Generally, in order to maximize gains it also means high risk. Similarly, investing or diversifying into developing countries has the potential for immense gains, but at the same time the risk is high. Companies can get settled in developing countries early while cost are still low (mostly due to the high risk and generally unfavorable conditions), but run the risk of failing if they don't correctly understand the market and adapt to it. Developing markets require different strategies as their inherent market is different due to lack of stable development and regulation. (Strategies That Fit Emerging Market)
If companies don't diversify to new markets they run the risk of someone else starting there earlier to gain a competitive advantage or someone local starting the business. So one lower risk option is to mind the latter group and collaborate with them to gain a local advantage. But before a company starts moving to a new market, especially in a developing country, they need to accurately figure out the country’s institutional context, beyond the typically composite indices wildly available (Strategies that fit emerging market).
Some examples of companies who failed to accurately complete this critical first step would be Facebook, Google, Amazon, and Uber when they tried to move into the Chinese market. These Silicon Valley tech giants failed because of China’s censorship, IP Theft, government regulations that favor domestic companies, etc. 1 If these companies studied the Chinese institutional context, those failures may have been avoided. If the political and social system were examined, the company would have realized that China has a strong censorship, where the government has control over the media. In addition, that government may favor supporting local businesses rather than a global company. Or by considering the capital market, they will realize there is little corporate transparency. (Strategies that fit emerging market)
Examining the Uber case more, they went into the Chinese market expecting to be different and thinking they can change the market, but they failed to account for the market rules already set by the local competitors, Didi and Kuaidi. While these two companies were small at the time Uber joined, they have mostly decided how the ride hailing industry works in China.1 In addition, Uber is technically not legal in China (Uber drivers can face a tremendous fine if found out by traffic cops). Uber is trying to adapt their US strategy to change the context of the Chinese market. but the barriers are too high for them to trying to overcome the legal regulations and competitions. Although China has a tremendous market with large user base, many users are only using Uber for the low cost. Thus, Uber is competing by offering heavy subsidies and bonuses, resulting in large losses. The bonuses for drivers also encouraged fraud where drivers could be paid without providing a ride.
All those are institutional context issues Uber couldn’t easily resolve or which allowed a sustainable, competitive business. They ultimately resulted in Uber’s failure in the Chinese market, with Didi, the competitor, purchasing Uber China. 2