Read Closing Case Starbucks Foreign Direct Investment (uploaded). Answer the following in a three to four page response. Why do you think Starbucks decided to enter the Japan

Starbucks’ Foreign Direct Investment Forty years ago, Starbucks was a single store in Seattle’s Pike Place Market selling premium-roasted coffee. Today, it is a global roaster and retailer of coffee, with more than 28,000 stores in 76 countries. Starbucks set out on its current course in the 1980s when the company’s director of marketing, Howard Schultz, came back from a trip to Italy enchanted with the Italian coffee- house experience. Schultz, who later became CEO, persuaded the company’s owners to experiment with the coffeehouse for- mat—and the Starbucks experience was born. The strategy was to sell the company’s own premium roasted coffee and freshly brewed espresso-style coffee beverages, along with a variety of pastries, coffee accessories, teas, and other products, in a taste- fully designed coffeehouse setting. From the outset, the company focused on selling “a third-place experience,” rather than just the coffee. The formula led to spectacular success in the United States, where Starbucks went from obscurity to one of the best- known brands in the country in a decade. Thanks to Starbucks, coffee stores became places for relaxation, chatting with friends, reading the newspaper, holding business meetings, or (more recently) browsing the web.

In 1995, with 700 stores across the United States, Starbucks began exploring foreign opportunities. The first target market was Japan. The company established a joint venture with a local retailer, Sazaby Inc. Each company held a 50 percent stake in the venture: Starbucks Coffee of Japan. Starbucks initially invested $10 million in this venture, its first foreign direct investment. The Starbucks format was then licensed to the venture, which was charged with taking over responsibility for growing Starbucks’ presence in Japan.

To make sure the Japanese operations replicated the “Starbucks experience” in North America, Starbucks transferred some employees to the Japanese operation. The joint venture agreement required all Japanese store managers and employees to attend training classes similar to those given to U.S. employees. The agreement also required that stores adhere to the design parame- ters established in the United States. In 2001, the company introduced a stock option plan for all Japanese employees, making it the first company in Japan to do so. Skeptics doubted that Starbucks would be able to replicate its North American success overseas, but by the end of 2018 Starbucks’ had some 1,286 stores and a profitable business in Japan. Along the way, in 2015, Starbucks acquired Starbucks Coffee of Japan, making the stores wholly owned as opposed to licensed.

After Japan, the company embarked on an aggressive foreign investment program. In 1998, it purchased Seattle Coffee, a British coffee chain with 60 retail stores, for $84 million. An American couple, originally from Seattle, had started Seattle Coffee with the intention of establishing a Starbucks-like chain in Britain. By 2018, Starbucks had almost 1,000 stores in the United King- dom.

In the late 1990s, Starbucks also opened stores in Taiwan, China, Singapore, Thailand, New Zealand, South Korea, and Malaysia. In Asia, Starbucks’ most common strategy was to license its format to a local operator or joint venture partner in return for initial licensing fees and royalties on store revenues. As in Japan, Starbucks insisted on an intensive employee-training program and strict specifications regarding the format and layout of the store.

China has developed into Starbucks’ fastest-growing market and is now second only to the United States in terms of store count and revenues. Although China has historically been a nation of tea drinkers, the third-place coffee culture pioneered by Star- bucks has gained significant traction in the nation’s large cities where wealthy and middle-class customers will pay $5 for a cup of coffee. As with many other nations, Starbucks originally entered China by setting up a joint venture with a local company and licensing its format to that entity. That changed in 2018 when Starbucks bought out its East China venture partner in order to attain greater control over its growth strategy. According to Belinda Wong, CEO of Starbucks’ China operations, “Full own- ership will give us the opportunity to fully leverage the company’s robust business infrastructure to deliver an elevated coffee, in-store third place experience and digital innovation to our customers, and further strengthen the career development opportu- nities for our people.”* The company now aims to have 6,000 wholly owned stores in China by the end of 2022, up from 3,500 at the end of fiscal 2018.

Sources: Starbucks 2018 10K; J. Ordonez, “Starbucks to Start Major Expansion in Overseas Market,” The Wall Street Journal, October 27, 2000, p. B10; S. Homes and D. Bennett, “Planet Starbucks,” BusinessWeek, September 9, 2002, pp. 99–110; “Starbucks Outlines International Growth Strategy,” Business Wire, October 14, 2004; A. Yeh, “Starbucks Aims for New Tier in China,” Financial Times, February 14, 2006, p. 17; Laurie Burkitt, “Starbucks to Add Thousands of Stores in China,” The Wall Street Journal, January 12, 2016; “Starbucks to Acquire Remaining Shares of East China JV,” Starbucks press release, July 27, 2017; Jon Bird, “Roasted: How China Is Showing the Way for Starbucks in the US,” Forbes, Janu- ary 15, 2019; Eric Sylvers, “After 25,000 Stores in 78 Countries, Starbucks Turns to Italy,” The Wall Street Journal, September 6, 2018.

