Impact of Free Zone on Economic Development - Starbucks Corporation - Research Proposal Example

Name: Course: Instructor: Date: Table of Content CHAPTER 1: INTRODUCTION 3 1.1 Objectives of the Study 4 1.2 Research Questions 4 1.3 Rational for the Free Zones 4 1.4 Characteristics of Free Zones 5 1.4.1 Strategic location 5 1.4.2 Openness 5 1.4.3 Infrastructure Availability 5 1.4.4 Availability of Labor and Cost Effective Labor 5 1.5 Methodology 6 CHAPTER 2: IMPACT OF FREE ZONE ON THE DEVELOPMENT OF A COMPANY 6 2.1 Contribution of free zones in development of companies 6 2.2 Impact of Free Zone on Economic Development 8 2.3 Risks companies face in the Free Zones. 10 2.4 Contribution of Free Zone to the Creation of Employment 11 2.5 Contribution of Free Zone to Creation of Business Opportunities 12 2.6 Contribution of Free Zone to Trade 14 CHAPTER 3: CONCLUSION 15 References 16 CHAPTER 1: INTRODUCTION 2 1.1 Objectives of the Study 2 1.2 Research Questions 3 1.3 Rational for the Free Zones 3 1.4 Characteristics of Free Zones 4 1.4.1 Strategic location 4 1.4.2 Openness 4 1.4.3 Infrastructure Availability 4 1.4.4 Availability of Labor and Cost Effective Labor 5 1.5 Methodology 5 CHAPTER 2: IMPACT OF FREE ZONE ON THE DEVELOPMENT OF A COMPANY 5 2.1 Contribution of free zones in development of companies 5 2.2 Impact of Free Zone on Economic Development 7 2.3 Risks companies face in the Free Zones. 9 2.4 Contribution of Free Zone to the Creation of Employment 10 2.5 Contribution of Free Zone to Creation of Business Opportunities 11 2.6 Contribution of Free Zone to Trade 13 CHAPTER 3: CONCLUSION 14 References 15 IMPACT OF FREE ZONE ON THE DEVELOPMENT OF A COMPANY (CASE STUDY OF STARBUCKS CORPORATION) CHAPTER 1: INTRODUCTION Free zones have played a great role in development of the economic, social and political relations among nations across the world. With creation of the first modern free zone in Shannon free zone in Ireland, other free zones have emerged in the current world especially in USA, Japan and Germany (UNCTAD, 2005). Free zones have evolved in in the world with various aims based on their countries of location. After what was termed as global economic crisis, most countries have aimed at creating ways to minimize crisis in the future. This led to some countries crating the free zones. Free zone comprises of the free trade zones and free economic zones (UNCTAD, 2005). They are regions in which companies are given incentives in order to enhance growth. Over the last thirty years free zones has developed in various countries in the world, especially in USA. Various multi-national companies attribute their growth to the existence of the free zones (Zeile, &, William, 2009). One of the companies that has largely benefited from the free zones is said to be Starbucks. Starbucks is a multinational company with its headquarters in Washington, USA. It deals in coffee beverages, beers and wines (Simon &, Bryant, 2014). It was founded in 1971 as a coffee retailer and a coffee bean roaster. Up to today, Starbucks has opened various branches in various countries. Today Starbucks operates in over fifty countries in Africa, North America, Oceania, South America, Asia and Europe (Simon &, Bryant, 2014) 1.1 Objectives of the Study The aim of this project is to assess the impact of free zones on the development of a company. The project is based on the following specific objectives; i. To determine whether free zone contributes to development of a business or company ii. To determine whether free zone creates business opportunities iii. To determine whether free zones exposes companies to risks iv. To determine whether free zone contributes to economic growth and development v. To determine whether free zone promotes trade vi. To determine whether free zone contributes to employment 1.2 Research Questions The project is based on the following questions i. Does free zone contribute to development of businesses or companies? ii. Does free zone create business opportunities? iii. Does free zone expose businesses to any risks? iv. Does free zone contribute to economic growth and development? v. Does free zone promote trade? vi. Does Free zone help to solve unemployment problems in a country? 1.3 Rational for the Free Zones Initially free zones were used to eliminate the procedures involved in obtaining customs and to ease the process of trading. However, free zone has been of much significance especially in facilitating foreign direct investment across borders (Zeile, &, William, 2009). These investments have been of importance to the host nations since they increase their capital bases. Free zones have also enabled free transfer of knowledge and technology across the borders especially to members of a particular free zone (Zeile, &, William, 2009). Attracting investors in these free zones involves coming up with policies aimed at providing incentives to various investors (Zeile, &, William, 2009). In addition, a developed infrastructure especially within the free trading zones may help in luring more investors. Therefore, the study will seek to gain more knowledge on the effects of free zone on the development of an organization. 