With the rise of tech giants across the globe, there has been increasing concern about the consequences their dominance creates for market competition. Governments in various countries have responded by implementing antitrust regulations to curtail the power of these digital platforms. In China, the introduction of the Anti-Monopoly Guidelines for the Platform Economy in February 2021 offers a unique opportunity to study the effects of platform regulation on entrepreneurship. Research by Ke Rong, Professor at Tsinghua University, D. Daniel Sokol, Professor at University of Southern California, Di Zhou, Professor at Tongji University, and Feng Zhu, Professor of Business Administration at Harvard Business School and Principal Investigator of D^3’s Platform Lab, titled “Antitrust Platform Regulation and Entrepreneurship: Evidence from China”, provides valuable insights into how these regulations have impacted competition, investment, and startup activity in the Chinese technology sector.
Key Insight: Platform Regulation Has Reduced Venture Capital Investment
“[A]fter the Platform Guidelines’ enactment, such investments experienced a modest decline of 1.14% per month.” [1]
The research demonstrates that the implementation of China’s Platform Guidelines resulted in a significant reduction in venture capital (VC) investments in industries dominated by large tech platforms like Alibaba, Tencent, and ByteDance. Prior to the enactment, these platforms had seen steady growth in corporate venture capital (CVC) investments. However, the regulations curtailed their ability to engage in certain activities, including mergers and acquisitions and strategic investments in startups. As a result, the monthly number of VC investments in affected industries decreased, indicating a chilling effect on venture financing. This suggests that regulatory changes can alter the flow of capital and may necessitate shifts in strategy to adapt to a more constrained investment environment.
Key Insight: Fewer Startups Enter Platform-Dominated Industries
“[A]fter the platform antitrust regulation implementation, the monthly number of investments in and startups entering the 41 influenced industries registered a substantial reduction, of 26.73% and 18.72%, respectively, in comparison to the 127 uninfluenced industries.” [2]
One of the most striking findings from the study is the significant decline in startup activity in the industries targeted by the Platform Guidelines. Startups, which play a crucial role in driving innovation and competition, have been deterred from entering these markets due to increased regulatory uncertainty and the perceived risks associated with competing against dominant platforms. The 18.72% reduction in new entries suggests that regulation, while intended to foster competition, may inadvertently stifle it by creating barriers for new players. For executives, this highlights the importance of anticipating how regulatory shifts might impact industry dynamics and the competitive landscape.
Key Insight: Regulations Have Not Increased Market Competition
“This study transcends a focus on the immediate repercussions of antitrust enforcement on platforms or platform complementors… We find that China’s Platform Guidelines did not increase market competitiveness in tech related industries.” [3]
While the Platform Guidelines were designed to curtail monopolistic practices and enhance competition, the study reveals that these regulations have not achieved their intended effect. In fact, competition in the affected markets has weakened as venture capital investments and startup activity have both declined. Researchers found that new startups in affected industries tended to differentiate themselves from existing platforms rather than trying to directly compete. This outcome serves as a cautionary tale for policymakers and business leaders alike, suggesting that the unintended consequences of regulation must be carefully considered. Businesses may need to rethink their strategies for growth and competition in highly regulated environments, as traditional assumptions about increased regulation leading to greater competition may not always hold true.
Why This Matters
The case of China’s Platform Guidelines serves as an example of how government regulation can have far-reaching and unexpected consequences on market dynamics. While the goal of antitrust regulation is often to promote a more level playing field, the reality is that such policies can create additional barriers to the entrepreneurial activity they seek to encourage. Executives operating in industries subject to similar regulations should adapt their business strategies, focusing on differentiation, mitigating regulatory risk, and exploring alternative avenues for growth. At the same time, policymakers should carefully weigh the potential unintended consequences of regulation and consider more nuanced approaches to fostering competition in the platform economy.
References
[1] Ke Rong, D. Daniel Sokol, Di Zhou, and Feng Zhu “Antitrust Platform Regulation and Entrepreneurship: Evidence from China” Harvard Business School Working Paper 24-039 (January 16, 2024) 1-26, 3.
[2] Rong, Sokol, Zhou, and Zhu “Antitrust Platform Regulation and Entrepreneurship: Evidence from China” Harvard Business School Working Paper 24-039, 3.
[3] Rong, Sokol, Zhou, and Zhu “Antitrust Platform Regulation and Entrepreneurship: Evidence from China” Harvard Business School Working Paper 24-039, 4.
Meet the Authors
Professor Ke Rong currently serves as the Director at the Institute of Economics, School of Social Sciences, Tsinghua University, China. He earned his Ph.D. from the University of Cambridge after completing his bachelor’s degree at Tsinghua University. Before his appointment at Tsinghua, he held positions as a Senior Lecturer at the University of Exeter and Bournemouth University in the UK, and as a Visiting Scholar at Harvard Business School in the US.
D. Daniel Sokol is the Carolyn Craig Franklin Chair in Law and a Professor of Law and Business at the USC Gould School of Law and Marshall School of Business (marketing department). He holds a courtesy appointment in the Department of Economics. He also serves as faculty director of the Center for Transnational Law and Business and the co-director of the USC Marshall Initiative on Digital Competition. Additionally, in a part time capacity, he serves as Senior Advisor at White & Case LLP.
Professor Di Zhou is a research associate professor in the School of Economics and Management at Tongji University. He earned Ph.D. from the Institute of Economics, School of Social Sciences, Tsinghua University. Before joining Tongji, he was a research staff at Tsinghua University and a visiting fellow at the Harvard Business School. His current research interests focus on Digital Economy and Governance, including Platform Ecosystems, Data Economy, and Digital Regulation.
Feng Zhu is a Professor of Business Administration at Harvard Business School, faculty lead in D^3’s Platform Lab, and faculty co-chair of the Harvard Business Analytics Program. Zhu is a leading expert on platform strategy, digital innovation and transformation, competitive strategy, and business model innovation.