South Korea's Economic Infrastructure And Impact on Starbucks Coffee Korea's Operations

By Alicia Adams-Glover

Introduction

     The role and shape of globalization has been studied, discussed, and debated throughout the course of the OMBA 606 program. Its impact on business operations, trading systems, economic cooperation, global e-commerce, and foreign currency has shed light into the challenges that countries, businesses, and people face when confronted with the changing roles that must be apparent for survival. But what does this all mean without adequate infrastructure that supports the development of our sources of economic growth? Valuable and helpful infrastructures are essential to everyday life and operations. Would a DC Metrorail commuter ride a continuously ineffective transportation system that is always late? Not likely! How effective would an accounting offices financial system be without the proper information technology support? Not very functional! Efficient and operative infrastructures are fundamental for economic development because it provides the very means by which people and institutions thrive and progress.
          The government of South Korea understands the importance of operative infrastructures that support its global growth. It is vital to mention the dedication of South Korea's government in addressing existing policies and procedures that ultimately affect its economic infrastructure. In efforts to address the system of globalization and South Korea's effectiveness in participating in the global market, it has made considerable progress in providing adequate support for its infrastructures. Over the past 5 years (since crisis of 1997), South Korea has actively participated in what Friedman (2000) describes as the democratization of technology, finance, and telecommunications. In hopes of "modernizing, streamlining, and privatizing their economies in order to thrive in the system of globalization" (p. 31). For example, the democratization of technology and information is speared by the expansion of communications and information technology standardizations. The Ministry of Information and Communications announced April 2, 2003 the development plans of its information and communication structure. One key aspect of the plan is the improvement of communications technology in particularly the online services and access for Korean Internet users. In line with week's 5 discussions of international technology standards, in July 2002 China, Japan and Korea are promoting joint information technology standardizations that will bind the countries towards international cooperation to develop acceptable practices. The democratization of finance is led by the initiative to increase foreign direct investment (FDI). Korea has streamlined regulations previously hindering FDI to standards that are accepted internationally. Korea has now opened FDI to all business sectors, in efforts to promote aspects of globalization (Ministry of Finance and Economy).
          This report focuses on any impediments of South Korea's economic infrastructure that negatively affect operations of Starbucks Coffee Korea. In order to evaluate the impact South Korea's economic infrastructure has on Starbucks business operations, certain aspects of its mission and international business partnerships measures are considered. This attempts to address the components that are valuable to Starbucks. As outlined in week 2's company profile, the 'Starbucks' value is created and transcended through its search for "dedicated human resources, strong financial resources, strong multi-unit retail/restaurant experience and the delivery of fresh coffee". The who, what, when, where, and how of Starbucks Coffee Korea's operations are addressed and evaluated in deriving conclusions about the stability (or lack thereof) of South Korea's economic infrastructure. From these considerations, it is ascertained that the primary South Korean economic infrastructures impacting Starbucks operations are the local real estate market, labor force, banking stability, and the transportation system.

Where is Starbucks Coffee?

     Where will Starbucks house and offer its specialty brand of coffee and relaxing environment? In considering the options, Starbucks executives must think about the three mantras of real estate - location, location, and location. It is determined from Starbucks past and continued success that top retailing sites are identified when exploring expansion options. The retail sites chosen are more often than not in prime areas of high traffic, which lends itself to high visibility. Starbucks stores are strategically located near office buildings, downtown and suburban retail centers, airport terminals, college campuses, and busy shopping centers. Starbucks generally reserves the acquisition of building and land for their roasting and distribution plants, it primarily leases spaces for its retail stores, cafés, and office spaces. When considering purchasing, and/or leasing property in South Korea, Starbucks must be cognizant of government policies regarding property acquisition and leasing and any related taxes.
          According to Starbucks' annual report, the company accounts for rental rate escalation as well as the potential for certain rental fees based on the company's gross sales in its leasing agreements. These contingencies account for a portion of possible additional rental fees associated with leasing property. South Korea's Foreign Investment Promotion Act has opportunities for foreign direct investment companies to receive incentives such as the reduction of rental fees, and expansion of lease duration to 50 years of national and local government properties. The criteria set for receiving a reduction or exemption from rental fees is mainly focused on high technology and manufacturing companies. It is ascertained that the clauses of leasing government property is not advantageous to Starbucks in receiving additional reductions in rental fees, since Starbucks does not fit into either criteria. The impact of South Korea's lease policies does not affect the operations of Starbucks Coffee Korea because the general guidelines and contingencies in place for the entire company presumably govern leasing property in South Korea (The Korea Real Estate Information Center).
          If Starbucks is considering purchasing property as part of its expansion strategy, the Korean government does impose certain taxes on the acquisition of property. It is noteworthy that significant changes in the real estate market to foreigners since its liberalization has been lifted; thereby, opening the market to increased competition and opportunities. It also allows Starbucks the opportunity to expand its operations without fear or blockage of foreign real estate laws and policies. Despite its joint venture and support from the Shinsegae Co., Ltd., acquisition tax is still enforced and is not based on whether the business or individual is a foreigner or not. The acquisition tax is calculated by using the cost of the property as the tax base. The standard rate is 2% of the tax base. However, if the business property is acquired in what is considered the Seoul Metropolitan Area (SMA) it is subject to a 6% tax rate. The implications of this tax could become costly for Starbucks Korea, since it bases its operations in the popular sites and within the metropolitan districts within a city. However, the probability of high sales in these areas may offer relief from the tax imposed.