1.4 Characteristics of Free Zones 1.4.1 Strategic location Free zones are usually located in strategic positions. They are usually located next to an international market (Vendrell, 1998). Factors that determine location of free zones includes, marketing advantages, transportation costs, labor costs, material costs and closeness to auxiliary services. 1.4.2 Openness Free zones must have a properly regulated business environment, a favorable exchange rates and appropriate trade policies (Vendrell, 1998). In addition, government should minimize taxes and tariffs they subject imports to in order to encourage foreign investments (Vendrell, 1998). Exporters should have the titles of free trade in order to make their products effectively compete in the market. 1.4.3 Infrastructure Availability Free zones should have appropriate infrastructure that facilitates cross border trade. Good transportation and communication services should be made available in order to allow cross border exchange of goods and services (Vendrell, 1998). 1.4.4 Availability of Labor and Cost Effective Labor Production process requires labor. According to Vendrell, 1998, foreign firms aim at reducing the cost of their labor, therefore they would prefer in investing in regions or countries that offers low cost labor and readily available. Therefore, free zones must offer a readily available labor at a low cost in order to encourage foreign direct investment. 1.5 Methodology There are various methods of conducting research, which are primary and secondary methods. In preparing this research, various secondary sources were used to access information on free zones. Thorough literature review was conducted based on the past studies conducted on trade organizations and international organization. The information was mainly from the relevant secondary sources since they provided readily available information on free trade zone and its impact on company activities. CHAPTER 2: IMPACT OF FREE ZONE ON THE DEVELOPMENT OF A COMPANY The research conducted on the impact of free zone on the development of an organization, showed that free zone positively influences the development of organizations. Specifically the research identified that, free zones contributes to company development, contributes to employment creation, contributes to trade, contributes to economic growth and development and creates business opportunities. The research also identified that free zones also exposes various organizations such as Starbucks to various risks like competition, and cultural issues. The effects of free zone on development of organization are discussed below. 2.1 Contribution of free zones in development of companies Free zone contributes to the development of companies. Growth of most companies has been attributed to the existence of free zones. Companies within the free zones are always granted various benefits and incentives (Zeile, &, William, 2009). These incentives and benefits may include exemption on tariffs, taxes, duties and any charge that might be applicable on imports and exports (Zeile, &, William, 2009). This helps in boosting the returns of these companies, for example in 2014, Starbucks revenue was approximately 16.45 billion U.S. dollars (Simon &, Bryant, 2014). The company for expansion and development purposes could use these returns. Starbucks attributes its growth to the incentives it has enjoyed in USA and other countries for the past years to its location in some points considered free zones (Simon &, Bryant, 2014). In addition, Simon &, Bryant (2014) it has been able to increase its market share and develop new products in different countries in the world, for example Australia, Egypt, Mexico, Japan, France, Germany and Hungary. A large organization like Starbucks corporation in a free zone has the capacity to higher an expert to help in decision-making (Simon &, Bryant, 2014). Globalization has also eased the process of movement of people across the world. Through these organizations, whose member states fall within a region of free trade are able to import and export experts. Due to the existence of the free zones in some of its areas of operations, for example in North and South America countries, Starbucks have been able to higher different experts to help in the manufacturing of its coffee products (Simon &, Bryant, 2014). Starbucks has been strategizing and ensuring appropriate location of its branches to places where there exists human labor. Development of communication and information system in the free zone also enhances the growth of various companies. Communication and information systems facilitate free exchange of information from one region to another (Zeile, &, William, 2009). This enables companies to borrow from one another or learn from their competitors. Effective information systems enable quick transfer of information from one region to another hence facilitating trade. Starbucks’ headquarters is in Washington, USA, however the corporation has been able to open its branches in various parts in