The co-evolution of the innovation and regulatory regime in socio-technical transitions : the case of the Chinese individual lending transition

In recent decades, the socio-technical transition (STT) approach has been widely adopted to analyse social and technological changes caused by radical innovations taking elements of consumer practices, policies, cultural meanings, infrastructures, and business models into consideration. The STT approach emphasises development alignments between niche-innovations, existing regimes, and exogenous landscapes. However, the role of regulation in innovation development during the transition process has been ignored in existent STT studies. Regulation is important for financial sectors but there is a lack of research on the bi-directional interactions between the regulatory regime and financial innovations. Moreover, transitions in financial sectors remain unexplored in STT literature. This research fills the above gaps by investigating Chinese individual lending transition (ILT) caused by the development of the financial innovation, Peer-to-Peer lending (P2P lending), to explore how the innovation and regulatory regime co-evolve in STTs. Based on the framework of the multi-level perspective (MLP) on socio-technical transitions, a multi-level and multi-dimensional analytical framework was developed to analyse both macroscopic transition processes and microscopic bi-directional niche-regime interactions in four stages of ILT. From the case study, three main findings were revealed. First, based on the trajectories of P2P lending and the corresponding regulatory regime, the generalised trajectory of the regulatory regime in STTs was identified, including lag time, circulation of enforcement and modification, and further stabilisation. Secondly, the mechanisms of niche-regime interactions highlighted the role of the cultural-cognitive institution in the regulation of radical innovations in STTs. Thirdly, enforced self-regulation with a mix of responsive, risk-based, and principles-based regulations was identified as an appropriate regulatory strategy for radical innovation development while the policy mix was substantiated as a solution to promote the coordination of the regulation and radical innovations' development in STT processes. This research is at the vanguard of exploring the role of regulation in STTs and extends the scope of STT literature by analysing the transition in the financial sector. Practical implications for both regulators and practitioners involved in STTs are given. Research limitations are illustrated, and future research agenda are proposed accordingly.