The Effects of Government Regulation on Entrepreneurship and Product Innovation in Nascent Markets: The Case of the Global Commercial Drone Industry

 Whether drones, quantum computing, artificial intelligence, or additive manufacturing, both governments and firms are required to navigate the uncertainties associated with these new technologies to achieve their shared high-growth ambitions. This dissertation explores the institutional and innovation strategies that firms consider when governments regulate technology features in such nascent markets. This research looks at a global emerging market with multiple combinations of product features — the global commercial drone industry. Through this empirical context, this dissertation addresses three distinct questions: (1) how does government institutional support impact firm establishment? (2) how do institutional carriers impact the experimentation of product features? (3) how do regulatory standard changes impact the framing of new products? 

In Chapter 2, I study the infrastructure that can help explain the emergence of experimental markets (e.g., markets with both unclear institutional and technological trajectories). The Chinese commercial drone industry is an indicative example of such a market. I find that market-input infrastructure that clarifies the know-how needed for inputs has a greater association with upstream founding (component firms). Market-output infrastructure that clarifies market fit for resulting products has a greater association with downstream founding (end product firms). These effects are substitutive; local governments focus only on one of these forms of market infrastructure to reduce the risks involved in such experimentation and to reduce competition with other cities. Finally, institutional infrastructure that clarifies the rules increase founding, especially in cities with more aforementioned market infrastructure. 

In Chapter 3, I examine how formal standards (regulative institutional factors), industry consortia (normative institutional factors), and knowledge providers (cognitive institutional factors) interact to differentially impact observed firm product features. The drone industry around precision agriculture is a heavily regulated yet nascent market that serves as a useful context to explore the product innovation process. I test the interaction between these three institutional factors on product innovation using panel data of 464 newly introduced drone platforms targeted at precision agriculture sector that were released between 2000 to 2021. While regulatory standards do lead to convergence in product features, local institutional carriers play a key role in either enhancing or acting against such convergence. Firms located near industry consortia tend to experiment less and align with the emerging standard, whereas firms located near knowledge providers tend to experiment more and diverge from the emerging standard. While accounting for regulations is crucial, managers may find looking at how local institutional carriers respond to standard trends important in how they modulate product design choices. 

In Chapter 4, I investigate how firms navigate regulatory uncertainties in the U.S. consumer drone industry, where competing conventions co-exist: appropriateness vis-à-vis regulation vs. vis-à-vis market. Using 2,796 repeated observations of 466 small drones listed on the Amazon marketplace from 2013 to 2018, this study explores the impact of product framing strategies (framing to regulation, to market, or both) on product performance. The findings suggest that both framing around regulation and market have a positive effect on product market performance, but these effects are substitutive. Specifically, framing around regulation has a positive effect on market performance after a shift in regulation, while framing around market has a positive effect prior to the shift in regulation. By recognizing the impact of different framing strategies on market performance, entrepreneurs can gain valuable insight into when to pivot their product framing choices and product features in the face of regulatory uncertainty. 

The concluding chapter summarizes the findings of this dissertation and presents practical recommendations that emanate from these findings for regulators and managers seeking to adopt new technologies in the face of both market and regulatory uncertainty. Policymakers in such markets should consider more carefully the market nuances and tradeoffs when introducing regulatory standards. While introducing such standards can legitimize the market and promote entrepreneurship therein, these standards may also hinder subsequent product innovation in such a market. As such, policymakers need to be attuned to the stage of development in the market when pondering what standards to issue and when. Coordinating with local institutional carriers such as industry associations, national labs, science parks and universities specialized in certain domain knowledge could potentially mitigate these negative innovation impacts. On the other hand, firms need to consider the benefits and weaknesses of proximate institutional carriers in their location as they craft product design and market entry strategies. Additionally, the introduction of standards will influence the performance of different product framings, so firms need to adapt their framing strategies in ways that align with regulatory changes.