Overcoming Institutional and Infrastructure Weaknesses in China via Online Third-Party Marketplaces

Abstract

China is the world’s second largest retail market and is expected to surpass the United States in 2020. This makes China a must-win market for global and local firms. However, manufacturers often find it hard to reach Chinese consumers due to China’s institutional and infrastructure weaknesses. The advent of online third-party marketplaces provides manufacturers with a new model to tackle these challenges. The question remains, however, whether and to what extent joining online third-party marketplaces in China can generate market value. Using an event study methodology, the authors assess the net impact of online marketplace adoption in China on manufacturers’ expected profitability. Although the abnormal returns are, on average, significant and positive, stock markets recognize that not all manufacturers can reap benefits. To delve deeper into this variation, the authors relate the abnormal returns to various sources of manufacturers’ market knowledge and marketing capabilities. They find that less diversified manufacturers with marketplace experience are expected to achieve greater gains, irrespective of their origin. However, the effects of marketing strengths diverge for foreign and local firms.

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