“If You Build It, They Will Come”: Stimulating Innovation with Regulatory Sandboxes

By: Sarah Mostowich, Head of Innovation at NorthGuide

“If you build it, they will come.” In this classic scene from the 1989 movie Field of Dreams, we see Kevin Costner walking through a cornfield, dreaming of a way to attract people and forge a sense of community.?

These words, now a cultural mantra, certainly ring true in ecosystem building. When we build innovation ecosystems, we look to tools and frameworks to put our good intentions into action. Policy can help us ‘de-risk’ investments, enabling infrastructure development and encouraging collaboration. We can apply various policy tools to enhance competitiveness. For example, tax incentives and grants attract businesses and incentivize R&D investments while talent attraction and retention programs (such as visa schemes, educational partnerships, or reskilling initiatives) attract and upskill needed human resources.

One such policy tool seeing traction around the world is the regulatory sandbox.

Flipping the script on innovation?

A regulatory sandbox is designed to enable experimentation and reduce regulatory barriers to innovation. New technologies and business models often push the boundaries of existing rules, creating uncertainty for both innovators and regulators. This can stifle progress, sending promising solutions – and the economic opportunities they represent – to more accommodating jurisdictions.

Sandboxes create a controlled environment where innovative solutions can be tested under regulatory supervision. Think of it like a playground sandbox where kids can build and experiment safely under supervision. Just as children test out new construction techniques with their sand castles while parents keep watch, companies can try innovative approaches with regulators ensuring everything is being done safely.

Executed well, the sandbox can unify jurisdictions, much the way a physical sandbox brought us together to collaborate as children. Jurisdictions looking for a ‘where do I sign up’ response to innovation find this tool inspires diverse parties to join in.? It’s a signal that the jurisdiction wants to “play.”?

Let me give you an illustrative scenario: A company develops a breakthrough construction material that's stronger, more sustainable, and significantly lighter than traditional concrete. Tests prove it's stronger and more resilient than conventional concrete, but because it's lighter, it doesn't meet existing density requirements in building codes. In a regulatory sandbox, this company could work with regulators to safely test their material in specific locations, collect data on its performance, and potentially update regulations to accommodate this innovation – if it proves both safe and beneficial.

Sandboxes also provide an opportunity for regulators to engage with innovators proactively in areas where there are few or uncertain regulations such as applications of AI or healthcare services. They give governments a path to proactively work with innovators in key areas where they want to see innovation growth. The Government of Canada included in its 2024 budget a commitment “to increasing the use of regulatory sandboxes across government” with the goal of “allowing temporary limited exemptions to existing legislation and regulations in order to run a regulatory sandbox.” It’s a commendable approach for governments who wish to proactively flip the script on innovation and stay up-to-date with industry and technology change.

Spurring economic growth: a real-world case?

NorthGuide works with global jurisdictions to frame out regulatory sandboxes. We’re often asked when and why jurisdictions should consider launching a sandbox. A real-world client case might best answer these questions.?

The country of Barbados boasts a highly educated population, resilient labour markets, and a high quality of life, which highlights its potential for fostering innovation. With a desire to diversify its economy and drive growth, the Government of Barbados has taken steps to create an innovation-friendly environment - for example, tax incentives for research and development and digital transformation.?

The Barbados sandbox is designed to signal the island’s openness to innovation. The ultimate goal being to drive economic growth, stimulate entrepreneurial ventures, and position Barbados as a center for creativity and technological advancement.

In this project we first examined some of the challenges in the Barbados ecosystem. Some of these included:

• Emigration of skilled talent: There was a notable trend of skilled professionals and potential entrepreneurs leaving Barbados to pursue opportunities elsewhere, driven by a perception of better prospects and support systems abroad.?

• Cultivating local talent: There was a need for more focused efforts on cultivating and retaining local talent within the innovation ecosystem. This included providing opportunities for skill development, mentorship, and entrepreneurial education.?

• Market access and international expansion: The Barbados market itself is very small. In order to achieve meaningful scale, companies need to sell into international markets. However, they often lack the skills, market knowledge, experience, and connections to do so.?

Examining these and several other obstacles, we guided the Government of Barbados to consider innovation opportunities. For example, how could the sandbox help retain, inspire, and foster local talent in Barbados by attracting foreign businesses that provide high-skill job opportunities and facilitate upskilling?? And how could the sandbox act as a focal point for innovation, providing a central platform where startups, regulators, investors, and support services converge?

Throughout our engagement, businesses, academic researchers and start-ups have all leaned in on this initiative. They envision an economic future where a well-structured, government-supported regulatory sandbox serves as a catalyst for transformation. We are all excited to see the Government of Barbados eager to embark on this journey.

Anatomy of an effective Regulatory Sandbox

A well-designed regulatory sandbox isn't just about relaxing rules; it's a carefully structured program that balances innovation with public safety and interest.?

To maximize its effectiveness, a sandbox must be closely connected to the broader innovation ecosystem. Our experience with sandboxes has highlighted the importance of aligning sandboxes with national priorities, ensuring they have well-defined goals, and are backed by sufficient resources. Key components of an effective sandbox include:

1. Clear Governance and Oversight: Success requires the right balance of stakeholders, from regulatory experts to innovation specialists. A strong governance framework ensures decisions are made efficiently while maintaining accountability.
2. Defined Testing Parameters: Every sandbox project needs clear boundaries: What can be tested? For how long? What safeguards must be in place? These parameters protect both innovators and the public.
3. Monitoring and Evaluation: Regular checkpoints and data collection help assess both the specific innovation being tested and the broader implications for regulatory reform.
4. Ecosystem Integration: The most effective sandboxes don't operate in isolation. They connect participants to broader support systems, from mentorship and funding to technical expertise and market access.

Sandbox evolution: From differentiator to table stakes

Since the launch of the world’s first regulatory sandbox by the UK’s Financial Conduct Authority in May 2016, their prevalence has increased drastically. As of January 2023, there were 153 active sandboxes in 85 countries across the globe.?

While regulatory sandboxes originated in fintech, they’re now unlocking market opportunities in other areas such as healthcare, autonomous vehicles, smart cities, telecommunications, and AI.

Early adopters of regulatory sandboxes gained a clear competitive advantage to attract innovation and talent. As more jurisdictions implement these programs, they're becoming less of a differentiator and more of a basic requirement for jurisdictions wanting to compete in the innovation economy.?

This shift mirrors what we often see with product features: what starts as a unique selling point becomes an expected capability. For jurisdictions, this means the question is no longer whether to implement a regulatory sandbox, but how to design one that truly serves their unique strengths and strategic objectives.

The most successful jurisdictions aren't copying existing sandbox models. They're carefully considering their unique strengths and strategic priorities, then designing sandbox programs to amplify these advantages while addressing specific market gaps and opportunities. As Barbados and countless other jurisdictions have learned, a sandbox is not a lift and shift. It is instead a refactoring and reimagining of the jurisdiction, making innovation a viable and enviable reality.

Get in touch to learn more about our approach to building effective, innovative sandboxes.