Exploring the Applicability of the OLI Framework in International Expansion Decisions: A Critical Analysis of a Company's Choice

This essay discusses Dunning's eclectic paradigm, also known as the OLI (Ownership, Location, and Internalisation) paradigm, which explains how businesses go global and why they choose foreign direct investment (FDI). The essay uses Starbucks as an example of a company that has expanded internationally, particularly in China and India. Starbucks' primary motivation for entering the Indian market is commercial, as India is a high-growth, under-penetrated market. Starbucks' partnership with Tata Consumer Products has allowed the company to access local resources and put its sourcing expertise to better use.

Apply the OLI framework to explain the decisions on international
expansions taken by a company of your choice. Critically discuss
the applicability and validity of the framework for determining
such decisions.
Part A: Essay
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1. Introduction
Dunning's eclectic paradigm was presented by John Dunning to explain how businesses go
global and why they choose for foreign direct investment (FDI) rather than other investment
strategies (Ietto-Gillies, 2012). According to the findings of his study, Dunning identified two
primary ways in which businesses interact with economies abroad: both the company's home
country's economic activities that create products or services aimed at export markets, and the
host country's economic activities aimed at export markets, are considered export activities
(Dunning, 2000). The OLI paradigm is concerned with the economic activity of foreign markets
and the reasons and locations where FDI is concentrated. The eclectic viewpoint is also known as
the "OLI" (Ownership, Location, and Internalisation) paradigm (Bevan et al., 2004). Patents and
intellectual property are two examples of ownership benefits; other examples include a
company's better technology, management, and personnel, as well as intangible assets like name
recognition, reputation, and the opportunity to take advantage of economies of scale (Dikova et
al., 2010). Having a presence in a certain nation or market may be advantageous for a firm.
Incentives for foreign direct investment (FDI) might be in the form of cheap labour, inexpensive
resources, or a favourable policy environment. There is also the benefit of internalisation, which
arises when a company is able to use its ownership advantage inside for minimising expenses
incurred by both sending and receiving organisations as a result of sharing confidential
information and technology (Buckley & Hashai, 2009).
Starbucks is the most famous coffee chain in the world, and its name is instantly identifiable
throughout the globe (Rajasekaran, 2015). What's more, it all began as a little coffee shop in
Seattle and is now the largest coffee corporation in the world.
Oversaturation in the American market was a major concern for Starbucks, prompting them to
look abroad for growth opportunities (Kramer et al., 2020). China is Starbucks' fastest-growing
market outside the United States, therefore the company decided to attempt to use the same
approach it utilised there in another rising market, India (Ramakrishan, 2017). With the help of
Uni-President Enterprises Corp and President Chain Store Corp, Starbucks has expanded into
China. They used the similar tactic in India, partnering with Tata Consumer Products to form
Tata Starbucks Limited (Kramer et al., 2020). There are four types of factors that might prompt a
firm to expand internationally (Dunning & Lundan, 2008).
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The first is market searching, in which businesses target one or more specific international
markets to sell their wares. As a result, this FDI would be categorised as "demand-seeking." The
second kind of company is the resource-seeker, which operates for the purpose of acquiring
materials, information, or human labour. These are examples of FDIs that aim to increase supply.
Lastly, there are businesses that prioritise effectiveness. They look for ways to specialise their
current assets or find new ways to divide up their workload. The fourth kind of company is the
strategic acquirers. They are primarily concerned with preserving the benefits they get from asset
ownership (Dunning, 2000; Franco et al., 2008). Starbucks' primary motivation for entering the
Indian market is commercial. India is a promising alternative for Starbucks' global development
since it is a high-growth, under-penetrated46 market. Starbucks' greater access to a supplier via
the JV will enable the company to put its sourcing expertise to better use. Because of its
partnership with Tata, Starbucks has access to local resources (Luo, 1998).
