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International Entrepreneurship: Uber in China Case Study

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Updated: Jul 31st, 2021

Introduction

The modern business world is characterized by a focus on innovation and internalization. The major advantages of this approach include enhancing the visibility of the product, increasing sales, becoming less prone to local trends, and obtaining knowledge and experience that can be used to innovate (Boehe 2016; Narula et al. 2019). Some of the primary challenges linked to internalization are local political and social environments, currency fluctuations, and peculiarities of markets, among others (Verbeke & Kano 2016; Buckley & Casson 2018). Uber can be regarded as an illustration of the failure of a multinational’s entrance into a specific market. This report includes a detailed analysis of the flaws in Uber’s operations in the Chinese market in terms of network/social capital, digital internationalization, and institutional perspectives.

Brief Summary of Uber

The company entered the French market in 2011, and by 2016, Uber operated in 445 cities of over 60 countries across the globe (Wade et al. 2016). With its 750 million residents of urban areas commuting on a daily basis (compared to 150 million American commuters), the Chinese commuter market seemed attractive (Tybout 2017). Ride sourcing was also rather popular in the country, so Uber and similar companies offered services that were appreciated (Nie 2017). Uber entered the Chinese market in 2013 when it started its operations in Shanghai. The company developed partnerships with Baidu (a local GPS and map searching engine) and Alipay (a Chinese mobile payment platform) (Wade et al., 2016). First, the American multinational focused on collaboration with Chinese car rental companies as the most effective way to avoid possible legal risks (Wirtz & Lovelock 2016). Later, individual drivers were involved and encouraged to use the application.

A serious challenge associated with this approach was the Chinese government’s restrictions regarding entities that could conduct road transportation (Wade et al., 2016). The government’s restrictions did not cover private services, so Uber, as well as its Chinese competitors, started operating in a “gray area of Chinese regulation” (Wade et al. 2016, p. 7). Uber also had to rely on subsidies that were instrumental in offering competitive prices as this tool tended to attract drivers and passengers in the majority of cases. However, this choice is associated with certain financial constraints for the company.

It is necessary to note that the company faced serious challenges in the Chinese market as local companies tried to support Chinese-based on-demand-hailing services providers. For instance, WeChat blocked Uber’s promotional campaign, which had an impact on the American company’s expansion (Wade et al., 2016). Furthermore, the top management of Uber made several managerial mistakes, including the use of ineffective communication channels, short-staffing, poor recruiting and training practices.

Role of Network Relationship and Social Capital in Uber’s Expansion to China

One of the pillars of Uber’s entry strategies was its use of networking in the Chinese market. Networking can be referred to as a practice that involves collaboration between individuals and/or organizations in diverse settings (Alon et al., 2016). Companies develop partnerships that help them address various challenges and improve their position in the market (Andersen & Medlin 2016). This strategy is often employed during internalization due to the opportunities it has to offer to organizations of different sizes (Julkunen, Gabrielsson & Raatikainen 2015). Entrepreneurs and multinationals can benefit from networking as it can facilitate their entry into new markets.

Some of the central advantages of networking for companies operating in the international market is their ability to increase their visibility and obtain new valuable contacts. When entering a new market, it is often difficult to locate reliable suppliers and partners in various settings (Alon et al., 2016). Networking ensures sharing contacts that can be instrumental in the organization’s high performance. This approach also ensures effective knowledge and experience sharing, which helps in developing innovative strategies and products. People coming from different cultures can develop effective methods to address emerging challenges. In many ways, networking enables organizations to minimize their risks associated with legal and financial aspects.

At the same time, networking is often related to certain disadvantages and issues that should be considered when making the decision to employ this practice. One of the major challenges of this approach is associated with cultural and other differences of the companies operating in a network (Godart & Claes 2017). People have different perspectives regarding numerous concepts, and, moreover, organizations have different cultures that shape their employees’ behavior. It can be difficult to collaborate with another firm and share information if this enterprise has other values, vision, and goals.

Uber was successful in some areas when implementing its networking strategy. They collaborated with car rentals and local digital companies to provide the services for their new customers (Wade et al., 2016). Nevertheless, the company had financial losses and eventually lost competition due to its inability to create strong relationships based on the principles of social sustainability with local companies (Fan et al., 2019). Chinese companies tend to support local organizations in various areas, including transportation, which placed Uber in rather a difficult position (Makino & Yiu 2014). Uber failed to acknowledge these values and was unable to become a social actor whose operations could be exclusive, innovative, and beneficial for the country.

One of the central components of networking is effective communication that can be implemented via different channels (Zheng et al., 2015; Chang, Shen & Liu 2016). Modern companies make extensive use of social networks that have become an efficient platform for building links and sharing information (Park, Jun & Lee 2015; Pogrebnyakov 2016; Banik & Sengupta 2019). It is noteworthy that such widely utilized instruments as Facebook or Twitter are not sufficiently popular among Chinese users, so it is necessary to develop partnerships with local social media. Uber tried to use some of the most popular communication channels to reach their potential customers in China. However, these efforts were rather unsuccessful as the digital platform that was chosen as a partner made Uber’s marketing initiatives invisibly (Wade et al. 2016). In addition, the use of the communication channel for interactions with customers was ineffective since email was not seen as a convenient tool in China. In simple terms. Uber failed to utilize proper communication channels when building its networks.

