Exploring how social interactions influence regulators and innovators: The case of regulatory sandboxes

Abstract

Like incubators, regulatory sandboxes constitute a prominent mechanism to enable entrepreneurial activities that guide financial technology (FinTech) firms through regulatory frameworks in the financial industry. Because they are new, there is a lack of research on regulatory sandboxes; most studies have investigated legal aspects while overlooking the management perspective. To address this gap, this paper builds on incubation research studies to explore how social interactions within regulatory sandboxes influence the practices of regulators and regulatees, using social capital theory. An exploratory-abductive approach is adopted, using data collected from 16 semi-structured interviews. The findings indicate that regulator-regulatee social interactions increase the legitimacy, risk management capabilities, and knowledge of regulatory frameworks among regulatees and, as to regulators, increase their understanding of regulatory constraints and potential risks in enabling technologies, better inform them of regulatees’ support needs, and offer them early access to regulatory innovations. The findings also reveal that the practices of regulators and regulatees may be negatively affected due to lowered trust and discrepancies in expectations and underlying goals. This research contributes to the incubation literature by focusing on the micro and meso levels of knowledge exchange and the entrepreneurial finance literature by promoting the role of incubation models.