The Innovator’s Dilemma, but for countries

With help from Derek Robertson

Who can direct the future?

The answer is not always clear at the time. Forty years ago, Digital Equipment Corporation was a dominant technology giant thanks to its minicomputers, which were more compact than standard mainframe computers. Then came even smaller and cheaper personal computers, and well, Digital Equipment Corporation disappeared.

His fate is one of many similar cases detailed in “The innovator’s dilemmathe 1997 business strategy classic written by Harvard Business School professor Clayton Christensen.

The dilemma is that established companies face incentives that force them to focus on incrementally improving their already successful products. This makes them vulnerable to newcomers who may focus on developing radically new technologies that may seem risky or immature, but end up taking over the market.

What if a version of this strategic dilemma also applied to countries?

This is a big question raised, more recently, by the argument of whether the ongoing crypto crackdown in the US is driving the industry to more hospitable foreign shores, and whether that matters. One problem is that the United States has been criticized for regulating the industry while failing to issue clear guidelines on the nature of those regulations.

The US dominates the global financial system and US-based tech giants dominate the internet.

If a new kind of technology emerges, it’s predicated on disrupting those systems that your country dominates, and secondly, it’s associated with a lot of issues like piracy, circumvention of sanctions, and financial meltdowns, then you’re more likely to crack down on companies that use the technology you are to encourage their growth.

We are currently seeing a version of this with crypto as US regulators ramp up enforcement following the collapse of FTX.

This approach may well make sense for US consumers. And that certainly makes sense for the established financial sector. But how will this affect national competitiveness in the longer term? The problem is that there are many other countries that do not have the same interest in protecting the prevailing numerical and financial order. And many of them prepare the welcome mats.

As POLITICO reported late last month, the new EU legal framework for digital assets, which creates regulatory clarity for the industry, makes it more attractive to certain companies, a point that crypto lobbyists in Washington have been careful to point out.

It’s not just the EU. British Prime Minister Rishi Sunak harbors ambitions to use digital assets to restore London’s primacy as a financial hub. Both Dubai and the United Arab Emirates have courted the industry. And the Japanese government sees the related development of Web3 as an opportunity to regain its cutting edge high technology.

Like the title of recent grandstand in CoinDesk said it, ostensibly, “I’m American, but my Crypto startup won’t be.”

So… is it true that the United States could lose its primacy in a growing industry? Or is this just a case of regulators finally doing their job? In an interview with POLITICO’s Sam Sutton and Declan Harty, published Tuesday, SEC Chairman Gary Gensler pushed back against the industry outsourcing argument.

“We lose more if investors are harmed here,” he said. “It’s a basic market in finance: if you want to raise funds from the public, disclose certain facts and figures.”

In a vacuum, the dilemma here looks like a simple regulatory race to the bottom. Create an industry-friendly legal environment or all that economic activity will move elsewhere. And in some cases, that’s fine: there are plenty of risky or dirty industries that Americans are quick to say goodbye to.

But the involvement of technology that could potentially disrupt the United States’ position in the financial system and the internet adds a whole other layer of complication: Is the United States putting off the next big thing? Is there even a good way to capitalize on this new thing without messing up what it already has?

Join the race to develop and deploy central bank digital currencies, which often incorporate the same innovations used by private and open source blockchain networks. As with its cautious regulatory stance, the US approach is complicated by the fact that it already has a good thing going.

BCG World CBDC tracking gives an idea of ​​the international situation. Much of Europe and Asia are in proof-of-concept or pilot stages, while the United States remains in the research phase (the Atlantic Council’s tracker, with its own methodology, roughly depicts the same picture).

Notably, the Chinese digital yuan, widely used for surveillance, has already been used for billions of dollars value of transactions as the country seeks to make its currency a bigger part of global trade.

Last week, the United States moved closer to a digital dollar when the Treasury Department announced a new interagency task force to explore its possible creation. But the response from a number of constituencies, from the banking industry to Federal Reserve governors, to corners of the Biden administration, to Republicans on the Hill varied from lukewarm to downright hostile. Many people have a lot to lose, which makes it difficult to remake the system from within.

Incumbent corporate executives may feel like their hands are tied by economic incentives, but that’s nothing compared to the political straitjacket that awaits anyone who wants to remake the dollar from within.

It turns out that when your currency underpins the global financial order, it’s hard to “move fast and break things.”

Of course, for the biggest crypto devotees, CBDCs look like the mini-computers of money: a halfway upgrade that will soon be forgotten when the real revolution takes off.

Last year’s CHIPS and Science Act was presented largely as a tool to stay competitive with China. But what if America has to go even further to keep up?

This is argued by Dan Wang, a Shanghai-based technology analyst, in a long try recently published in Foreign Affairs. In short, Wang argues that “chips” are science, and that America must “treat manufacturing as an integral part of technological progress, not just a sideshow to the most exciting acts of invention and R&D”.

“Beijing’s manufacturing-focused approach has become critical to its ability to challenge the West in cutting-edge technology,” Wang writes. “…The country’s most significant technological achievement over the past two decades has been the development of a large and highly experienced skilled labor force, which can be adapted as needed for the most high-intensity industries. technology intensity.”

Wang compares and contrasts US and Chinese solar energy efforts over the past decade as an example, demonstrating how China’s solar industry has thrived through such integration where that of America has weakened. — Derek Robertson

All of a sudden there’s a lot going on in Washington when it comes to AI.

In this morning’s Morning Tech newsletter for Pro subscribers, POLITICO’s Mallory Culhane and the rest of the Technology Policy Team recapped yesterday’s Senate Homeland Security and Government Affairs Committee AI hearings and of the House Oversight Subcommittee. Some notable takeaways:

  • AI so far seems to be a bipartisan issue…mostly. Senate Republicans declined to attend the Homeland Security meeting when its chairman, Sen. Gary Peters (D-Mich.), declined to include remote testimony from Jordan Peterson.
  • Sen. Richard Blumenthal (D-Conn.) used the hearing to tout his merits Child Online Safety Actthat would update federal child safety guidelines for new technologies.

Members of the House, perhaps unsurprisingly, posed questions to Eric Schmidt, former CEO of Google and AI and technology guru. — Derek Robertson