*Belinda Wong, “Starbucks Acquires Remaining Shares of East China Business; Move Accelerates Company’s Long-Term Commitment to China,” Starbucks, 2017.

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Case Discussion Questions

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Endnotes

1. Where did the original idea for the Starbucks’ format come from? What lessons for international business can be learnt from this?

2. What drove Starbucks to start expanding internationally? Is this strategy in the best interests of its company’s shareholders?

3. Why do you think Starbucks decided to enter the Japanese market via a joint venture with a Japanese company? What lessons can be drawn from this?

4. What drove Starbucks to shift from a joint venture strategy in China to run the operation through a wholly owned subsidiary? What are the benefits here? What are the potential risks and costs? Do you think this was the correct decision?

1. United Nations, Conference on Trade and Development, Statistical Database, accessed July 2018, http://unctadstat.unctad.org.

2. World Trade Organization, International Trade Statistics, 2018 (Geneva: WTO, 2018); United Nations, World Investment Report, 2019.

3. United Nations, World Investment Report, 2019.

4. United Nations, World Investment Report, 2018 (New York and Geneva: United Nations, 2018).

5. Howard Silverblatt, S&P 500 2017: Global Sales, S&P Dow Jones Indices.

6. United Nations, Conference on Trade and Development, Statistical Database.

7. United Nations, Conference on Trade and Development, Statistical Database.

8. United Nations, Conference on Trade and Development, Statistical Database.

9. United Nations, World Investment Report, 2020

10. Data from https://www.us-china-fdi.com/ us-china-foreign-direct-investments/fdi-data

11. United Nations, World Investment Report, 2019.

12. See D. J. Ravenscraft and F. M. Scherer, Mergers, Selloffs and Economic Efficiency (Washington, DC: Brookings Institution, 1987); A. Seth, K. P. Song, and R. R. Pettit, “Value Creation and Destruction in Cross-Border Acquisitions,” Strategic Management Journal 23 (2002), pp. 921–40; B. Ayber and A. Ficici, “Cross-Border Acquisitions and Firm Value,” Journal of International Business Studies, 40 (2009), pp. 1317–38.

13. For example, see S. H. Hymer, The International Operations of National Firms: A Study of Direct Foreign Investment (Cambridge, MA: MIT Press, 1976); A. M. Rugman, Inside the Multinationals: The Economics of Internal Markets (New York: Columbia University Press, 1981); D. J. Teece, “Multinational Enterprise, Internal Governance, and Industrial Organization,” American Economic Review 75 (May 1983),

pp. 233–38; C. W. L. Hill and W. C. Kim, “Searching for a Dynamic Theory of the Multinational Enterprise: A Transaction Cost Model,” Strategic Management Journal 9 (special issue, 1988), pp. 93–104; A. Verbeke, “The Evolutionary View of the MNE and the Future of Internalization Theory,” Journal of International Business Studies 34 (2003), pp. 498–501; J. H. Dunning, “Some Antecedents of Internalization Theory,” Journal of International Business Studies 34 (2003), pp. 108–28; A. H. Kirca, W. D. Fernandez, and S. K. Kundu, “An Empirical Analysis of Internalization Theory in Emerging Markets,” Journal of World Business 51 (2016), pp. 628–40.

14. J. P. Womack, D. T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990).

15. The argument is most often associated with F. T. Knickerbocker, Oligopolistic Reaction and Multinational Enterprise (Boston: Harvard Business School Press, 1973). See also K. Head, T. Mayer, and J. Ries, “Revisiting Oligopolistic Reaction: Are Decisions on Foreign Direct Investment Strategic Complements?” Journal of Economics and Management Strategy 11 (2002), pp. 453–72.

16. The studies are summarized in R. E. Caves, Multinational Enterprise and Economic Analysis, 2nd ed. (Cambridge, UK: Cambridge University Press, 1996).

17. See R. E. Caves, “Japanese Investment in the US: Lessons for the Economic Analysis of Foreign Investment,” The World Economy 16 (1993), pp. 279–300; B. Kogut and S. J. Chang, “Technological Capabilities and Japanese Direct Investment in the United States,” Review of Economics and Statistics 73 (1991), pp. 401–43; J. Anand and B. Kogut, “Technological Capabilities of Countries, Firm Rivalry, and Foreign Direct Investment,” Journal of International Business Studies, 1997, pp. 445–65.

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