Who are the Starbucks baristas-employees?

     Who in South Korea is going to partner with Starbucks in creating and delivery the Starbucks Experience to its customers? Selecting qualified employees is a challenge for any organization, and it is intensified by labor and economic conditions. Starbucks faces deterrents in creating a winning team of employees because of traditionally poor labor-management relations in South Korea.
          One possible impediment is Starbucks' culture regarding employee relations versus South Korea's historically antagonistic labor-management relations' culture. On the whole, Starbucks actively engages in positive and productive relations among its employees. This commitment to developing and encouraging its employees is exemplified in the companies guiding principles of creating great work environments and embracing diversity. It promotes fairness, openness, and ample opportunities for their employees - baristas as they are called - in line with the training and education programs, and impressive benefits package for both full and part-time employees. On the other hand South Korea's labor-management policy can be described as authoritarian where decisions are made only from the top and not considering input from workers. This practice is not in line with the principles of Starbucks perceived labor practices or with the general movement towards knowledge sharing. The Korean Labor Institute's President Lee Won Duck writes of some of the challenges and amendments to the labor policy in an essay titled "New Government's Labor Policy: Pursuit of Social Integration and Growth Opportunities." He interestingly details the strain of relationships between management and employees in general. It is noted that South Korea struggles with maintaining a comparable labor-management relations, which arises from "mutual distrust and lack of dialogue between employers and employees (Duck, 2002). The consequences of such a strained relationship between Korean workers and their management could affect the Starbucks Experience and the company's efforts in promoting a positive work environment for all - one where employees are treated with dignity and respect.

How and when does Starbucks receive its products?

     How and when does Starbucks receives and transports its products from the loading docks to trucks and into the store? Transportation is a critical component to the daily operations of the company. In order to meet its objective of delivering fresh coffee, Starbucks is heavily dependent on the adequacy and efficacy of South Korea's transportation and importing system in delivering goods on a timely basis.
          One of Starbucks' primary problems would be the requirement of an import license by a foreign exchange bank and requirement of companies to have approvals for payment in foreign currency. These are examples of processes and policies established by the government that has a barring affect on the receipt of imported items. Conversely, the South Korean government has addressed this (among others) in a July 1996 law that excluded import licenses from the import authorization process, thereby streamlining the clearance process for customs. (Korea Trade-Investment Promotion Agency).
          In addition to trade regulations and standards, transportation policies and stimulation are important in the delivery of imported/exported goods. The increased flow of trade in and out of South Korea ports, since the drive to becoming a major participant in the global arena, can strain the porting facilities and resources if plans are not in place that address the demands of increased trading volume. According to Korea's Ministry of Commerce Industry, and Energy, the trading volume increase from 1998 to 2002 was as follows: total exports in 1998 132,313 and in 2002 was 162,471 (US$ Millions), while total imports in the respective years were 93,282 and 152,126. South Korea's ports ability to handle high trading activity is critical to Starbucks Coffee Korea's daily operations needs - receipt of imported products such as coffee beans. Also, ports are vital to the South Korean economy, which because of its geographical location must have modern ports to receive and ship goods. This is further evidenced by the budget increase of funds appropriated towards ports by 22% from 2001 to 2002 in contrast to its subway system, which decreased by -11.2% (Ministry of Construction and Transportation).

What type of support does Starbucks require from the banking institutions?