2. Main Body
Location Advantages
Numerous factors contributed to Starbucks' decision to open a store in India, but the 'L' of the
OLI paradigm is necessary for a full explanation of why the country was chosen. India, like
China, benefits from its prime geographical position, which is why its economy is expanding at a
fast pace (Dunning, 1998). When considering where to locate value-adding activities, most
companies look to the economic, political, or institutional advantages of the countries they are
targeting (Stefanović, 2008). With an increased ownership advantage, a company is more likely
to make investments in the country (Dunning & Lundan, 2008).
The size and growth prospects of a market are fundamental to the achievement of international
business goals. Starbucks wanted to expand into India because it offered the possibility to
establish a foothold in a rapidly expanding market (Agarwal & Ramaswami, 1992). As more
individuals in India take advantage of their increasing disposable income, the country's retail
coffee sector, now estimated to be worth RS 1,700, is expected to grow by 20% over the next
few years. Westernisation and changing consumer habits are two other variables. It has been
shown that Indian customers would spend between RS 200 and RS 400 for a meal consisting of a
cup of coffee and a meal (Srivastava, 2014). Many Tata companies now provide Starbucks with
essential ingredients and other supplies in India (Kramer et al., 2020). This is consistent with the
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tendency to extend the internal value chain, reduce uncertainty, and provide lasting competitive
advantage (Kotabe & Murray, 2004). With the continued growth of the Indian economy,
Starbucks is sure that the country will become one of its top five worldwide markets (Pandey et
al., 2021). As the Indian nation advances economically, more individuals will have access to
higher education and disposable money, adding to the already massive consumer base (Zhuang,
2023).
Tata Starbucks works with the urban middle class as their target market since they are the only
ones who can buy their goods in the present Indian market (Rajasekaran, 2015). Although tea
consumers outnumber coffee drinkers 8 to 1, the latter are expected to expand their share of the
market. The expanding middle class in India is a major factor in the country's attractiveness as a
potential destination for foreign businesses (Ellram et al., 2013).
As a growing economy, India has a big pool of untrained employees seeking jobs, making cheap
labour one of the country's greatest geographical advantages. Tata Starbucks was attracted to
India as a destination for foreign direct investment in part because of its cheap labour rates.
Starbucks baristas in India make an average of 13,000INR per month (about £135), whereas their
counterparts in the United Kingdom earn an average of £1,160 per month (Nemmaniwar, 2022).
This is somewhat in line with expectations given the disparity in average income; however, the
real savings here result from the cost of a Starbucks coffee, which is £2.67 in India but £2.90 in
the UK as well as £3.49 in the US. Despite the wide disparity in salary, the pricing of their
respective goods are quite similar, which is good news for Starbucks' bottom line.
The Kramer et al. (2020) notes that Starbucks uses locally produced coffee in its Indian outlets,
taking advantage of the fact that the country has a climate in which coffee grows organically.
Most coffee is produced in the tropics and along the equator, an area sometimes referred to as the
"coffee belt" (Vega et al., 2020). Since India is located inside this "belt," the coffee used in
Starbucks cafes throughout the world may be sourced locally rather than having to be sent in
from far away. Starbucks' decision to invest in India was influenced by the country's low cost of
labour and materials, its quickly expanding economy, and the rising demand for coffee.
Ownership advantages
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The advantages to a corporation's shareholders are derived from the assets the firm really
possesses. The resources that a company has access to or control over are a major source of its
competitive advantage in a foreign market (Rugman, 2010). Organisations with more resources
tend to have an ownership advantage when competing with smaller ones (Johnson & Tellis,
2008; Ruzzier & Ruzzier, 2015). Achieving trademark status is essential. Starbucks is aware of
the value of its global brand and the perception that Western companies provide quality and
service in developing nations, thus the company is prepared to establish a premium brand there
(Johnson & Tellis, 2008). Protecting its brand-based competitive advantage, Starbucks has been
using the name "Starbucks" in ten different Indian languages since 2008 (Martin, 2006). The
cups are a convenient and movable form of outdoor advertising. The pleasant scent of its coffee
specialty and the calming atmosphere of its retail locations are just two examples of how the
brand appeals to customers via several senses (Goh et al., 2020).