the world (Zeile, &, William, 2009). The corporation easily locates in these countries because there are appropriate information and communication networks that would facilitate information conveyance across its branches. Companies in free zones are also able to engage in direct foreign investment. Direct foreign investment enables companies to exploit various markets which are untapped or which offers great opportunities (Zeile, &, William, 2009). According to Zeile, &, William, (2009) direct foreign investment enables companies to exploit resource that is untapped in a particular free zone. This would enable it to reduce its production cost. Reduction in production cost implies a decline in prices of a company’s product thus making them effectively compete in the market (Zeile, &, William, 2009). A company whose products can effectively compete in any market has the ability to increase its market. A growth in a company’s market share facilitates company’s growth and development. Starbucks has been able to engage in direct foreign investment in various continents such Asia and Europe. This is because these countries offer incentives to investors like Starbucks (Simon &, Bryant, 2014). In addition, small companies are also able to borrow ideas from the large organization within their respective free zones. This is especially on the free zone that allows free flow of information within an industry. 2.2 Impact of Free Zone on Economic Development In United States of America, the first free zone was established between the years 1929-1939 at the period of Great Depression. The free zone was targeted at promoting direct foreign investments in the United States (Zeile, &, William, 2009). The growth and recovery of the United States economy had been linked to free zone. Free zones are usually located at strategic points. These are points that could allow for the growth of an industry in a country (Zeile, &, William, 2009). Free zones are mostly located at points that could facilitate export and import of goods by different countries. Export and import of goods enhances a company strength since they are to increase their profits. The process of exporting and importing enables a country to earn foreign exchange (Zeile, &, William, 2009). The foreign exchange can be used to implement various economic development programs. Free zones zone enables a country and its companies to engage in various investments. Countries with free zones are able to attract and lure more investors in such regions. A well-established and functioning free zone with all the incentives and reliefs will attract more investors, both with small or multinational organizations (Zeile, &, William, 2009). More industries in a region signify development of infrastructure like roads, hospitals and schools. In addition, Zeile, &, William, (2009), these companies may be required to pay a certain portion of their income in form of tax to the government especially in those zones where companies are partially taxed. The government could use this income to develop it economic structures and infrastructure in order to lure more investors. Well-established free zone also promotes economic stability and protects a country during an economic crisis. Simon &, Bryant, (2014), Starbuck Corporation has enhanced economic growth in USA due to employment it offers to its citizens and payment of revenue. Furthermore, free zones facilitate regional development and peaceful coexistence among member nations. Through the establishment of common customs, members of free zone are able to enhance their peaceful coexistence because of trade (Zeile, &, William, 2009). Sharing of knowledge and technology within the free zones facilitates the process of understanding group’s culture. This therefore enables various nations to understand and appreciate culture of other nation. Peaceful coexistence contributes to regional development. 2.3 Risks companies face in the Free Zones. The process of production undergoes changes over time as a result of competition and emergence of new technologies. Free zone is associated with high competition due to the large numbers of industries located in these areas. Competitions affect prices of products in the market and threaten the survival of certain products of a company in the market (Zeile, &, William, 2009). Organization’s survival in such conditions requires appropriate strategies to help counter the threats. Most organizations who cannot afford to hire a specialist maybe vulnerable in such trade conditions (Zeile, &, William, 2009). Starbucks faces competition from other multinational companies such as KFC Corporation, Whitbread PLC and McDonald Corp. this has threatened its growth in certain regions in the past years. For example in the year, 2003 Starbucks closed six of its locations in Israel due to fierce competition (Simon &, Bryant, 2014). This closure was because of unfavorable business environment and operational challenges. In addition, Starbucks in 2007 closed its Imperial palace, Beijing. The closure was because of protests by the locals on what they termed as “erosion