     What type of support does Starbucks' business requires from the banking institutions? In hopes of continued profitability and expansion, Starbucks turns to the stability of South Korea's banking institute as a source of strength in its financial markets and economic growth. The Ministry of Finance and Economy reported an increase in the monetary value of the won versus the dollar in the exchange rate market. According to the report the won appreciated 10.7% against the dollar at the end of 2002, and continued into 2003. This is the sort of result that yields positive returns for Starbucks Coffee Korea because it increases the earning potential, as reported by its operations in South Korea. However, as of Friday April 18, 2003 the won/dollar exchange rate has depreciated in value to 1.00 United States Dollar = 1,204.80 South Korean Won according to universal currency converter. A fluctuation of the Korean won represents a foreign exchange risk for Starbucks possibly affecting its earnings, future expansion plans, and financing of some operations. Hill (2003) discusses that the foreign exchange market stabilizes a foreign exchange risk, and offers some relieve to combat the risk (p. 308). Korea's foreign exchange market has regulations that may affect Starbucks' financial pursuits such as the limit of borrowed funds by foreign companies, and the limit on the amount available for exporting Korean won. However, Korea's foreign exchange market is being scrutinized and reforms are scheduled by 2011. The revised foreign exchange market policy is hoped to give the Korean foreign exchange market an advantage over other Organization for Economic Cooperation and Development countries (Sung-tae, 2002). Stabilizing and liberalizing the Korean foreign exchange market will be beneficial for Starbucks by providing sound support against foreign exchange risk.
          A strong banking system and confidence in banking institutions directly benefits consumers and businesses. As noted by Hill (2003), " currency depreciation would raise borrowing costs, depress corporate earnings, and increase the risk of bankruptcy" (p. 324). For an example, one only has to look to the east to Japan, where public confidence in banking institutions is at all time lows due to the banks inability to contain bad investments (Japanese Bankers Association). The massive losses suffered due to questionable investments decrease the ability of a bank to lend money to deserving consumers and businesses while at the same time having to charge them inordinately high interest rates to remain profitable themselves. A further effect of low public confidence in banks cause investors and consumers to stash their money elsewhere, usually outside the country, once again depressing economic growth at home. Starbucks Korea benefits from a strong banking system as it prepares to open new stores and grow in Korea.

Conclusion

     In summary, the overall stability of South Korea's economic infrastructure supports who, what, when, where, and how of Starbucks Coffee Korea's operations. Despite, additional taxes imposed in certain situations the availability of South Korea's real estate market assists Starbucks Coffee Korea in expanding into other metropolitan cities in South Korea. It is ascertained that the biggest challenge for Starbucks operations regarding labor force stability is the existing halted labor-management relations. With the reformation of regulations and constant watch over the foreign exchange market, the South Korean financial institutions has the makings of providing stable support for Starbucks Coffee Korea. Finally, the projected advancements in the transportations system addresses the main concerns that Starbucks would encounter in relying on the system for its imported goods. In light of recent events and talks of North Korean's nuclear threats, the resolution and development of positive Inter-Korean relationship is an economic threat that Starbucks Coffee Korea should be cognizant of because of the potential of disastrous affects on the economy and its stagnation. This could affect Starbucks current returns and projected sales by a decline in sales, and slow South Korea expansion plans. All in all adequate, efficient, and effective infrastructures are essential to the economic vitality of any country. In order to remain or become economically competitive a country should invest in designed up keeping and upgrading of its infrastructures because they support people and businesses future growth opportunities.

Japan's economic infrastructure - implications for Starbucks Coffee Japan, Ltd.