Similarly, to its coffee, Starbucks also markets a certain way of life. As a result, consumers have
no problem paying a higher price (Fischer & Roy, 2019). Additionally, Starbucks has a strategic
reputational advantage due to its care for its workers, which includes assisting baristas by paying
education fees. Incentives to build and maintain a great team at Starbucks include financial
support in the form of stock options and discounts on products and services (Zhou & Guillen,
2016). Efforts to educate and train workers may help boost production processes. To assist
extend Starbucks' distinct culture and maintain the chain's continuously high quality standards,
the best baristas are sent to new territories (Fischer & Roy, 2019). In a normal store, there are
87,000 different product permutations, but production is simplified to cut down on wait times
(Starbuck, 2017).
It was realised by management that location, product quality, and décor were just as important to
the company's success as was price and service (Burt & Carralero‐Encinas, 2000). Starbucks was
one of the first businesses to accept mobile payments and has since been noted for its pioneering
spirit in areas such as the usage of applications to make purchases. Additionally, Starbucks is not
only a coffee store, but rather an experience supplier, according to the company's management
(Rajasekaran, 2015). Customers are drawn to outlets because they provide a shopping
environment that is both comfortable and familiar (Fischer & Roy, 2019). To better serve its
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clientele, Starbucks often conducts consumer surveys. The whole effect is enhanced by the nice
aesthetic.
The firm takes use of adaptation in order to increase its knowledge base. Starbucks' worldwide
business strategy is same across countries, notwithstanding minor adjustments made to reflect
local customs. Hand-carved wooden screens, Indian artwork, and sturdy local teak are just some
of the materials used to make Indian coffee tables. Strong entrepreneurial abilities, including
familiarity with real estate, allow the organisation to open up new, one-of-a-kind retail locations,
improving the quality of service provided to customers. This suggests that Starbucks has the
know-how and advantages to create economic rents high enough to cover the expenses of global
expansion (Kramer et al., 2020).
However, Starbucks has maintained the same design of Café worldwide, much as they did in
China, to maintain a more genuine "Starbucks atmosphere"(Srivastava, 2014). This is in contrast
to the majority of Starbucks' rivals in India, who have modified the appearance of their
storefronts in order to better fit the Indian market. Starbucks is able to capitalise on customer
recognition of its name by delivering the same high-quality service for which it is known in the
West. The key benefit of this strategy is that it attracts customers who are interested in living this
way of life. Despite the fact that these fast service restaurants are not the most common or
conventional kind of café that people in India visit, their popularity is growing at a compound
annual growth rate of 22% between the years 2016 and 2022 (Kannammal & Suvakkin, 2019).
Tata Starbucks was aware of the very high demand for tea in India, a need that they were unable
to satisfy. One of the advantages of having a major organisation that operates on a global scale is
the ability to swiftly and effectively use your position in order to make rapid and effective
adjustments to your company in order to satisfy the requirements of the market. This meant that
Tata Starbucks needed to expand both the quantity and type of teas that they offered to
customers. According to Tata Global Beverages, the company debuted eighteen new brews of tea
under the brand name Teavana (Dubey et al., 2020).
Starbucks has used its in-depth familiarity with the coffee shop industry to create a globally
competitive cafe business. Starbucks is a significant MNE that has been in operation since 1971
(Haskova, 2015). Starbucks' STRIVE campaign in India was launched with this wealth of
information. This course combines the retail know-how of Starbucks with traditional job-skills
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training. More than 3,000 young people from disadvantaged backgrounds who lack practical job
skills and meet employment barriers will be trained via this project. The program's goal is to help
these individuals overcome these barriers and find job. Starbucks places a special emphasis on
young women and has set a goal to expand the percentage of women working for the company to
40% by 2022, up from 25% now (Butrica & Mudrazija, 2022). Starbucks will benefit directly
from this by having a workforce that is more highly skilled; Nonetheless, the reputation of the
corporation as one that cares about its employees and the areas in which it operates is certain to
improve as a result of this project. Starbucks is banking on its good name to bring in customers
in the future.
