8:20 PM, December 5, 2022

Regulators can determine the degree of disruption

Business
| The European | 13 July 2022

It is important that tech firms understand the legal and regulatory risks they face in pursuit of market disruption, says Nicholas Occhiuto of emlyon business school

The past 25 years has seen disruptive firms play an increasingly powerful role in the modern economy. Indeed, tech firms such as Google, Netflix, Amazon, Uber, and Airbnb have disrupted established industries, changed the way goods and services are provided, and transformed how work is carried out.

Of course, there are a lot of market factors that contributed to the ability of these firms to disrupt markets and build a multi-million-dollar companies, such as their entrepreneurial ability to recognise market opportunities and secure financial investment, the human capital of their founding team, their ability to offer online distribution or lower prices than their competitors, and their capability to withstand challenges from incumbents. 

However, a crucial, but often overlooked, component of all market disruption and entrepreneurial success is the regulatory and legal environments that the firm faces. Indeed, the regulatory arena is often paramount to startups – particularly in highly regulated industries. Regulators can pose significant barriers to entry for startups – either actively excluding them from markets altogether or discouraging them from entering through imposing highly costly regulation. 

In response to antiquated regulation and hostile regulators, disruptive startups often pursue what we refer to as “regulatory entrepreneurship” – or, rather, the strategies and tactics that entrepreneurs use to change existing laws and regulations. And, while scholars of regulatory entrepreneurship have typically focused on the strategies and tactics of disruptive firms, my research examined the collective work of regulators and lawmakers in the taxi markets of New York City, Chicago, and San Francisco, who played an active role in making policy changes for Uber.  

Too big to ban 

Like many disruptive firms, Uber pursued a market entry strategy that scholars have described as “begging for forgiveness rather than asking for permission” – whereby rather than asking for regulatory approval before operating in each city, they introduced their product into these industries without the approval of regulators. I found that, New York City, Chicago, and San Francisco, regulators initially responded to these tactics with what I refer to as blocking strategies – or, rather, measures aimed at stopping a new entrant from entering, operating, and disrupting the industry.

Largely due to their massive financial backing, Uber simply ignored those blocking strategies — and continued to contract with drivers, attract passengers, and raise venture capital. In the process, they become what scholars refer to as “too-big-to-ban”. By displaying a critical mass of drivers, passengers, and venture capitalists backers, Uber forced regulators and lawmakers to adjust their approach to the disruptive firm. Lawmakers, motivated by getting re-elected, and regulators concerned with enhancing their career prospects or political reputations, could no longer afford to be seen as stifling an innovative products that was benefiting constituents and driving economic activity in the city.

Nevertheless, the process of market integration would still be on the terms of regulators and lawmakers, who either enacted new regulation policies, or re-interpreted their existing laws. For example, in San Francisco, regulators at the California Public Utilities Commission utilised the ambiguity of Uber’s app-based dispatch to claim regulatory authority over the emerging industry away from the hostile city regulators at the San Francisco Municipal Transportation Authority and create new regulations specifically for Uber and other ride-sharing platforms.

In Chicago, city lawmakers superseded the hostile regulators at The Department of Business Affairs and Consumer Protection, and created new laws specifically for Uber, which the taxi regulator would then implement.

Finally, in New York City, sympathetic regulators at the Taxi and Limousine Commission utilised their regulatory discretion — or, rather, the flexibility to interpret and implement public policies created by elected officials — to transform the effects of their existing “black car” regulations without changing their codified form. Counter-intuitively, because the existing regulations pertaining to black cars were far stricter on Uber’s operations than the new regulations created by regulators and lawmakers, ride-sharing platforms are more heavily regulated in New York than in either San Francisco or Chicago.

Understand the legal environment 

Of course, most disruptive startups will not have the financial backing of Uber, which became one of the largest unicorn companies in the world. As a result, they may not be able to pursue hostile market entry strategies like “beg for forgiveness rather than permission” and “growing too big to ban”. In these cases, start-ups may pursue collaborating with regulators on regulation, self-regulating to avoid regulatory scrutiny, or avoiding potentially hostile markets altogether. And, it may mean that other disruptive firms might experience even more impact from regulators when entering a market. 

Nevertheless, for all tech and innovation firms looking to enter a market, it is crucial to understand the regulatory and legal environment that they face. Regulators and elected officials can be your best friend or your worst enemy. It is important to understand the legal and regulatory risks that you face in your pursuit of market disruption. 

ABOUT THE AUTHOR

Nicholas Occhiuto is an Assistant Professor at emlyon business school’s Center for Work, Technology, and Organization. He is an economic sociologist and ethnographer whose research interests includes work and occupations and corporate political activity.

Further information

Emlyon Business School

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