By Jenny Glenn

Introduction

     Economic infrastructure creates the support system for the business activities carried out in a country. A country’s economic infrastructure operates in the context of governmental policies and regulations. This paper looks at Japan’s economic infrastructure from both the traditional economic perspective and from the viewpoint of a globally competitive environment. Economic infrastructure issues affect how Starbucks Coffee Japan, Ltd. should manage its investment in Japan over the next two years, and over the next five to ten year period. For Starbucks, the important components of Japan’s infrastructure include import regulations, transportation, electrical services, the availability of appropriate retail space, investment banking services, and the integrity and enforcement of trademark and contract law.
          Foreign direct investment is carried out in an environment of uncertainty. Accurately assessing a country’s economic infrastructure is important for making beneficial investment decisions (Hill, 2003). The right economic infrastructure makes business operations manageable and profitable. The wrong type of infrastructure may make business operations unacceptably risky. Without the right infrastructure in the short term, Starbucks may not be able to clear imported coffee beans through customs, transport them to the stores, grind and brew up coffee, or prevent copycat businesses from diluting the value of the Starbucks name. Over the longer term, if Japan’s infrastructure changes and Starbucks does not recognize this, the company may make poor business decisions. Over investment in a declining environment or under investing in an improving environment are both serious business risks. In the first situation, the company may not recover the money spent in the country. In the case of under investment, the company will leave unmet demand that can create a market for competitors.
          Over the course of the OMBA program, we have learned many traditional methods for evaluating investment decisions. Traditional risk analysis considers government stability, currency repatriation policies, financial markets, economic infrastructure, population trends, and internal market demand (Hill, 2003; Heyne, Boettke & Prychitko, 2003). These parameters have one important bias. Economic data is historical. Trends in the data can lull businesses into thinking that the current environment will continue indefinitely. Friedman argues in The Lexus and the olive tree that understanding the effects of globalization on country policies and business practices is as critically important to long-term success as traditional business metrics (2000). Political events in the last several years are forcing businesses to take a broader view of foreign investment. The SARS disease in China and Singapore continues to spread and is affecting travel and trade throughout Southeast Asia. It is estimated that the disease will cause as much as a 2% reduction in China’s Gross Domestic Product (GDP) in 2003 (Pomfret, 2003). If SARS spreads to Japan and the Japanese GDP also declines, how might this affect the country’s economic infrastructure? Alternatively, what would happen if the Japanese economy were to boom? The answers to these questions are only partially found in traditional economic analysis. Without insight into the current environment and alternative forecasts of future performance, Starbucks cannot make an assessment of the risks of doing business in Japan.

Traditional analysis of Japan’s economic infrastructure

     A retail sales business like Starbucks is critically dependent on Japan’s economic infrastructure. Every aspect of the infrastructure has the potential to affect business operations. Import regulations for food products control whether or not Starbucks is able to have access to sufficient quantities of raw materials. Transportation, electrical services, and retail space availability determine if Starbucks is able to supply and operate individual stores successfully. Investment banking services determine if Starbucks can obtain the loans to finance business operations in the country. Trademark and contract law ensure that competitors cannot copy the Starbucks brand image and ensure that contracts with landlords, suppliers, and employees are honored. The more reliable and predictable each of these areas is, the better Starbucks can assess and mitigate business risk. We will now consider each infrastructure area in turn.
          Food import regulations are well established in Japan. The regulations are in compliance with World Trade Organization treaties and guidelines and enforced by the Ministry of Health, Labor, and Welfare. Food imports are a core necessity for Japan. The country is not self-sufficient in food and imports 60% of its food requirements each year (USDA, 2002). Politically, Japan’s government policies support some tariffs and economic protectionism for portions of indigenous agribusiness. The government heavily subsidizes rice grown in Japan. This staple crop is considered culturally sacred and the Japanese government has been willing to support the financial costs of inefficient production (M. Hladik, University of Maryland OMBA teleconference, March 29, 2003). Most other food products, including coffee, are not protected by import restrictions or tariffs because there are no domestic producers for the products. This environment is very favorable for operating Starbucks coffee shops, since coffee is an imported product.
          Banking services affect both the Starbucks Corporation and the Japanese consumer. Japan’s recent banking history is uneven. Japanese government policy has been designed to be very protective of Japanese businesses. Fiscal policy permitted cozy relationships between government, banks, and industry that concealed true profit and loss performance. These policies also helped overvalue real estate holdings. In order to appear solvent, companies would inflate the value of their real estate portfolios to compensate for losses elsewhere (Hill, 2003). The huge valuations encouraged people to make speculative purchases in real estate, driving up the cost of retail space rents. The combination of real estate speculation and lack of available land may result in Starbucks overpaying for business leases.
          Japan boasts excellent power distribution and electrical services throughout the country. All cities and towns are electrified and infrastructure services are maintained through private companies regulated by Japan’s Ministry of Economics, Trade, and Industry (METI, 1998). In 2002, Japan produced 1.015 trillion kWh (kilowatt-hours) of electrical power (CIA, 2002). Only the United States produced more electrical power – 3.799 kWh(CIA, 2002). Road networks, railways, and coastal shipping are well developed, with 1,152,207 km of roads and 23,654 km of rail (U.S. State Department, 2002). There are several potential trouble spots in this sector. As with food, Japan is heavily dependent on imported energy. In 2001, 57% of Japan’s total energy needs came from imported petroleum (U.S. State Department, 2002). This dependency will affect the cost of shipping goods by road when the price of oil increases, and this cost would get passed through to the expense of Starbucks’ business operations. Traffic congestion is a concern in the larger Japanese cities that Starbucks targets for its stores. Starbucks may have to hold larger inventories of products in each store than expected if shipments of coffee beans, cups, food items, and other consumables are unpredictable.
          Trademark protection and contract law are well established in Japan and support a stable, regulated environment conducive to business. Corporations are able to establish and operate businesses in Japan in a climate relatively free of bribery and corruption (U.S. Department of State, 2002). The Japanese government has many ministries and bureaus tasked to facilitate trade, business development, and economic growth.
          A traditional economic analysis of Japan would support the conclusion that Japan is a country with a robust economic infrastructure, on par with the United States. Food import regulations are well established and follow World Trade Organization treaties. Japan has begun to undertake structural changes in the banking industry to correct inefficient economic policies. The country is highly urbanized, with an extensive and reliable transportation system and electric power grid. Japanese zoning laws allow retail businesses to be located in office parks and transportation hubs, which fits the Starbucks business model. Last but not least, contract law and trademark protection laws are pattered after the American model of jurisprudence and are enacted and enforced with minimal bribery and corruption (U.S. Department of State, 2002).
          On the basis of traditional analysis, Starbucks Corporation should proceed with business expansion over the next two years. The two cautionary issues are the cost of leasing retail space and the stagnant performance of the overall Japanese economy. If real estate values deflate, Starbucks may be left holding over-priced leases. The company can mitigate this risk by taking short-term leases of one or two years duration where possible. If Japan’s economy continues to sputter at 1% or less GDP growth a year, Japanese consumers may begin to reduce coffee consumption. Cups of premium coffee are a luxury item, not a necessity.
          The forecast for business operations over the next five to ten years is more problematic. The near-term question is whether or not the Japanese government will continue the commitment to correct the economic inefficiencies of its current banking policy. The reforms the government has started have caused significant personal economic pain through declining investment portfolios and job losses. If the government pulls back from the reforms and permits banking bailouts before the reforms are completed, the worst of all possible situations will occur. The economy will have declined, Japanese consumers will have lost confidence and purchasing power, and Japanese companies will still be at a disadvantage in global competition because they are receiving subsidies from their government.

