/beps/tax-and-digitalisation-policy-note.pdf (accessed on 21 October 2020).

[28] OECD (2018), “Financial Markets, Insurance and Private Pensions: Digitalisation and Finance.”.

[2] OECD (2018), OECD Regulatory Policy Outlook 2018, OECD, https://doi.org/10.1787/9789264303072-en.

[8] OECD (2018), “Rethinking Antitrust Tools for Multi-Sided Platforms”, http://ww.oecd.org/competition/rethinking-antitrust-tools-for-multi-sided-platforms.htm.

[26] OECD (2018), Tax and Digitalisation, https://www.oecd.org/tax/beps/tax-and-digitalisation-policy-note.pdf (accessed on 7 October 2020).

[3] OECD (2018), Tax Challenges Arising from Digitalisation – Interim Report 2018: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264293083-en.

[11] OECD (2009), “Alternatives to Traditional Regulation”.

[7] Tirole, J. (2019), “Regulating the Disrupters”, Project Syndicate.

[10] Tõnurist, P. and A. Hanson (2020), “Anticipatory innovation governance: Shaping the future through proactive policy making”, OECD Working Papers on Public Governance, No. 44, OECD Publishing, Paris, https://dx.doi.org/10.1787/cce14d80-en.


← 1. Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on Better Law-Making, April 2016.

← 2. Interinstitutional Agreement between the European Parliament, the Council of the European Union and the European Commission on Better Law-Making, April 2016.

← 3. https://www.csf.gov.sg/who-we-are/

← 4. https://horizons.gc.ca/en/about-us/

← 5. https://ec.europa.eu/info/law/law-making-process/evaluating-and-improving-existing-laws/refit-making-eu-law-simpler-less-costly-and-future-proof_en

← 6. https://www.gov.uk/government/publications/agile-nations-charter.

← 7. https://www.oecd.org/fr/gov/politique-reglementaire/oecd-global-conference-on-governance-innovation.htm.

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