Internationalisation Of Starbucks

No less than 25 years ago, Harold Schultz joined a small American chain of coffee shops in Seattle as the director of retail and operations (Starbucks). Since then, Schultz's vision has transformed Starbucks into a transnational giant on a scale similar to the international growth experienced by McDonalds. By the end of 2006 the firm had a total 12,400 stores across 37 different countries (Starbucks 2006). In this essay I will explore the academic literature on international business and apply it to the case of Starbucks. I will conclude with a summary of the motivating economic factors that led to the expansion of Starbucks into foreign markets.

The application of the academic literature to the Starbucks case does invariably lead to a degree of bias towards some theories over others for reasons that are specific to the Starbucks case. Hill (1997) emphasises three motivations for global expansion; greater returns from core competencies, location specific advantages and experience curve economies. In the Starbucks case, only the first of these three is a valid motivation for multinational expansion. Experience and location economies are primarily concerned with cost economies derived from minimising manufacturing costs, vertical internalisation and overcoming transactional market imperfections. In the Starbucks case however I am primarily concerned with the utilisation of Starbucks' intangible core competencies and the horizontal expansion of multiple retail outlets into foreign markets where structural market imperfections exist.

To some extent, Starbucks is already vertically integrated across national borders with significant bargaining power downstream in the value chain over farms, coffee mills and coffee exporters in countries such as Guatemala, Costa-Rica and Indonesia (Carolis research). Vertical integration was the second objective in Starbucks 7-part strategy outlined in its IPO prospectus in 1991. Although the firm does not directly control these input activities, the extent of its bargaining position could be said to minimise the potential benefits of further internalising the vertical chain. Needless to say, for the purpose of this essay I will restrict my analysis to the horizontal expansion of Starbucks into foreign markets on the basis that it has already exploited all potential location-specific advantages of vertical expansion.

I also look at Starbucks through the lens of the firm rather than from a macroeconomic perspective. This is because the classical and neo-classical frameworks of analysis do not provide sufficient reasoning to explain the firm-specific motivations for becoming transnational.

Naturally, as Dunning and Rugman observe below, there is no greater starting point for such an analysis than the work of Stephen Hymer.

Until Hymer articulated the process of FDI as an international extension of industrial orgnaisation theory, it was not possible to understand why the MNE transfers intermediate products such as knowledge or technology among its units across different nations while still retaining property rights over such assets. Today it is widely recognised that the theory of FDI is primarily about the transfer of nonfinacnial and ownership-specific intangible assets by the MNE, which needs to appropriate and control the rate of its internalized advantages. (Dunning and Rugman 1985)

Hymer's market power theory of the firm was the first departure from the idea that lower costs of production in foreign locations are the primary motivation for investment abroad. Rather, he posits that the existence of structural market imperfections and the desire of the firm to increase the extent of its market power are the main determinants of investment in foreign markets (Ietto-Gillies 2005). According to Hymer, market imperfections enable TNCs to "separate markets and prevent competition between units" (Hymer in Dunning & Rugman 1985) and increase market power.

Dunning and Rugam (1985) also make reference to the fact that this view predates the work of Michael Porter who focus on establishing market barriers to entry and exit as the best strategy for gaining competitive