Starbucks and WalMart in China and Choice of Entry Mode - Case Study Example

Starbucks and WalMart in Chinese Economic Boom Introduction Since the emergence of trade liberalization in 1990, domestic and national income thresholds of all the modern market economies have improved. In the contemporary era, the one man Robinson Cruise economy does not exist, as most of the nations adopt strict open door policies in business (Peng, 2010). The living standards and discretionary spending power of the individuals have substantially improved with the sesame of increased degree of business internationalization. However, some emerging economies of the globe like China are witnessing superior economic prosperity with the essence of international trade. Perhaps, this is the reason multinational firms desire to expand their business branches in China and reap some benefits of its economic prosperity (Peltonen, Sousa and Vansteenkiste, 2012). This essay will concentrate on a case study that will precisely elaborate the market entry mode adopted by the giant American coffee company Starbucks and popular retailing firm WalMart in China. The paper will also elaborate the factors that influenced the chosen entry modes. FDI and Business Internationalization Since, most of the countries in the world have opened up their economies for international trade, giant business firms have appropriately expanded their business across prosperous booming as well as developed economies of the world. However, the cross country trading operations of the multinational corporations (like trading of tangible assets and takes) are undertaken through special investments known as foreign direct investments (FDI). The FDI made by the multinational firms can either be Portfolio FDI or Greenfield FDI (Froot, 2008). Under the regime of the former, the foreign firms completely or partially acquire an existing firm of the host country by investing in its equity stakes. On the other hand, for the latter type, the foreign firm makes a fresh new investment for its business launching in the host country. The business operations of the multinational organizations across the world are termed as its scope of business internationalization (Froot, 2008). Chinese Economic Boom China is a popular developing economy with highest population pressure in the globe. Chinese Imperialism had ended long back in 1940. However, till 1970, the public authorities of the nation did not support FDI inflow as they believed in import substitution and export promotional policies. Since 1970, China’s centrally planned economic system changed to form a market economy. By 2010, the country became the largest exporter in the world and started to actively participate in global trading affairs. By the end of 2011, its economic growth was considered to be the second highest in the world. Through trade liberalization, China’s banking sector has diversified, private sector has flourished and FDI inflow rate has increased. Multinational companies like WalMart, Starbucks and Apple have thus spread their business branches in China to reap the growing periodicity and market demand growth of the nation. Figure 1: Sectoral FDI Distribution in China (Source: Xu, 2013) The above table shows, that the majority of FDI inflow has taken place in China’s secondary and tertiary sector. However, it is evident that since 1997 till 2002 the FDI inflow of China had substantially increased (Xu, 2013). Starbucks and WalMart Market Entry Modes Starbucks is a popular American coffee selling Multinational Corporation, with its headquarters in Seattle, Washington. The company was founded long back in 1971 (Linnskog, 2008). After some years of its inception, when the company realized that its domestic market was saturated, it started expanding its scale and scope of business operations. WalMart is another popular multinational company based in America. The company is considered to be the largest retailing firm in the world. Since, its foundation in 1962, the company has always sought business internationalization as the primary strategy for revenue maximization (WalMart, 2014). The firm engages in the sales of various types of consumers’ goods and services. In general a multinational company can enter in any foreign economy through various modes of entry. Figure 2: Different Entry Modes (Source: Osland, Taylor and Zou, 2001) However, Starbucks and WalMart expanded their business across the world by five major means. Namely, turnkey projects, franchising, licensing, joint venture and direct investment. Licensing Starbucks has expanded its business through this process with limited risk. Through this process the company allows a local producer to serve on behalf of the company through the enactment of a legal licensing agreement (Osland, Taylor and Zou, 2001). Franchising It is a similar process like licensing, only difference is the local producers need to pay a royalty to the company for producing on their behalf. Joint venture The company allies with another firm in the host country and forms a third combination firm that operates in the host market (Osland, Taylor and Zou, 2001). Direct investments and Turnkey projects In case of direct investment, the company makes a fresh investment in the foreign nation to settle its business subsidiary. If it is made for only one project, then it is termed as the turnkey project (Osland, Taylor and Zou, 2001). Figure 3: Internationalization of Starbucks (Source: Linnskog, 2008) From the above table it can be observed that Starbucks has entered in the Chinese market through a joint venture with a firm known as Shanghai President Coffee Co. However, the company owns only 5% of the stake of the venture company (Linnskog, 2008). Apart from joint venture mode of entry, the company has also entered through other ways like licensing and directly investing across various nations of the world (Speiser, 2003). It should be also noted that the extent of business internationalization adopted by WalMart was much higher than its potential competitors in the industry like C. Penney, Kmart and Sears and Carrefour. Unlike, the case of Starbucks, WalMart entered in some economies like Germany through the process of acquisition. In Germany, WalMart acquired the Hypermarket company named Wertkauf (WalMart, 2014). In some of the European nations, the company made Greenfield investments. Some other popular firms acquired by WalMart were Britain’s Tesco, Metro in Germany and Makro in Netherlands. It also acquired the company of Woolco in Canada (WalMart, 2014). Starbucks in China Apart from the joint venture shown in the above table, Starbucks has entered in the emerging economy of China through various other means. Since China is a traditional tea drinking nation, the company faced several problems when it launched new stores in the country in 1999. This was a process of direct