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

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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