By David Teece
April 18, 2017 at 5:00 am ET
The central goal of the Trump administration is to create new jobs and bring home old jobs that have moved overseas. To have any hope of success, President Donald Trump will need to have an innovation policy that supports new technologies and reduces regulatory and legal barriers to growing these technologies.
There are many places to start. Research firm IHS Markit in January released a study of the coming economic impact of 5G, the next generation of mobile technologies. According to the report, 5G will be a significant step forward in the evolution of mobile technologies. This new technology, successfully implemented, will have great economic impact, with the “value chain” amounting to $3.5 trillion of output and 22 million new jobs, many of them here in the United States.
While we should all welcome the transformative impact of 5G mobile broadband, we must be concerned that poorly designed public policy could adversely impact this new technology. The economic literature on innovation suggests that with many significant innovations, the social rate of return greatly exceeds the private rate of return. In simple terms, what society captures is far above what the innovator gets in exchange for its research and development.
Consider the smartphone. Anyone reading this article probably has one, and most will have strong preferences for the brand of smartphone they are using. The features of the device such as the camera and the screen are apparent, but a central part of the appeal of the phone is its ability to tap into 3G and 4G networks. While many appreciate the value of these networks—which are modest relative to the speed 5G will achieve—most people are only dimly aware of the formidable amount of research done by firms such as Qualcomm, Nokia and Ericsson that developed these technologies.
It is this research that substantially drives the value of the devices and networks. Investing in research is risky— investors do not have a clear view of which risks will pay off. It stands to reason that the research that does translate into high-value applications should compensate the innovator enough to pay for its risk-taking and more importantly to provide incentives for future research and development.
Unfortunately, many antitrust authorities around the world, including in the United States, have chosen to focus not on the benefits of these innovations, but on the narrow possibility that innovators charge “too much.” The motivations of antitrust authorities are diverse: many mistakenly believe that they are protecting the consumer from harm. Others may be swayed by lobbying from those—such as handset manufacturers—who claim that innovators are getting too high a price; and in some cases, political and protectionist factors may play a role too. Their focus is almost always short term. They worry about today’s prices, not tomorrow’s innovation.
From the perspective of actual experience with 3G and 4G technology, the narrative of excessive licensing costs makes little sense: Just consider the incredible progress that we have seen recently in the wireless-related arena. So-called “excessive” royalties have not stopped Apple or Samsung from being profitable and innovative in their own way, yet our own antitrust agencies are making it difficult for U.S. developers of the enabling technologies that support smartphone industry growth.
Innovations such as 4G and 5G do not happen by accident. They require an extraordinary amount of research, development and risk-taking, and that is highly sensitive to the expected returns from that development. The short-sighted focus of the antitrust agencies on protecting handset manufacturers ignores the real possibility that when the strong arm of the “regulator” is done, even the most valuable patent portfolio is deemed to be worth mere pennies. The danger is that some of the most innovative technology firms will simply decide to not invest in the next round of technologies. As a result, we could end up with new phones, but no new technologies to make them run, with the entire ecosystem weakened and hurting the very people the agencies think they are trying to help. The United States will no longer be considered the place where innovators are assured of strong intellectual property rights. Foreign antitrust agencies would follow suit, using that example to protect their own national champions.
If the Trump administration wants to assure the creation of trillions of dollars of benefits from 5G, it will need to look anew at antitrust and innovation policies. The continuation of prior policies will likely reduce R&D budgets and jobs in the U.S. technology sector. With the vast economic potential of 5G, it would be short-sided to let misguided theories discourage investment in innovation, frustrating the goals of job creation and U.S.-based technological leadership.
David Teece is the Tusher professor of global business at the Haas School of Business, University of California Berkeley.
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