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She's right. Economists have long known that when there are high externalities in a market, regulation can *increase* innovation. Because without the regulations, businesses are not facing the costs of their actions and thus have no incentive to reduce those costs.
Put it another way: regulations on a high-externality industry aren't increasing the cost of that industry — they're just shifting the existing costs from non-producers, who have no way of redressing those costs, to producers, who do.
Example: If there's no regulation on pollution, a factory can just dump it in a river and the cost will be paid by all the farmers downstream. If the government then limits river dumping, that factory will pay a similar cost to figure out how not to pollute. And create new tech.