Japan’s economic infrastructure from a global perspective

     The reading and conferences so far in the OMBA 606 curriculum have emphasized the themes of global impacts on country policies and a life cycle, ecological perspective on economic development. Both of these themes are extremely important to assessing the possible future directions of Japan’s economic infrastructure and continued attractiveness to foreign investment. The traditional picture of Japan’s economic health has some worrisome threats in the future when viewed from a global perspective.
          Japan is constrained by severe resource dependencies on other countries. 60% of Japan’s food is imported (USDA, 2002). The country has no natural sources of oil or coal. What will happen to Japan’s economic infrastructure if the country has more competition for food and energy? The war in Iraq is causing increased demand for food imports. This increased demand may continue for a number of years as the country rebuilds and recovers from war. The calculated removal of farmers and resulting land distribution in Zimbabwe has caused the collapse of Zimbabwe’s agriculture. What happens if there is more global competition for food surpluses? The price of imported food will rise.
          If Japan’s economic growth continues to stagnate, the country may not be able to generate the surplus currency to cover the increased cost of food imports without drawing down savings. This is a risky downward spiral to embark on. The more money Japan diverts to cover immediate food needs, the less capital there is lending out for business expansion. Interest rates on business loans will rise, increasing the cost of operating and expanding the Starbucks chain in Japan. This situation is a much worse business proposition for Starbucks than inflation spurred by economic expansion. Under economic expansion, money is flowing through the local economy to increase economic output (and presumably enrich Japanese employees). In this scenario, Japan is spending more and more money to compensate for what it lacks (arable land for growing food) without developing offsetting competencies to increase economic performance in areas where Japan is the premier producer (Friedman, 2000). The net result is that Japan becomes a poorer country. Starbucks’ investments in the country may not be worth what was paid for them.
          Japan’s economic infrastructure is severely constrained geographically. Overloaded transportation systems are starting to cause gridlock in the major cities during the business day. This in turn is causing longer commutes for workers (increasing time spent unproductively) and affecting just-in-time manufacturing systems used to reduce business inventories. Increasing materials inventories to counteract delivery gaps acts to tie up business capital unproductively. Increased crowding in cities may also raise rents as more businesses compete for a finite amount of space. The aggregate costs of operations may rise to the point where the Starbucks’ price point is more than consumers are willing to pay.
          None of the concerns raised here negate that fact that Japan has one of the world’s largest economies (U.S. State Department, 2002). The global issues potentially affecting Japan’s economic infrastructure are factors to consider as Starbucks determines the right rate of growth and investment in Japan.