Social capital theory can also be applied to identify the reasons for Uber’s failure in China. Social capital can be defined as the input of the relationships of people within (and outside) an organization into its success (Frynas & Mellahi 2015). Uber failed to create the social capital it could benefit from. The training programs provided to drivers are aimed at improving certain professional skills and build organizational culture. However, many drivers did not receive any training as they bought their accounts from a Chinese C2C online platform (Wade et al., 2016). Moreover, staffing in Chinese offices was rather insufficient, which led to people’s low morale, considerable burnout, and high turnover. Employees were not committed to the principles, values, and goals of the organization, so their performance was poor, which led to customer dissatisfaction. Companies tend to benefit from forming links among employees as informal communication and interactions contribute considerably to the development of a strong organizational culture (Alon et al., 2016). Uber could not build the link between office employees and drivers, and the company did not facilitate the development of professional bonds with employees from other countries.

In a nutshell, networking is a common practice facilitating the internalization of companies irrespective of their size or other peculiarities. Organizations can benefit from knowledge and experience sharing within networks as well as developing innovative strategies as they contribute to each other’s success. However, cultural issues can become considerable obstacles to effective networking. The choice of the most appropriate communication channels is critical for the successful implementation of partnerships and networks. Uber failed to create networks and become a part of the Chinese business landscape. The American organization employed inefficient communication channels in China and failed to find reliable and responsible partners to build a sustainable network. Uber did not develop social capital, which also prevented it from becoming competitive. The organization did not facilitate the creation of professional and informal links between its employees in China, so people were not committed to organizational goals and values.

Digital Internalization

It has been acknowledged that technological advances have contributed to companies’ internalization, which is specifically true for the digital sector. Organizations operating in this market often need to pay less attention to resource constraints or geographical issues (Banalieva & Dhanaraj 2019). For instance, such companies as Facebook or YouTube have been capable of entering the global market within a very short period of time. Various Internet-based enterprises do not invest heavily in the development of a supply chain in new markets as manufacturers do (Zeng, Khan & De Silva, 2019). Internet-based services tend to reach consumers within shorter periods of time due to people’s access to the Internet, which is taking place at an unprecedented pace (Li et al., 2019). It is noteworthy that the size or other specifics of the company are irrelevant for the success of the venture as even entrepreneurs achieve high results in the global market with their start-ups.

Researchers are exploring the process of internalization divide organizations into two major groups, while their views on the reasons for these companies’ success and approaches differ (Wittkop, Zulauf & Wagner 2018). The two kinds of enterprises are the so-called International New Ventures (INVs) and Born Global Companies (BGCs). INVs and BGCs are similar in several respects as they are both created in one country but soon enter the international market. The period from the creation to emerging as an international actor is confined to several months (Fan & Phan 2018). The major difference between the two kinds of organizations lies within the scope of their reach as INVs are mainly regional, while BGCs tend to enter markets of several continents (Wittkop, Zulauf & Wagner 2018). The primary advantages of the latter are rather obvious and include a considerable number of customers and products or services visibility (Frynas & Mellahi 2015). In addition, BGCs are characterized by an ability to mitigate risks emerging in certain markets due to the sustainability of operations in other regions.

International new ventures also have their strengths and weaknesses that are mainly linked to geographic and cultural peculiarities. One of the central advantages of INVs is the amount of their profit, as such companies usually cover a considerable number of customers (Andersson & Servais 2018). INVs also manage to establish their business effectively using available resources and addressing social, cultural, economic, and political peculiarities of the countries they operate in (Madsen, Sorensen & Torres-Ortega 2015). However, the major shortcoming of this kind of enterprise is its inability to expand globally as it is unprepared to address the challenges the global market provides (Glowik 2016). INVs often fail to adjust to the peculiarities of certain regions, which makes their successful entrance and further operations impossible. These companies have organizational cultures that may differ substantially from the values of people living in specific countries.

Uber can be regarded as an illustration of INVs’ lack of understanding and ability to adopt certain perspectives and values. Although Uber operates in over 60 countries and can be seen as a BGC, it faced insurmountable obstacles in China, where a different approach to ride-hailing services has reigned (Seifert 2016). Uber tried to address the cultural and institutional peculiarities of the Chinese market, but the company made several mistakes. The organization still focused on the operations it utilized in other countries. The company in question was not prepared to operate in the market with the fierce competition characterized by the considerable support of local businesses that were apparent in different areas. Local authorities, as well as companies, preferred interacting with and helping Didi, a local competitor of Uber, rather than interact with the internationally known enterprise.

