Across the globe, a cohort of young companies is driving dynamism in the private sector, despite frequent threats of regulatory measures. Today’s innovative entrepreneurs are providing as many benefits as the industrial revolution did in the 19th century.
Over the last two decades, we have become accustomed progressive companies extending new services to people without owning any tangible assets. When I say tangible assets I don’t mean office spaces and human capital – I mean owning actual the resources that are relevant to the company.
Consider the companies at the forefront of social media: Facebook and Instagram. Facebook is the most popular social media site, whilst Instagram claims the top spot as the most valuable photo company yet, but neither provides any original content or owns any actual cameras. Instead, these companies are powered by consumers who are willing to become part of a digital sharing community, in return for the global platform that Facebook and Instagram offer for free. They have augmented online repositories of user experience by digitizing the details of our everyday interpersonal relationships.
Now let’s look at the ride-sharing phenomenon taking over the world one smartphone at a time: Uber. Founded in 2009, it is now the world’s largest taxi company, without owning a single vehicle. The vehicles are all owned by the drivers, who to pick you up and take you to your destination with the tap of a button on your phone at the fraction of the cost of traditional cabs.
Let us not forget about Airbnb, the multimillion dollar company responsible for turning homes into hotels. The company is now the largest accommodation provider, yet it doesn’t own any real estate. Airbnb is able to provide even the most luxurious accommodation to consumers at a significantly cheaper price than a 5-star hotel.
So what are the secrets behind the overwhelming success of these young innovative companies? They are at the forefront of a revolution that is quietly turning millions of people into part-time entrepreneurs, and disrupting old notions about consumption and ownership.
The central feature of this people-driven entrepreneurial revolution is meeting the demand of previously un-served consumers by offering more information. Sharing economy companies put consumers and suppliers in touch with one another, eradicating “asymmetric information” problems where one party in a transaction has access to more information than the other. When an Airbnb user is able to access a stranger’s networks of real-world connections, the user gains powerful cues as to the host’s authenticity, intent and dependability. Similarly with Uber, the app discloses the name of the driver, the number plate, and most importantly the driver’s rating to the user, which helps build trust even before the user and the driver meet each other.
It is not just consumers who are empowered by the free flow of information – the sharing economy caters to the individual needs of workers too, providing flexibility and mobility. These new platforms are helping individuals shift away from overwhelming work regulations and authoritative figures from top level management. Workers in the sharing economy system instead have total control with their hours, what they want to sell, and when they are willing to let their product or service be used.
There is growing public awareness that regulations are not primarily designed to protect us but to protect established interests. Today, user reviews and accessible information can help consumers hold companies to account directly, and are proving more powerful than government regulation. And that is what the regulators are afraid of.
Now government regulation is starting to weave its way into this new sector, forming roadblocks to hinder the undeniable progress of Uber and its colleagues in our economy. The governments of China and Iran have even placed restrictions on social media by banning Facebook and Instagram.
Uber often foregoes taxi licenses for many of its drivers, causing an easy loophole for government intervention when the company enters new, heavily regulated markets. As a result, the South Korean government has an excuse to delay the entry of ride-sharing services, while Uber has been ordered to exit the domestic market in countries like Taiwan.
Airbnb has also had to deal with its fair share of restrictions, as seen by the regulations passed in Chicago, which require hosts to register with the city, while also imposing a tax on each transaction to pay for the city’s homeless services and limiting the number of apartments and the days that can be rented out in a particular building, depending on its size.
However, these entrepreneurs are fighting their way around the regulators.
Despite international forms of social media being banned in China and Iran, entrepreneurs have created alternatives, with apps like WeChat and Qzone allowing citizens to still take part of the social media movement that is shaping the digital community today. In fact, the growth of these apps has made China the world’s largest social network market.
Uber has grown a notorious for being the target of aggressive regulations at the hands of local governments, but it has been fighting back and has had some success in winning lawsuits. Regulators argue that drivers do not own a “registered taxi licence” necessary to operate, so the entrepreneurs behind Uber are retaliating by announcing the bold plan to purchase commercial licenses for its drivers. The fight doesn’t stop there; Uber is set to invest £377 million in creating its own mapping system, thus ending their reliance with Google Maps, further certifying its remarkable power in the transport market.
The entrepreneurs behind Airbnb too are working around regulators. Just recently, the company has proposed buying land to build community centers to draw tourists to small, little-travelled towns. Airbnb is drawing more travellers and boosting tourism. In contrast, the weight of regulation from over-active government officials is crushing the tourism industry.
The history of market change suggests that the key role of government is not to create unnecessary regulations, but rather to actively promote the market for new enterprise by allowing the right networks of private and public sectors to meet, fostering radical innovation. Instead, politicians all over the world have come out to protect the established interest; they do not seem to understand why people would want to work for themselves, or why consumers want a more flexibility and choice. They think we need regulations to run efficiently, but clearly the ongoing success of the aforementioned companies proves otherwise.
As long as regulators do not stand in the way, these benefits will only continue to expand throughout the economy. Allowing innovative young companies to disrupt slow-moving industries will lead to higher quality, more dynamism, and more choice.
Governments should instead identify and support these new paths for innovation, and adjust rules to promote them. They are, after all, consistently ahead of the game in areas that will drive the next decades of growth. Transport, media, tourism, communication – who knows which industry will be next?