Entry Mode Analysis

Entry mode

Lets move to the second framework for a deeper analysis to see whether eBay used the right entry mode when entering Chinese market.

This framework is more complicated, so we transformed it into the graph, which shows the three entry modes and the one eBay should use.

It include three axis which represents control, resource commitment and dissemination risk.

Control: The control over foreign operation.

Resource commitment: Dedicated assets that cannot be redeployed to alternative uses without cost.

Dissemination risk: The risk that firm-specific advantages in know-how will be expropriated by a partner.

For licensing (low control & resource commitments, high dissemination risk), both control and resource commitments are low, while dissemination risk is high

For joint venture (medium control resource commitments & dissemination risk), all the three conducts are at a medium level.

For wholly owned subsidiary (high control & resource commitments, low dissemination risk), both control and resource commitments are high, while dissemination risk is low

As we can see, the zone of ebay’s entry mode is lying exactly in the zone of wholly owed subsidiary, which is similar to acquisition, so acquisition is a right choice for eBay to enter Chinese market.

How do we come to this conclusion? Based on the theory, the variables above have an impact on the level of the three conducts, thus to determine which entry mode to choose.

• The strategic variables would have an impact on the level of control. Gnerally speaking, the greater the national differences, the lower the control, cuz companies would prefer multi-domestic strategy, giving more autonomy to the subsidiary. However, eBay did not follow this rule and pursued a global strategy instead, which is always under the condition of scale economies. The greater the extent of scale economies, the higher the control. Moreover, the global ecommerce industry was highly concentrated, as there were limited number of players in the market. As a result, eBay should prefer the entry mode with high control, which should be wholly owned subsidiary.
• The environmental variables would have an impact on the level of resource commitments. When the country risk is high, the location familiarity is low, the demand conditions is uncertain, the volatility of competition is great, companies would prefer the entry mode requires low resource commitments. As the level of country risk of China and the uncertainty of demand conditions are medium, the resource commitments should be medium, leading to the entry mode of joint venture. However, the level of volatility of competition is low, which results in high resource commitments. The entry mode should be wholly owned subsidiary. The level of location familiarity is low, which results in low resource commitments. The entry mode should be licensing.
• The transaction variables influence the level of dissemination risk and control. Both the value od firm-specific know-how and tacit nature of know-how are low, because the model of e-commerce is easy to be imitated, and from the case we can see that the local knowledge is more important to achieve success compared with the firm-specific know-how. This leads to low dissemination risk and low control, which represents wholly owned subsidiary and licensing respectively.

As is mentioned in the theory, different variables pull the company in different directions, and some results from the analysis of different variables may contradict with each other. So the optimal decision is to choose the entry mode that maximize the lont-term value of the firm when all relevant factors have been considered. For eBay, the strategic variables and environmental variables are more relevant, and among them we think the global concentration and volatility of competition are more relevant to its long-term development. Based on that, we come to the conclusion that acquisition is a right choice for eBay.

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