Competitive Dynamics between Multinational Enterprises and Local Internet Platform Companies in the Virtual Market in China
| Published date | 01 July 2016 |
| Date | 01 July 2016 |
| DOI | http://doi.org/10.1111/1467-8551.12136 |
| Author | Jing Zeng,Keith W. Glaister |
British Journal of Management, Vol. 27, 479–496 (2016)
DOI: 10.1111/1467-8551.12136
Competitive Dynamics
between Multinational Enterprises
and Local Internet Platform Companies
in the Virtual Market in China
Jing Zeng and Keith W. Glaister1
University of Gloucestershire, Cheltenham GL50 2RH, and 1University of Warwick,
Warwick Business School, Coventry CV4 7AL, UK
Corresponding author email: jzeng@glos.ac.uk
We adopt the dynamiccapability perspective and the institutional view as the guiding the-
oretical lenses to explain the relativeperformance of foreign internet platform companies
(IPCs) operating in China. Based on data obtained from 51 interviews a multiple-case-
study approach is adopted, with representative matched cases between foreign IPCs, in-
cluding Google, eBay,Amazon and Groupon, and local IPCs. The findings highlight the
unique characteristics of the IPCs and the Chinese context that challenge assumptions
prevailingin the literature of the applicability of firm-specific advantagesin determining a
sustainable competitiveadvantage. We highlight the dynamic capabilities of the firm, such
as flexibility and experimentation, in contributing to sustainable competitive advantage.
Further, rather than focusing on firm-specific resources, we find that the active agency
of the firm can approach institutions as resources through external links with diversified
institutional players,which is crucial for multinational enterprise IPCs to develop sustain-
able competitive advantage.Drawing on the findings we present a number of propositions
and implications for theory and practice.
Introduction
This study provides an explanation for the per-
formance of foreign internet platform companies
(IPCs) operating in China. The economic term
platform refers to an intermediary connecting mar-
kets from dierent groups of users and relying
on technology/information to facilitate value cre-
ation interactions (Armstrong, 2006; Rochet and
Tirole, 2003). We define IPCs as those that are es-
tablished with the primary focus to provide infras-
tructure, information and technology that enable
direct transaction or value creation over the web-
based virtual platform by linking markets from
dierent groups of users and that extract a signifi-
cant proportion of their revenue from the transac-
tion. Prominent examples of IPCs include eBayfor
buyers and sellers,Google for searchers and adver-
tisers etc. An increasing numberof IPCs have inter-
nationalized and are nowmultinational enterprises
(MNEs).
IPCs dier from traditional companies in fun-
damental ways. In the traditional manufacturing
and professional service company, a firm’s abil-
ity to generate supernormal economic return is
largely determined by firm internal resources and
its supply-side eciency. In contrast, the IPC’s
value is largelydriven by network externality where
the value to users largely depends on the number
of users using the same goods or services (Katz
and Shapiro,1994). Consequently, an IPC can only
generate economic return if it can enable direct
transaction/interaction by serving dierent inter-
dependent customer groups. In other words, the
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480 J. Zeng and K. W. Glaister
value has to be created among dierent groups of
users in order to be captured by the firm (Katz
and Shapiro, 1994; Shapiro and Varian, 1999).
This represents a unique challenge to the tradi-
tional strategic thinking postulating that posses-
sion of ‘superior’ resources determines the firm’s
competitive advantage. In addition, whereas tra-
ditional manufacturing and professional service
firms generally have higher costs, both fixed costs
(e.g. capital expenditure) and variable costs (e.g.
cost of dealing with each individual interaction),
as they are more predicated on physical assets,
land and natural resources, IPCs deliver informa-
tion and services that are instantly available to a
vast number of customers with significantly re-
duced search and transaction costs (Malone, Yates
and Bejamin, 1987). Further, IPCs are more vul-
nerable to sustaining their competitive advantage
due to low entry barriers (Porter, 2001), easily im-
itableinformation-based capabilities and resources
(Shapiro and Varian, 1999), much more empow-
ered customers owing to low switchingcosts, more
substitute services (Porter, 2001) and reduced mar-
ket information asymmetry (Singh and Kundu,
2002). The unique characteristics of IPCs and the
virtual market in which IPCs operate represent a
fundamental challenge to the conventional expla-
nation of the MNE’s competitive advantage that
mainly focuses on firm-level eciency.