Conclusion

     In summary, this paper examines the dynamic relationship between Starbucks’ business opportunities in Japan, Japan’s economic infrastructure, and global forces. Economic infrastructure is not a static collection of investment bank loans, highways, office space, and government regulations. Government policies towards food imports, contract law, or even electrical power regulation may have a significant impact on Starbucks’ business assumptions and operational environment.
          The greatest potential infrastructure risk is government policy decisions about improving economic growth. If true economic reform does not occur, the long-term drag on Japan’s economy may begin to affect the maintenance and functionality of the country’s economic infrastructure. A frequent casualty when government funding is tight is transportation infrastructure maintenance, electric power grid improvements, and city services. These changes would make it more difficult for Starbucks to operate its store locations efficiently if supplies are stuck in traffic jams or trash collections does not take place according to schedule. Customer service and customer perceptions will be negatively affected if stores experience power outages and have to close at unpredictable times as a result. If Japan’s economic position continues to stagnate or decline, the country may begin to make changes in banking regulations or attempt to influence interest rates on loans. This could affect the payoff rate on existing business loans or make the cost of opening new store locations unattractive. If these problems develop over the next five to ten years, Starbucks will want to carefully reconsider the level of investment in Japan.
          Alternatively, what should Starbucks do if the Japanese economy were to return to 3% or better GDP growth rates? The classic risk in economic expansion is inflation (Hill, 2003). More businesses want to pursue opportunities relative to the availability of capital, so interest rates rise in response to scarcity and act as a rationing mechanism. The cost of money needed to finance additional store operations will increase. The cost of renewing existing store leases and securing new store space would also be predicted to soar. Starbucks should do well with the existing store locations and conditions for expansion would be favorable. The corporation will have to determine the balance point between seizing an opportunity and getting caught with too much many locations with expensive leases when the next economic downturn occurs.

South Korea's financial markets and its affect on Starbucks

By Bill Kemp

Introduction

     In the early 1990s, South Korea emerged as one of the economic powerhouses that sustained year over year annual GDP growth rates of greater than 5%. In 1997 however, Korea's financial markets crashed, and with it economic growth. Since 1998, Korea has begun its climb its way back to economic vibrancy. This paper will begin by introducing how Korea grew into a flourishing economic power, outline its financial market structure, and will provides answers to the following questions: 1) What were the catalysts behind Korea's economic crisis in 1997? 2) How must Korea's financial markets be changed to prevent such an event from repeating itself? 3) Why did Starbucks choose to enter the Korean market in the midst of what still appeared to be an economic crisis? 4) How does Korea's financial market structure affect Starbucks' business risk?

The Growth Of A Tiger

     South Korea (from this point forward referred to as Korea), is known as one of the Asian tigers. Over the past 10 years the country has ridden the euphoric and horrific rollercoaster ride that is today's rapidly changing global financial and consumer market. Over the course of the twenty-year span from the 1970s to the early 1990s the country practiced a mercantile approach to foreign trade, that is, it strove for prosperity through maximizing exports. Korea steadily grew its manufacturing and export capacity to meet the burgeoning demand of steel, automobiles and consumer electronics in the United States and Europe. The manufacturing and steel sectors were areas that Korea's costs were low enough to effectively compete in the global market.
          In the 1980s and early 90s Korea's GDP was growing at an impressive annual rate. It was over this period that Korea earned its name as an Asian tiger, joining Taiwan, Singapore, Malaysia, and Thailand as one of the small GDP Asian countries who chose to embrace global trade according to the rules of today's major trading countries (Europe, Japan, United States, Canada, etc.) and the World Trade Organization (WTO) (Friedman, 2000; Hill, 2003). This manufacturing growth was driven by Korea's chaebol. The chaebol are large, family-owned, highly diversified conglomerate corporations that received funding and direction from the Korean government.

