REGULATORY SANDBOX
By MICHAEL AUSTIN, MA
Lecturer at Washburn University School of Business
President & Owner of Knowledge & Decisions Economic Consulting
As the pandemic ends, Topeka entrepreneurs and small businesses are eager to return to work, catering their products and services to an ever-dynamic marketplace. However, unlike businesses, state agencies and regulators might struggle to keep up with entrepreneurial zeal. As a result, antiquated rules are like trying to fit square pegs into round holes, cramping entrepreneurship, and putting the brakes on growth. A regulatory sandbox could be a solution that gives businesses a longer leash to innovate, while ensuring consumer protection. With this “playground,” Topeka can become a hub of innovation where business can flourish, and customers can rejoice.
TECHNOLOGICAL CHANGE VS ORGANIZATIONAL CHANGE
We live in the 21st century, where innovative ideas and technology grow like flowers after the rain. But governmental agencies have always played catch up when regulating the vast new ideas and processes. Even the Clinton administration noticed this situation. Their report, “Framework for Global Electronic Commerce,” emphasized allowing the private sector to take the lead and even allowing the industry to self-regulate (Magaziner, Cutter, & Costa, 1997).
The Clinton administration understood what those in economics and management teach; Martec’s Law. Martec’s Law is an ever-increasing gap between technological change and organizational change. The bigger the mismatch, the greater the stress and the further we stray from our economic growth potential. Topeka is no exception.
HIDDEN COSTS OF REGULATIONS
The Bureau of Economic Analysis reported a 3.8% growth rate for the Topeka metro area from 2020 to 2021. While this growth is impressive, it’s only about half of what the average metro region in the nation achieved. Over-regulation might be a significant factor contributing to this comparatively slower growth. Although regulators have good intentions, we must be mindful of hidden opportunity costs — the missed chances and resources we give up due to specific economic actions or policies. A quintessential example is the company Free World Dialup.
At the turn of the millennium, a company known as Free World Dialup (FWD) created a product of peer-to-peer voice communication over the Internet. FWD held back on launching its communications product until it took appropriate compliance steps with the FCC. FWD waited a year and a half to get regulatory approval to launch, but they were at a severe disadvantage by then. A small European company ignored American regulators and launched a similar product. They got a “first-mover advantage” and built a solid base of consumers. FWD struggled and ultimately went out of business. Roughly ten years ago, Microsoft bought that European company but kept its name on the communication service. Today, Skype has at least 160 million active users. Such an example underscores the importance of balancing regulation and business freedom.
The Kansas regulatory code has 3.3 million words and nearly 73,000 restrictions (Broughel, 2021). In context, reading the entire code would take 185 hours, or more than four and a half 40-hour workweeks. On a per capita basis, Kansas’ 24.9 regulations per person is higher than the national average of 19.6 per person. Moreover, state agencies often fail to conduct cost-benefit analyses on regulations, leading to costly burdens on the business and startup community.
The 2017 National Small Business Association found that regulations cost small business owners an average of $12,000 yearly and startups an average of $83,000 yearly. Such resources could’ve been plowed back into the business to create more jobs, spur investment, raise wages, or even increase charitable contributions. A regulatory sandbox might be the solution we need.
REGULATORY SANDBOX
What is a regulatory sandbox? It’s a legal classification where participating companies won’t be subject to onerous regulations for a limited period. In a nutshell, businesses can “play in the sandbox” to discover what works and what doesn’t.
The concept came from the United Kingdom’s Financial Conduct Authority (FCA). Their November 2015 report defined a regulatory sandbox as a “safe space in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.
During the limited period, specific regulations are suspended. However, it is not a free-for-all. Regulations related to public health, safety and consumer protection remain. Once the trial is over, lawmakers evaluate the sandbox’s effectiveness and determine the proper regulations for a successful product or service launch. It’s like a playground for businesses to experiment and innovate while ensuring that everyone’s still safe and sound.
IMPLEMENTING A REGULATORY SANDBOX IN TOPEKA
How could this be implemented in Topeka? A regulatory sandbox could be tailored towards Topeka’s competitively advantageous industries. Using quarterly census records from the Bureau of Labor Analysis, Topeka has a higher concentration of workers in certain industries than the state. Those include, but are not limited to, food manufacturing, finance and real estate, social assistance programs and health care, to name a few (Bureau of Labor Statistics, n.d.). The presence of such a relatively higher share of workers in these industries suggests such industries lead Topeka to faster economic growth. These should be the first businesses to play in the sandbox.
As for lawmakers, they should ensure that:
Regulatory sandboxes are made voluntary,
Sandbox companies are transparent with customers,
Sandbox companies that cause harm are held accountable,
Regulatory institutions provide full support to sandboxes,
Customer exposure is limited to mitigate risk, and6.Sandbox companies work with federal agencies as appropriate.
Additionally, lawmakers should conduct ongoing “lessons learned” analyses to ensure continuous improvement and refinement of the sandbox model.
Once the structure is in place, sandboxes should pave the way to see lessened regulations for all. An all-inclusive regulatory sandbox can help customers by providing innovative products and services. It also benefits entrepreneurs and small businesses without worrying about following outdated rules. Most importantly, they can help grow the economy by lowering the cost of startups and entrepreneurial activity, creating more jobs and opportunities for Topekans.
As Topeka businesses embrace the post-pandemic era, state agencies and lawmakers should be ready to join them. Addressing the hidden costs of over-regulation and streamlining the regulatory code is paramount and vital to unlocking the full potential of the Topeka economy. By using a regulatory sandbox, businesses can better succeed and improve Topekan’s quality of life. It’s one novel way Topeka can become one of the best places in Kansas to start and run a business.