China is the world’s largest digital market, hav-
ing surpassed the USA and reaching US$296.57
billion online shopping transactions in 2013. How-
ever, China has proved a challenging market for
several MNE IPCs. eBay and Google entered
China in 2002 and 2006, respectively, but despite
early successes their marketshares declined rapidly
to 6.2% and 19.2% by the time they exited China
in 2006 and 2010. Others, such as Amazon and
Groupon, continue to struggle, with their mar-
ket shares in China reaching only single digits.
With superior resources available to MNE IPCs,
this performance was unexpected. A widespread
speculation holds that government censorship ac-
counts for the performance of MNE IPCsin China
(New York Times, 2010). However, similar gov-
ernment censorship was also experienced in other
countries, such as Indonesia, Thailand and Saudi
Arabia, where MNE IPCs, e.g. Google, are still
able to dominate with more than 95% of the mar-
ket share in these countries. One explanation from
the international business (IB) literature is the lia-
bility of foreignness (LoF) (Hymer, 1960; Zaheer,
1995). LoF suggests that MNEs face unavoidable
costs arising from unfamiliarity with the host en-
vironment due to cultural, political and economic
dierences, and from the need for coordination
across geographical distances. However, the LoF
tends to decrease over time, as subunits become
more embedded in the host country environment
(Zaheer and Mosakowski, 1997). If LoF decreases
over time and the advantages of an MNE in terms
of scale and superior knowledge transfer still hold
(e.g. Dunning, 1973), then logically Amazon and
Groupon should have become more competitive
compared to local IPCs. One way to overcome
the LoF is to acquire capabilities applicable to
the host country by involving a local firm as an
equity partner in the foreign subsidiary (Inkpen
and Beamish, 1997). Although eBay, Amazon and
Groupon acquired local partners when they first
entered China, they still underperformed com-
pared to their local competitors.
These examples indicate that extant theory of
the MNE faces a significant challenge in explain-
ing how MNEs develop and sustain competitive
advantage(Cantwell, 2014; Pitelis and Teece, 2010;
Teece, 2014). The IB literature has suggested two
lines of reasoning to explain sustainable com-
petitive advantage of the MNE. The first advo-
cates a capabilities-based theory of the MNE (e.g.
Cantwell, 2014; Cantwell, Dunning and Lundan,
2010; Dunning and Lundan, 2010; Teece, 2007,
2014). Essential to sustaining the firm’s compet-
itive advantage are dynamic capabilities, which
refer to the firm’s ability to integrate, build and re-
configure internal and external competences to ad-
dress rapidly changing environments (Teece, 2007,
2009, 2014; Teece, Pisano and Shuen, 1997; Zahra,
Sapienza and Davidsson,2006; Zander and Kogut,
1995). A second line of reasoning stems from in-
stitutional theory. The institutional view encom-
passes formal rules (e.g. laws and regulations) and
informal constraints (e.g. culture and norms) that
aect the MNE’s performance in the host country
(North, 1990). Some institutional theorists have
highlighted dynamic and non-linear institutional
change, and called for a more dynamic approach
focusing on the active agency of the firm in re-
sponding to and shaping the institutional environ-
ment (e.g. Cantwell, Dunning and Lundan, 2010;
Kostova,Roth and Dacin, 2008; Pitelis and Teece,
2010; Teece, 2007, 2014).
Both the dynamic capabilities and institutional
views hold important pieces of the puzzle to
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