Korea's Financial Market Structure

     Even though Korea's fundamental structure of government and financial markets are similar to the United States, there are a number of important differences. This paper will focus on some of the financial market differences. One difference is that in the United States, the business plans of privately owned companies (with the exception of government regulated utilities) are determined privately, with no government mandate on which markets to pursue. Korea's government centrally controls the direction its businesses will take by controlling the funds made available through its banking system. The Korean government encourages business growth in a particular market by providing low cost financing to encourage investment. Likewise, it curtails business development in a market by severely limiting the availability of investment funds through the use of high interest rates and/or highly restrictive loan acceptance criteria.
          As economic theory teaches, financial markets consist of a mixture of different forms of monetary obligations such stocks, bonds, loans, and currency markets (Hill, 2003; Heyne, Boettke & Prychitko, 2003). A financial market's stability is based on important prerequisites such as rule of law, well-established property rights, a stable currency value, and an efficient market. An efficient market is one that naturally enables a Darwin-like process of allowing weak businesses to fail and the strong to survive (Hill, 2003; Heyne, Boettke & Prychitko, 2003). In this way, the market produces companies that are more capable to compete due to their ability to produce at a lower cost to consumers. It is only when all of these aspects exceed a certain level of quality that the financial markets can flourish (Heyne, Boettke & Prychitko, 2003). Government fiscal policy plays a crucial role in its financial markets by controlling the amount, loan interest rates, the amount of currency printed, and objective oversight of its banks and currency exchange markets. This is done to ensure good financial practices are maintained, and that poor practices are ceased or punished.
          Just as a good foundation is required for a solid structure to be built, sound monetary and fiscal policy mandated by the government is required to keep financial markets stable (Hill, 2003; Heyne, Boettke & Prychitko, 2003). This is done by keeping inflation low, interest rates low, and providing adequate funds for business investment. All of these elements keep a country's currency value stable. A country's banking system must ensure that the structure of its loan portfolios and deposits provide ample reserves, and keep the percentage of risky loans as low as possible in order to maintain investor confidence (Hill, 2003; Heyne, Boettke & Prychitko, 2003).

What were the catalysts behind Korea's economic crisis in 1997?

     One of the largest catalysts creating the financial crisis in Korea was lack of economic oversight. There was no objective financial watchdog to ensure the banks were making sound lending decisions (SaKong, 2000). Allowing its flagship corporations to accumulate such massive debt loads should have raised a red flag to Starbucks, and may have been a factor in their timing to enter the Korean market. As part of its central planning, the Korean government sought to fill apparent worldwide capacity shortfalls in the marketplace by further increasing the manufacturing capacity of its nation. The government directed the chaebol to invest in foundries to produce even more steel, automobile parts, and semiconductors for export (Hill, 2003; Kim, 2000).
          The banking system allowed the chaebol to accumulate far too much short term debt. Just before the crisis struck, some chaebol had debt to equity ratios of 4.0! In order to take advantage of favorable interest rates, the chaebol assumed debt that was primarily short term (1-year) and borrowed from US banks (Hill, 2003). This astronomical debt load greatly increased the chaebol's dependency on growing revenues for continued survival or risk loan default. At the same time, Korean banks made another serious mistake by structuring their loan portfolios with mostly short term debt, which is inherently higher risk. Just before the crisis occurred in 1997, nearly 64% of its total portfolio was short term debt with maturities of less than 1 year (SaKong, 2000). On top of that, most of the debt was owed in American dollars to American banks (Hill, 2003). The mixture of extreme debt levels assumed by the chaebol coupled with a predominantly risky portfolio of short term debt held by the banks caused a lack of foreign investor confidence in Korean equities and bonds. This drop in foreign investor confidence caused a massive sell-off of stocks and bonds, and the Korean won (Hill, 2003; SaKong, 2000; Kim, 2002). The act of selling Korean won for U.S. dollars had a devaluation effect on the won and strengthened the dollar. When the dollar strengthened, the amount that the chaebol had to pay U.S. banks escalated at the same rate the won devaluated. Soon, the loan payments were simply too much for the chaebol to service and they began defaulting on loans (Hill, 2003). Starbucks entered negotiation talks with a Korean firm to form a joint venture in 1997.

How must Korea's financial markets be changed to prevent such an event from repeating itself?