of Chinese culture” by a USA company (Simon &, Bryant, 2014). It is therefore evident that multinational companies also face objections due to cultural constraints. Failure to understand the Chinese culture led to the closure of Starbucks’ Beijing outlet. Corporations through the support of the government should be made to understand a given country’s culture. This is to avoid future closure of companies due to cultural constraints. A closure of companies like Starbucks not only affects the corporations, but also the country of its location (Simon &, Bryant, 2014). This is because its closure means layoff, leaving its citizens with no jobs. Corporations also face accusations of supporting outlawed militants in countries in which they seek to trade. Starbuck for instance was forced in to close its store in Beirut, Lebanon (Simon &, Bryant, 2014). This was after protestors went to the streets accusing the corporation of sponsoring Israeli militants. However, before its closure, Starbucks defended its self and stated that the corporation is a non-political organization that does not fund militants. The corporation also faces inflation risk and foreign exchange risk. Exposure to inflation risk was evident during the 2008 global economic crisis. This led to closure of various stores in different countries (Zeile, &, William, 2009). For example in July 2008, Starbucks closed over fifty stores in Australia, what was viewed as Starbucks inability to withstand economic shake up in Australia. The corporation also suffers from foreign exchange risk exposure especially when it needs to convert other country’s currency to the United State dollars (Simon &, Bryant, 2014). However, this is viewed to be minimal because there exists different strategies for hedging foreign exchange risks. 2.4 Contribution of Free Zone to the Creation of Employment An established free zone attracts more investors who create new business enterprises in the region (Zeile, &, William, 2009). Creation of the new business offers job opportunities to people within the free zone and its surrounding. Starbucks is a multinational company that operates in over fifty countries in the world. Within its various outlets, Starbucks offers employment opportunities to the citizens of the country of its location (Simon &, Bryant, 2014). Countries through the creation of more free zones should lure Starbucks Corporation in their respective countries (Simon &, Bryant, 2014). This would help in offering more employment opportunities thus reducing unemployment crisis in various regions. In an industry created for production purposes, employees required to help in production of goods and services will be required. This helps a country to solve its unemployment crisis and improve the living standards of its citizens (Zeile, &, William, 2009). The government should create more free zones in order to attract more investors who would increase the number of jobs in such a country. Creation of employment helps a country to solve social problems that may hinder its development. Creation of business opportunities implies creation of employment. Starbucks by diversifying on its products for example by collaborating with Apple Company in order to sell music as part of its house experience, selling other beverages such as wines is a strategy that would create more opportunities (Simon &, Bryant, 2014):. This is because it will be able to cater for all of its customers who do coffee and tea. 2.5 Contribution of Free Zone to Creation of Business Opportunities Free zones have been on the rise due to their ability to create more business opportunities. Free zones are characterized with partial or complete tax relief, government incentives ad availability of resources (Zeile, &, William, 2009).. These features of a free zone help in luring investors who could see potential opportunities in search regions. Government helps in creation of business opportunities by providing an environment that is favorable for investment (Zeile, &, William, 2009). Creation of a functional free zone creates business opportunities. Potential market of certain products is a force that drives a company to locate in a certain region. Starbuck Corporation has been able to locate its outlets in various countries (Simon &, Bryant, 2014). In addition, Simon &, Bryant (2014) due to the potential market Starbucks Corporation projected in countries like China, Japan and Germany, made it consider increasing the number of its outlets in these countries. For example in USA Starbucks has twelve thousand stores, japan over one thousand stores and in China over one thousand three hundred outlets. Unexploited resources within the free zones also offer business opportunities to various investors. These resources might be in form of human labor or minerals. To facilitate exploitation of such resources a government of the host country may provide incentives of different forms. Member countries to a free zone would therefore benefit from such exploitation through engaging in trade. Most organization sees incentives as business opportunities since they are the