Internalisation Advantages
The OLI paradigm places a premium on minimising transaction costs, which is where
internalisation excels. To outsource or to internalize—that is the dilemma (Rugman, 2010). It is
often used when control measures are weak, the target country's institutional context is difficult,
and fears of agency difficulties emerging from foreign contractors are prevalent (Khanna &
Palepu, 2000).
With the increasing allure and high cost of enforcing outsourcing contracts, principal-agent
issues are driving up transaction costs for businesses. Starbucks' service-based model has moved
the company's focus to intangible assets, such as the tacit knowledge of its baristas. When
overseeing a subsidiary in a high-stakes, complicated market, however, it may be helpful to
partner with a firm based in the area. Tata supplies market experience (including how to manage
a firm in India) and a strategic network, while Starbucks provides certain internalisation
advantages (Anderson & Weitz, 1986).
As was indicated before, Starbucks has designed its cafés in the same way as those in the United
States. However, there is an additional benefit to this arrangement that is not related to the
creation of a "Starbucks atmosphere." They negotiate scale discounts with the companies who
provide them goods and services. These economies of scale are achieved by the company having
a vast network of cafés that all use the same components from the same suppliers. As a result, the
company's expenses are reduced since they are distributed across a greater quantity of items
(Bevan et al., 2004).
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Starbucks has run into some difficulties with its joint venture partner, Tata Beverages, due to the
fact that Tata controls a plethora of other tea and coffee brands in India, the vast majority of
which account for the country's market share (Fischer & Roy, 2019). Due to the vast number of
connections that they have, Tata is the obvious front-runner in the market to work with when
seeking for prospects to expand into India. Starbucks is positive about their chances of success at
the store level in India, although they lack familiarity with the market's suppliers. This is where
Tata can really help Starbucks out and make an impact in India. The issue is that Tata owns such
a large portion of the market, making it such that Starbucks is now competing directly against
their partner. This creates a business conflict of interest. Although this may prove to be
Starbucks' greatest difficulty in the years to come, the company has clearly overcome similar
obstacles in the past. Once a Joint Venture, Starbucks' China operations were acquired by
Starbucks in 2017 for around $1.3 billion (Anthony et al., 2017). Starbucks' tremendous success
as a company makes it possible for them to implement a risk-mitigation strategy of this kind
because they have the financial resources necessary to be able to afford acquisitions of this
magnitude. Starbucks benefits from the first joint venture relationship since it exposes them to
the international market with an established local firm that can help them in areas where they
have little to no prior knowledge. Now that Starbucks understood how the market and suppliers
worked, they felt comfortable enough to proceed without a partner, since the risks were lower
than they had been before they invested. It's possible that Starbucks may roll out the idea in India
if stores there are financially feasible, which is projected for 2020. However, because to the
current Covid-19 epidemic, this is unlikely to happen any time soon (Kramer et al., 2020)
Figure 1: The OLI framework of the eclectic paradigm
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The method through which a business breaks into a market is based on how the three OLI
elements interact with one another. At first look, the benefits of internalisation seem to be less
than the benefits associated with ownership and location. This suggests that FDI is the preferred
method of entering the market (see Figure 1). In light of these difficulties, the following
discussion will show how the FDI strategy is coupled with the JV approach.
3. Conclusion
In a nutshell, Starbucks formed a joint venture agreement to enter the rapidly growing Indian
market at lower risk, taking advantage of the advantages that come with operating inside a
developing country with affordable labour and materials. They were therefore able to take full
advantage of the opportunities afforded by operating in a developing nation. They have further
strengthened their position by focusing, not on the traditional custom of drinking tea, but rather
on the increasing middle class inside the nation and luring people in with a genuine Western-
style Starbucks experience.
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