How does a CLEC innovate?
Two  types  of  innovation,  namely  innovation  for  new  services  and  innovation  for  alternative  network  infrastructures,  underlie  competition  in  the  telecommunications  industry.  While  innovation  for  new  services  is  provided  mainly  by   telecommunications   operators,   equipment   suppliers   provide   most   of   the   innovation  for  new  network  technologies.  A  network  innovation  in  the  equipment  sector   is   followed   by   an   adoption   process   in   the   telecommunications   sector.   Operators have to decide whether and when to adopt the new technology. Indeed, an immediate   adoption   may   be   costly   and   risky.   Therefore,   adoption   resembles   innovation.   In   the   rest   of   the   paper,   innovation   will   refer   to   both   invention   (endogenous innovation) and adoption (exogenous innovation).


Generally,  regulation  can  affect  these  innovative  activities  via  two  different  channels.    First,    price    regulations    (or    more    specifically,    the    regulation    of    interconnection  charges  and  retail  prices)  alter  industry  profits,  hence  the  incentives  to innovate. Secondly, both price or entry regulations change the terms of entry, and hence innovation decisions regarding new entry.

Regulation and Innovation: M Bourreau and P Doğan 1 Regulation and Innovation in the Telecommunications Industry
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.477.412&amp;rep=rep1&amp;type=pdf
CLECs are given incentives to deploy capital investments that innovate in terms of services and network technology. ILECs are forced to offer competitive services and improve network technology to keep market share away from the CLECs. In the counterfactual world of natural monopoly the ILEC would not have incentives to innovate services or network technology. The ILEC would profit from investments in POTS - Plain Old Telephone Service - for a considerable period of time without any competitive forces making it adopt innovative services or network technology.