motivators to conducting business in any region in the world. Therefore, to facilitate thinking among various entrepreneurs and organizations more free zones should be created to accommodate more businesses. Starbucks, Simon &, Bryant, (2014) has seen various markets in terms of what benefits it adds to the company and its customers. This has enabled it to diversify its production line and offer more products like wine. Free zone has also enhanced the process of innovation. Due to the changes in consumer behaviors, people have been encouraged to invent various products that best suits customer needs. In addition, free flow of information and technology has facilitated the innovation process (Zeile, &, William, 2009). People and organizations are able to learn from their cross border trading partners and in turn apply the knowledge learnt in coming up with a product that suits his consumers. Through this, countries and organization are able to continue with trading since they are able to acquire products they cannot produce on their own. 2.6 Contribution of Free Zone to Trade Trade involves exchange of goods and services. The medium of exchange for trade is money in forms of any agreed currency. Free zones facilitate trade between nations for example between United States and Japan or Germany (Zeile, &, William, 2009). One of the free zone in the world trade is the free trade zones. Free trade zones have enhanced trading relationships among nations in the world. Multinational companies across the Europe have traded well over the past years. Various companies are able to locate in various nations within and outside Europe. Starbucks, Simon &, Bryant (2014) for example has been able to extend its trading across the Europe and Africa. It offers its services in Japan, Germany, China, South Africa, Egypt, Kuwait, Greece and USA, which is the home of the parent company. Existence of free trading zones in these countries has been the motivating factor to Starbucks for its expansion (Zeile, &, William, 2009). Different countries however have different free zones policies. Irrespective of the differences, countries are able to trade effectively based on the agreements and Memorandum of Understanding. In addition, Starbucks has also created fair trade policies aimed at mutual coexistence with other companies in the same industry. This is a strategy aimed at gaining cooperation from the citizens of various nations it offers its products. Free trade zones also promote trade due to the incentives offered in such regions. Low taxes encourage companies to locate in various companies. Tax has been identified as a discouraging factor for the growth of different business in different regions (Zeile, &, William, 2009). Therefore, countries that imposes low taxes on the corporate organization are able to lure more investors compared to those that impose high taxes. Free zones are characterized with free flow of information. Trade exists since traders have ways of conveying information to each other or among themselves. Starbucks has been able to establish itself in various countries since information can be easily laid from the parent company to its subsidiaries. CHAPTER 3: CONCLUSION Free zones prove to be best avenues to promote economic growth. Countries should apply various economic strategies within their free zone in order to help lure more investors. The strategies should be aimed at reducing risks within the free zones, encouraging foreign direct investment, creation of employment, growth and development of companies. From the research, it is also evident that free zones promotes trade and contributes to creation of more business opportunities. Organizations within the free zones also face various risks in the process of trading, for example inflation risks, stiff competition and foreign exchange risks. Free zone features varies from one nation to another. However, most of the free zones offer partial or complete tax to the investors interested in investing in the region. Governments also provide incentives that help lure more investors in free zones within their countries. These incentives however should be for the benefit of the country and the investors. A country when creating a free zone may aim at creating employment to its citizens, improve living standards and enhance the process of industrialization. An organization investing within a free zone may attracted by government incentives, resource availability, developed infrastructure and the ability to increase market share. In addition, the free zone also facilitates marketing, management and business planning due the available infrastructure. References Simon &, Bryant (2014): Everything but the Coffee: Learning about America from Starbucks, United Nations Conference on Trade and Development (UNCTAD) (2005): World Investment Report: Transnational Corporations and the Internalization of Research and Development, 2005 Vendrell J. (1998): Second Latin American Free Zones Conference. Santa Fe de Bogotá – Colombia, May 1998 Zeile N. &, William J. (2009) Foreign Direct Investment in the United States Read More