Ubers Internationalization in China PDF

Preview

Summary

Essay includes internalization strategy using 5 theories
Uppsala Model of Internationalization
Instituitional theory
Social capital theory
digital internationalization
Corporate Entrepreneurship...

Description

Uber’s Internationalization in China Uber’s internationalization strategy in China failed abruptly due to their incapability to cope with contextual factors and behavioral implications. Uber is a born global firm (BGF) that focuses on car-hailing on a global perspective. Uber is classified a born global as from its initial founding in 2009 emphasized in deriving a substantial proportion of their revenue from their services in the international market (Knight and Cavusgil, 2004). Uber is considered as a BGF because of its process for creating, searching and exploiting opportunities available outside the home country hence expressing International Entrepreneurship (McDougall and Oviatt, 2000). Because of Uber’s innovative technology for online car hailing it enabled the company to expand the borders of the home taxi market and implement it to an international level in numerous markets such as Latin America, Asia, Africa making them a BGF through early internationalization and rapid expansion (Knight and Cavusgil , 2004). Uber’s disruptive technology changed transformed the taxi industry with its business model. Several rivals tend to replicate Uber’s new and innovative business model due to its success in many countries (Crunchbase, 2016) with the exception of China. Uber currently stands at a value of $84.2 billion (The Guardian, 2019). Internationalization is defined as a process of adapting a firms’ operations in foreign environment (Calof and Beamish ,1995). The concept of internationalization has been viewed dynamically by several scholars each focusing on different theories for the easy success for entering international emerging markets. In the case of Uber, the following theories/models are highly relevant that are to be discussed are: the Uppsala model, institutional theory, social capital theory digital internationalization, and corporate entrepreneurship. The Uppsala model of internationalization focuses on the learning and evolutionary viewpoint (Johanson and Vahlne, 1977). Many firms use this theory as their strength of having knowledge to operate in international markets to which if they do not have the knowledge the company would be rendered handicaped (Carlson, 1996). Ubers has implemented this theory to enter China through means of geographic and psychic distance. This is based on the factors hindering firms going from one market to another, these include culture, language and differences in business practices. In China the taxi market was barely growing despite having increasing demand for individual transportation. This was an opportunity for Uber to transform the traditional taxi industry in China. Uber initially began

its services in China in 2013 as a test run to understand the marketplace. It began by having high-end services with luxury cars by partnering with car-rental companies and the price of these services were substantially higher than the regular which led to the company to learn that people prefer the lower price cabs. Based on this Uber launched a lower price service known as ‘UberX’ and ‘People’s Uber’ in order to serve the needs of price-sensitive customers. This strategy of Uber was successful as they had sufficient experimental knowledge. Johanson and Vahlne (1990) consider this strategy to be an experience for companies for identifying opportunities and thrive the internationalization process. However with Uber implementing the Uppsala model was not the ideal decisions for the company, despite having knowledge of the market and covering the aspect of psychic distance, this model is not as effective for a service company as Uber, as all its advances are primarily controlled by the environment the firm internalizes its resources. With this model Uber does not show initial commitment rather focuses on strategies after having experimental knowledge by having test run which is not the typical ideology of service firms (Johanson and Mattson, 2005). Along with having knowledge of the market, internationalization can be effective through networking. Johanson and Vahlne (2006) added on to their previous research stating that internationalization is a process of firms to develop and access social capital for strengthening international relationships. Social capital refers to the resources a firm acquires through its network of relationships (Coviello and Munro ,1997). Considering Uber China, the resource refers to the technology the company with the hailing app and their strategy is primarily based has emerged based on their variety of network relationships. Uber China had strong network with Baidu and Alipay. The company’s partnership with the local companies reflected their market commitment. Uber knew that in order to bridge into the foreign they had to have an agreement with the local companies (Sharma and Johanson, 1987). Baidu was an online map channel in accessible in China with the absence of Google Maps, it was accessible in nearly 400 cities in china, hence expanding the network range. Uber Uber’s partnership with Baidu sought to have been a ‘groundbreaking innovation’ that not only links two companies but also two countries (USA and China) as said by Baidu’s CEO, Robin Li. Uber further expanded its business in China by partnering with various companies such as the HNA group, China Telecom Guangzhou, and Yongda Automobile services holdings ltd. All of this was to provide better and enhanced services to their customers. Through these networks

