The Effect of Regulation on Innovation

This paper uses a two-by-two comparative framework comparing medical devices and drugs in the US and EU from 1906 to 2013 to assess whether there are differences in innovation between drugs and devices and between the US and EU, whether those differences can be explained by differences in regulation, and whether, within a given sector, increased regulation impacts innovation. Using a novel dataset, I make three key findings regarding regulation’s association with innovation. First, my analysis of innovation normalized for market opportunity indicates that there is more innovation in devices than drugs in both the US and EU and more innovation in the US than EU in both drugs and devices. Second, I find that regulation is one of several factors that could help explain increased innovation in devices and the US. Device regulation is less stringent than drug regulation and US regulation is more centralized than EU regulation. These key regulatory differences place less of an evidence, time and cost burden on firms and consequently may incentivize higher levels of innovation. Third, I find that, within a given subset, periods of tighter regulation were associated with reductions in patenting, which provides suggestive evidence that there may be an association between increased regulatory burdens and decreased innovation. While my findings are suggestive of a relationship between regulation and innovation, since I focus on the prima facie strength of regulation whereas the impact of regulation on innovation can be influenced by many additional factors, it is not surprising that my data show only a very weak association between regulation and changes in patenting.

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