All in all, it is necessary to note that companies operating in the international market can be divided into Born Global Companies and International New Ventures. The former organizations operate in more than three continents, while the latter’s operations are confined to certain regions. The advantages of INVs include their significant market share and ability to reach wide audiences. The disadvantages of such companies are their lack of flexibility when entering new markets that are considerably different from the ones they already operate in. Although Uber can be found in many countries on different continents, its expansion strategies failed in China. Some of the reasons for this failure are Ubers’ use of ineffective strategies and their inability to overcome the competition that is supported locally.

Institutional Theory and Global Entrepreneurship

The case under analysis is illustrative in terms of the impact institutional forces can have on the development of a company. According to the institutional theory, the market should develop in a sustainable way to balance the rights, opportunities, and responsibilities of all actors, which is possible through a certain degree of institutional governance (Styhre 2019). The supporters of this paradigm claim that some institutions should make sure all actors’ conduct is appropriate and beneficial for the development of the market (Lepsius 2016). Institutions develop rules and regulations that help all stakeholders behave in a sustainable way.

Institutions can be formal and informal, depending on the degree of formalization. Formal institutions tend to be created by countries’ legislation and are associated with specific rules, standards, contracts, and laws (Wei & Wu 2015). These institutions guarantee the balance in the economic sphere of their country (Buckley & Tian 2017). Informal institutions are often less tangible, but these influences can be even more powerful than formal institutions’ measures (Armstrong et al., 2014). Informal institutions are traditions, norms, and values that have been developed throughout decades and centuries in a certain society (Amaeshi, Adegbite & Rajwani 2014). It has been acknowledged that formal components tend to be more flexible and can be created within a short period of time, while informal institutions need time to emerge and become accepted (Zhao et al., 2016). Both elements of institutions should be properly considered when entering a new market, especially if the new country is considerably different in terms of the political, social, and cultural agendas (Ang, Benischke & Doh 2014; De Villa, Rajwani & Lawton 2015). Uber seems to have missed some aspects of Chinese institutional impact.

China is an Asian country where many western values and perspectives seem irrelevant or even harmful. The country positions itself as a communist-led state, although its economic sector is far from being consistent with the principles of Communism (Elg & Ghauri 2015). One of the major peculiarities of the Chinese market is its strict compliance with numerous regulations and laws. Economic relationships within the country are rigidly regulated, which is manifested in both formal and informal aspects. Apart from the functioning of various authorities that impose rules to be followed, Chinese society imposes certain principles regarding business and collaboration. International companies, especially western organizations, often find it difficult to remain consistent with all the formal and informal standards.

Uber was one of the companies that had to face serious challenges when entering the Chinese market. As mentioned above, the Chinese authorities introduced regulations forbidding the provision of any transportation services without the corresponding license (Wade et al., 2016). Therefore, Uber had to rely on private drivers whose services were not regulated at that moment. However, addressing informal institutional challenges turned out to be much more difficult for the company. Uber had to face local companies’ reluctance to collaborate effectively and fairly. The support of local businesses proved to be essential for local ride-sourcing companies.

Apart from this, Uber did not take into account Chinese people’s attitude towards subsidies as it was expected that people would try the service for free and start using it for a fee (Wade et al., 2016). However, due to the cultural peculiarities of the population, subsidies turned out to be a heavy financial burden for Uber as people used the company’s offerings and skipped to other (mainly local) ride-hailing services providers. Informal institutional forces were not properly managed by Uber, so the company failed to gain a meaningful share in the Chinese market.

To sum up, it is necessary to note that institutional forces played an important role in Uber’s entry into the Chinese market. The company managed to overcome some formal institutional challenges, but it failed to address informal forces. The former obstacles were associated with regulations imposed by local authorities and certain litigations, while the latter involved quite specific practices of local companies (occasionally supported by authorities) (Stone & Chen 2016). The cultural peculiarities of the local population also had an impact on Uber’s competitiveness as many of the organization’s policies were ineffective. The company failed to gain a meaningful market share in China and lost the competition to a local ride-hailing giant, Didi.

Conclusion

In conclusion, it is necessary to note that Uber can be seen as a successful international company having a significant market share in many countries. Its expansion to new markets was dynamic and successful, but the strategies utilized by the company’s management proved to be ineffective in China. The organization under consideration entered the market in 2013, but it had to admit its failure three years later. Uber failed to become a serious player in the Chinese market due to several reasons. First, the company chose diverse communication channels, but some of them proved to be ineffective. Although the management tried to meet the needs of the population, Uber utilized email as the major communication channel with its users. However, this method was not popular in China, which diverted certain populations from using the service.

More importantly, institutional forces had a considerable effect on Uber’s operation in China. The Chinese market is highly regulated, and Uber had to adjust to the legal and political peculiarities of the market. The formal components of institutional impact were addressed, but informal elements became an insurmountable challenge for the organization. Uber chose networking as the primary strategy aimed at facilitating its entrance and further expansion in the Chinese market. Nevertheless, local companies following some cultural standards and norms concentrated on the collaboration with local ride-hailing services providers. Uber was unprepared to develop an effective strategy for operating in such an environment, which led to its failure in China.

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