the members involved value the relationship more rather than the discrete transactions as the output for both parties are customer satisfaction and hence leads to opportunistic behavior to be controlled and minimized (Knight, 1994). Connecting to social capital, in this case has the higher dominating power, which means they have more social capital this leads them to effectively monitor their collaborative relationships (Coviello and Munro, 1997) with the partners mentioned above, hence with collaboration the existing social capital also increases which can enabled the company to have more new relationships (Walker, Kogut, and Shan 1997). Uber China highly focuses on the aspect of localization by partnering with local large firms and also have an alliance with local SMEs in order to implement its Application Programming Interface (API). They wanted to bring their experience of API in USA in China. Uber China wanted to implement API in order to improve the experience of the customers through their innovative new service. This links back to the first stage of the Uppsala model where companies acquire the experience in their domestic country and later aspire to implement their knowledge in the foreign market (Johanson and Vahlne, 1990). Also, with Uber being a BGF it allowed the company to have a greater social capital based on their prior experience (Chetty and Campbell-Hunt, 2004). It can be said that Uber gradually internationalized in China by connecting with different parties (mentioned above) and maintaining that relationship over time (Johanson and Vahlne, 1990). And through these multiple relationships the knowledge Uber acquired is far more diverse (McDougall, Shane, and Oviatt, 1994) and thus allowing it to build important synergies (Zhu and Lansiti, 2019). Further research contradicts the concept of social capital by considering it as a liability for firms such that it leads to increased risks and investment in time and costs associated in forming the networks and sustaining the social capital (Yli-Renko, Autio, and Tontti, 2002). Uber’s network in China is considered as an ‘overembedded network’ (Uzzi, 1997) in this multiple network combine and form a close network and suppress the external information from other relevant sources. With Uber, the company had primarily focused on the car-hailing or chauffeur services whereas its major competitor Didi Chuxing had several other weak ties that allowed the firm to identify new and better opportunities (Granovetter, 1973). Didi expanded their services with Didi express, Didi designated driving, Didi bus and several others thus exposing themselves to a wider network thus leading to diverse knowledge and opportunities (Coviello and Munro, 1997). Therefore, it can be said Uber networking relating

to social capital was focused on a closed ambiguous network as compared to Didi Chuxing which its open-ended network along with weak ties with multiple networks and did not only rely on social capital such as Uber. However along with networks, Peng et al. (2005) argue that internationalization can be viewed from an institutional perspective in order to understand the game rules abroad as well improve a firm’s competitiveness. Institutions can be considered as the foreseeable constraints that build human interaction (Peng et al., 2009). Scott (1995) perceives institutions as beliefs, rules, role and symbolic elements that structure an organization’s form and classifies them into three categories or pillars; regulative, cognitive, and normative. These three pillars were expanded from the traditional medium of viewing institutions by North (1991) that is formal and informal institutions, formal institutions involve laws and regulations (regulative) whereas informal institutions involve the societal ethical perspectives, culture (cognitive) and norms (normative) (Peng et al., 2008).

Figure 1: Dimensions of Institutions (Peng et al., 2008) Based on the research by Barney (2001) it was proven that the value of a firm's internationalization can be understood based on a particular market context in which the organization is running, and in this case China. Regulative forces are highly involved for the organizational change of Uber (Palthe, 2014). Traditionally Uber was accessible to everyone and any person with a valid driver's license could be an Uber driver, however this was against the Road transportation regulations, only drivers with the correct license could be involved in the car-hailing service. This became a major constraint for Uber for it bound the company to provide limited services unlike its US market where they had multiple services to provide. They had to remove carpooling, inter-city transport and 7-seater rides from the app to comply with the strict regulations (Huang, 2016).

