Government Regulation Affect the Tech Sector

Government regulation has always played a critical role in the economy. It shapes industry structure, reconciles conflicts and allocates resources, structures interaction among firms, and even coordinates the relationships within production and distribution networks. But as digital transformation continues to transform consumption from product-based bundles to experience-based ecosystems, the tech sector’s relationship with regulation is changing radically. Today, platforms and their ecosystems orchestrate sector-spanning value chains that define the digital economy. They are the new power brokers that regulators are now revisiting their playbook to address.

In the past, tech companies could rely on their ingenuity to stay ahead of regulation. Ride-hailing companies, for example, took geolocation and smartphone technology to fill a consumer need in transportation, while anticipating and influencing government regulations to their advantage. Today, tech giants are being scrutinized for a wide variety of reasons including antitrust; privacy; security; consumer data; platform activity and emerging technologies, such as AI. The growing regulatory backlash against big tech should be of serious concern to every company in the sector.

A key challenge for regulators is the sheer number of Tech Sector creators, uses and applications. Any given technology may be subject to regulatory scrutiny by multiple agencies, such as the Federal Aviation Administration because it flies through congested airspace; Department of Transportation for use on public roads; and Department of Homeland Security when it crosses borders. Each agency has its own goals and values that shape how it approaches the technology, resulting in different forms of regulation. Advocates of benefit-cost analysis urge that regulators tote up compliance costs and compare them with the qualitative benefits they are seeking from any given form of regulation, in order to determine whether it is cost effective.

How Does Government Regulation Affect the Tech Sector?

Another challenge is that cash-strapped governments often don’t have the staffing and budget to implement new regulation, or even enforce existing ones effectively. A recent Morning Consult survey found that a majority of Americans, across party lines, want to see more regulation of major tech companies. And with a new Democratic Senate majority, an eager and well-prepared Federal Trade Commission under Chair Lina Khan, and a Supreme Court challenge to the tech sector’s immunity in regard to user-generated content, it appears that there is growing momentum for increased regulation.

Despite these challenges, it is important to remember that market failures exist and that there is a case for some regulation in most industries. In the case of clean air and water, for example, there are many ways the government can encourage companies to take greater responsibility for reducing pollution, such as by paying them directly to offset their environmental impacts. But for most industries, the more practical approach is through regulation that requires compliance.

The greatest risk for tech companies is not overregulation, but the risk that governments won’t regulate quickly enough or at all. The best way for technology companies to minimize this risk is by actively participating in the creation of government regulations and ensuring they are designed with their interests in mind.