investment (Business Paper, 2011). Though the company could not appeal to a wide base of customers in the initial stages, it settled with a fair image in the market given its high brand reputation and facilities provided by the Chinese authorities. Hence, the first mode of entry adopted by Starbucks in China was direct investment. By 2005, it was found that the company had opened up 185 new stores in the mainland and had actively planned to open up few more (Business Paper, 2011). The CEO of the company claimed that the financial returns that the company was achieving from its business operations in China since 2005 was increasing annually at a fast rate. The company’s aim in China is to grasp the growing market demand of the middle income groups of the nation. However, the company’s primary marketing strategy in China is still based on the word-of-mouth strategy. Much investment in mass marketing or advertisements is not incurred by the company in China (Business Paper, 2011). WalMart in China WalMart only entered in China when its public authorities had adopted policies of economic openness. Until 1996, the international retailers in China had to strictly follow the rules and regulations of the government (Liu, 2007). One such rule stated that, if a foreign retailers had to enter in the market of China, then it could only operate on the basis of a joint venture with a Chinese firm who would legally own at least 51% of the stake of the venture (Liu, 2007). At this point of time WalMart formed a joint venture with the Chinese firm of Shenzhen International Trust & Investment Co., Ltd, for operating in China. Thus, unlike the case of Starbucks, WalMart entered in China through special joint venture for the first time (Liu, 2007). Figure 4: WalMart Operations in China (Source: Liu, 2007) The above table shows history of business expansion of WalMart in China. Factors Influencing Entry Modes From the above analysis it can be stated that popular multinational companies from developed economies like U.S. are significantly trying to expand their business branches in emerging developing nations like China. However, there are few causes for which FDI inflow shifts have taken place in China since the last few years. Capital Availability Right in the first half of 2000, it was found that the extent of foreign capital inflow in China was higher than that of U.S. It is found that the capital market and business environment of China was much better than that of other nations since then. Favorable capital market conditions in the Chinese economy had pulled the capitalists within its marketplaces (Wheeler and Mody, 1992). Competitiveness Since the emergence of globalization in 1990, the level of infrastructure in China has significantly developed. The country is rich in terms of factor resources like labor. It owns highest population pressure in the world and with rise in its literacy rates, the aggregate quality of its local human capital has significantly improved. Hence, the multinational companies operating in China face improvements in their value chains while operating in Chinese economy. The transaction costs faced by the foreign investors in China are much less than the costs faced while operating in other nations like India and Russia (Dickson and Giglierano, 1986). The good transportation and communication facility of the country has helped foreign firms operate in China in the most productive manner. Moreover, the cost of skilled, semi skilled and unskilled labor in the nation is also low since the proportion of gross labor force in the nation is big. Regulatory Environment However it should be noted that all the multinational companies that operate in China face high start up expenditures. At the same time the legal and regulatory expenses of the companies are also high. This is because of the rigid and complex policies introduced by the Chinese government in the economy. Though the extent of rigidity has fallen since 1970, but it can be stated that such strict political intervention has lowered the aggregate amount of FDI inflow in China to some extent (Abeles, 2001). Stability The overall economy of China is highly stable in nature. This implies that future opportunities and threats in business can be easily forecasted by the firms operating in China. High political and economic stability in the nation also encourages higher inflow of FDI in its economy. Corruption and violent practices prevails at a very low level in China (Abeles, 2001). Local Business Climate China’s favorable business climate promotes a higher inflow of FDI. The high proportion of domestic market demand attracts foreign firms to the country. The value of domestic income of the nation is also increasing with it’s per person income level. This has helped to increase the overall domestic consumption spending value in the nation (Abeles, 2001). Conclusion From the above context it would be correct to conclude that over time, with the improvement of domestic income and competitiveness, the aggregate amount of FDI inflow in the China has significantly increased. This shows that domestic income level in a nation is positively related to its FDI inflow. It is also true that companies like WalMart and Starbucks are considering developing economies like China to be more prospective fields for its business growth other than rich developed nations. However, FDI inflow rate in a nation is highly dependent on its political, economical, social and cultural factors. After, the saturation of their native market places, companies like Starbucks and WalMart consider emerging nations as appropriate fields for business growth. The most common entry modes adopted by these firms were joint venture and direct investments. The high degree of FDI inflow in China has helped to make its domestic firms more competitive in nature. However, if the government policies of the country were a little less rigid then the FDI inflow rate of the nation would have been much higher (Campbell and Netzer, 2009). Reference List Abeles, T. P., 2001. Impact of globalization. On the Horizon, 9(2), pp. 2 – 4. Business Paper, 2011. Achieving success in China: Starbucks – Starbucks assignment, case study. [online] Available at: [Accessed 28 March 2014]. Campbell, D. and Netzer, A., 2009. International joint ventures. Netherlands: Kluwer Law International. Dickson, P.R. and Giglierano, J.J., 1986. Missing the boat and sinking the boat: a conceptual model of entrepreneurial risk. Journal of Marketing, 50 (3), pp. 58-70. Froot, K. A., 2008. Foreign direct investment. Chicago: University of Chicago Press. Linnskog, L., 2008. Entry modes of Starbucks. [pdf] MUS. Available at: [Accessed 28 March 2014]. Liu, Y., 2007. Comparative study of strategies adopted by Wal-mart and Carrefour in China: A resource-based perspective. 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