In 2015, China’s Ministry of Transport issued new guidelines that had been quite a pragmatic factor for Uber. The company was allowed to have their own regulatory structure to which the service provider had to comply to. Uber had already initiated this program before the guideline was announced which allowed the company to have a competitive advantage such that it built a strong network with the leading service provider in Guangzhou, Telecom. Uber’s primary strength for attracting drivers and passengers is through subsidies, in 2015 Uber spent nearly 14 billion Yuan in subsidizing as compared to it Didi which had only 150 million. However soon Uber had to stop subsidizing to purview under the new regulations by the government. Such that there would be no more subsidies and it was necessary to implement government guided pricing. To ensure that such activities are taking place Uber had to get provincial and national regulatory approval for its activities anywhere in china. Withdrawal of subsidies had major impact on passengers, as now they had to pay more (Kirby, 2016). Subsidies can also be considered from the normative perspective. Based on the ethical norms (Selznick, 1948) all parties involved, managerial department, drivers and passengers have to ensure the activities conducted must be under social obligations (Palthe, 2014). In the case of Uber, it is evident that many of the drivers have taken advantage by logging in fake rides in order to get the bonuses. Also, some drivers would pretend to be passengers and get the benefit from both perspectives. In response to such behavior Uber claimed to have tools to detect such fraudulent activity and permanently delete account dealing with such. Therefore, it can be perceived the institutional theory played a significant role in the internationalization of Uber China such that multiple dimensions created barriers for Uber to compete in China. There have been several additions in Internationalization, Oviatt and McDougall (2005) identified information and communication technologies (ICT) as the enablers of international entrepreneurship. The tacit knowledge embedded in the firm forms its competitive advantage however digitalization can transform this knowledge behind firm-specific assets (FSA). Innovations in ICT change the business model of companies and the way they operate, these companies completely rely on internet and ICT for their operations and if the server has a disruption it would be a major catastrophe for the company as they would not be able to create and deliver value to their customers (Brouthers, Geisser, & Rothlauf, 2015). Uber is considered internet-based company as its internationalization process primarily relies on an online platform (Reuber and Fischer, 2011). Ubers implication of the API highly reflects

digital internationalization such that it allowed the technology FSA with the knowledge pertaining to their networking relationships in a cross-border context (Asmussen et al., 2016). Uber’s localization strategy does not relate to networking but also to the digital internationalization process. Uber involved local Chinese staff for the customer-based service through email, social media, hotlines and instant messaging however this strategy turned out to be dark side for the company such that the company became short-staffed, leading to ineffective customer service and low customer satisfaction. Another advantage for digital internationalization technology-intensive encouraged with constant innovation. The technology FSAs can be modularized through bridging with the complementary assets of local partners (Reuber and Fischer, 2011) and this is evident as mentioned before through Uber’s networking capability. However, there are certain limitations concerning digital internationalization, firstly the concern of competitive differentiation, this refers to the extensive quality of a firm's tacit knowledge against the causal ambiguity they are exposed to (Reed & Defillippi, 1990). Another limitation to consider would be the threat of imitation. Digital internationalization enabled technology FSAs to be easily transferable hence making it easier to be imitated, which is why the companies should always have their measures relating to sustainable performance. Uber did not have sustainable performance which is why Didi commoditized its technology FSA and forced Uber out of China (Banalieva and Dhanaraj, 2019). Uber’s retreat from China impacted its connections in other countries as well such as Russia, Uber Russia also retreated from the country in 2017 via joint venture with Yandex (Smith, 2019). Uber’s exit from China could be considered as a corporate entrepreneurship strategy. Corporate entrepreneurship (CE) is an important mechanism for organizations particularly due to the changing business environment (Keil, 2004). Uber’s CE strategy was through external corporate venturing, in this the company establishes new business creation activity in which semi-autonomous or autonomous organizational entities are utilized by the acquiring firm (Sharma & Chrisman, 1999). In Uber’s case, Didi completely acquired the company allowing the company to outstrip all existing competitors and leading to faster expansion, the acquisition of Uber by Didi can be considered as a process of internalization whereby Uber being an independent venture internalizes hence allowing Didi to acquire majority or all of its share capital thus having complete control over the company (Keil, 2004). Didi’s CEO Jean Liu considers this acquisition as a game changer for the company as it has impacted other

ride hailing companies such as Lyft and GrabTaxi. Liu also received financial support from Apple which locked down the support for Travis Kalanik, Uber’s CEO which led to the company abruptly existing as a single entity (Smith, 2019). In conclusion Uber’s internationalization in China was not effectively carried out due to the company’s inability to comply with the changes in the external environment. Uber also follows the traditional stages (Uppsala model) for their entry into the Chinese market which is highly unsuitable as it too determinant for service company, however psychic distance and experimental knowledge allowed the company to get an overall perspective of the Chinese market hence eliminating the liability of outsidership. Uber’s networking capability is commendable as they effectively had positive integrated relationships with their partners in China. Uber slowly expanded their network by being involved large organizations as well local SMEs for their services. However external pressures from the regulative institutions such on laws and regulations of the country manipulated the company’s competencies and from the normative and cultural perspective several ethical breaches were conducted by drivers in order to get subsidies. Digitalization of the company was successful in its initial stages but overtime the sustainable performance of the company led to its demise by being acquired by its major rival....