Regulations as an innovation forcing function

In earlier postings, I've argued that, done right, regulations can be a driver of innovation by creating demanding customers. Here is one small example from today's Wall Street Journal -- "A GM Redesign Achieves Higher MPGs":

After rising just 10 mpg in the last 30 years, the nation's fuel economy regulations are poised to rise at least an average of two miles a gallon a year for the next decade. By 2025, the average new vehicle is required to get 54.5 miles per gallon.

Those increases are forcing companies to rethink how they design their vehicles. Honda Motor Co.'s 2012 Civic has specially coated engine pistons that reduce friction. The result is a 2% improvement in fuel economy. The 2012 Toyota Motor Corp. Camry weighs 150 pounds less than this year's model. Chrysler Group LLC put a more fuel-efficient, eight-speed transmission in its 300 sedan. The car will get more than 30 miles a gallon, compared to 27 mpg in the current model.

In the case of the Chevrolet Malibu, GM engineers spent three years on changes that eked out at least five miles a gallon, creating a car that will go at least 92 more miles on a tank of gasoline compared to the current model. Slicker aerodynamics were just part of their bag of tricks. Lighter materials, such as an aluminum roof, and computer-controls that shut off the engine when idling and open and close grille vents also were part of the mileage boosters.

The story goes on to describe numerous other changes to improve fuel efficiency. None of them are "breakthough" innovations. Rather, they constitute a steady stream on incremental innovations. But they are the type of innovations that are easily overlooked. Without the forcing function of higher goals -- in this case in the form of regulations, they are innovations that may not have even been thought of, let alone implemented.

That may the real power of regulations as a forcing function: not necessarily the breakthrough but the smaller, incremental steps. Either way, good regulations can foster innovation - just as bad regulations can inhibit it. Our task is to know the difference.