     The foundation behind a sound financial market is an overall perceived confidence in the financial system and the choices it makes (Heyne, Boettke & Prychitko, 2003). Investors will not participate in a system that threatens to dissolve their hard earned savings due to risky ventures. Prior to the 1997 crisis, Korea had a number of underlying economic ailments which ultimately resulted in the fall of its currency and crash of its financial markets. One of which was lack of oversight and regulation of its financial markets (SaKong, 2000). Because of the lack of oversight, Korea's banks continued to lend more funds to large companies favored by the Government (such as the chaebol) to pursue Government business objectives regardless of the risks present to repay the funds.
          Properly structured oversight functions as a check and balance to halt destructive financial practices that result in bank failures, and lowering of investor confidence. It established property rights and rule of law in the economic realm (Hill, 2003; Heyne, Boettke & Prychitko, 2003). Such oversight must be able to intervene into businesses, applying the appropriate corrective action to halt the problem practices. This oversight body must not fear reprisal by the Government; rather they must be sanctioned and supported by the Government in order to be effective (Hill, 2003).
          As part of the corrective action mandated by the IMF, a government sanctioned, regulatory body that supervised all financial entities and markets in Korea was formed. It was also responsible for corporate restructuring. The entity was called the Financial Supervisory Commission, and was created in 1998 (Kim, 2000). This commission was also responsible for performing corporate restructuring. In order to restore investor confidence, Korea must allow banks with poor loan portfolios to be restructured, dissolved, or merged with stronger banks, and that is precisely what is being done (SaKong, 2000; Kim, 2002). Proper control of Korea's banking system will go a long way towards controlling questionable investments made by its businesses. Without bank funding, companies must turn to investors and solicit funds through stock or bond sales. Investors will scrutinize the company and its future plans in order to determine if they will be repaid. In theory, this should curtail frivolous or reckless investment choices.
          Starbucks must pay close attention to the financial reforms being implemented in order to plan their strategy for expansion and currency conversion. The choices made by the Korean government regarding financial markets will dictate which hedging options are viable, in order to ensure preservation of profits when transferring Korean Won to U.S. dollars without loss of capital.
          Another important problem present in Korean financial markets prior to the crisis was the lack of financial transparency (Kim, 2000). A lack of transparency causes a much larger, much more negative, knee-jerk reaction by investors when unwelcome surprises are discovered. Investors will flee for cover because they had no warning of what was coming (Friedman, 2000). The IMF mandated that Korea's publicly held companies provide transparency by requiring adherence to Generally Accepted Accounting Practices (GAAP) (Kim, 2000). A mechanism was put in place to enforce this rule (Kim, 2000). Adding the requirement of transparency was good news for Starbucks because it forced any competitors who were not observing GAAP to play on the same level field with the same visibility, restrictions, and limitations in place for a U.S. firm.

Why did Starbucks choose to enter the Korean market in the midst of what still appeared to be an economic crisis?

     The precise reason for this is unknown. But Starbucks may have coincidently begun talks with Korean firms, unaware that the ticking time-bomb of Korea's underlying fiscal practices were about to explode. After the currency meltdown in 1997 and 1998, Starbucks chose to wait for signs that the fiscal reforms mandated by the IMF were being implemented, and producing a favorable effect on GDP growth before choosing to open stores. Korea jumped on the reforms and GDP growth responded. Perhaps this is why Starbucks decided to go forward and open its first store in 1999 (Starbucks- Korea, 2003). Starbucks had to assess whether the economic crisis was going to appreciably affect the spending habits of Korean consumers on items such as gourmet coffee. Favorable initial GDP growth after the IMF devaluation and implementation of fiscal reforms indicated that there would still be consumer wealth available for Starbucks products in Korea (SaKong, 2000). Starbucks must have observed that window for first mover advantage would quickly close, so they open their first store in 1999. Clearly this was a good choice. Ten Starbucks stores were opened by the end of 2000 (Starbucks- Korea, 2003).

How does Korea's financial market structure affect Starbucks' business risk.

     The IMF imposed financial market changes will help Starbucks in many ways, although Starbucks must be careful to monitor the progress of fiscal reforms presently underway in Korea. One of Starbuck's primary on-going concerns is currency risk. The profitability of its Korean revenues is highly dependent on favorable conversion of Korean Won profits back to U.S. dollars. This must be done without a loss of value in order to preserve profit margins, so appropriate hedging techniques must be used to help ensure a favorable overall exchange (Hill, 2003; Heyne, Boettke & Prychitko, 2003). Since the country has embarked on IMF mandated fiscal reforms, the amount of foreign investment in Korean companies has risen dramatically as foreign investors see the banking system removing risk from their lending portfolios, corporations applying GAAP discipline, and a clear move towards the restoration of proper corporate debt to equity ratios (Kim, 2003).
          One area of financial reform that could be a potential negative for Starbucks is the change in percentage of foreign ownership of Korean companies. As part of its aid package, the IMF required Korea to remove caps on the maximum percentage of a Korean business a foreign entity could own. Opening up the markets in this way paves the way for greater competition from other foreign coffee companies that use a similar formula (high quality coffee in a casual lounge atmosphere) to erode Starbucks' market share. Simply put, opening up its markets could reduce the cost of entry into Korea's markets for other coffee competitors. As more "look-alike" competitors enter the Korean market, the switching costs for Korean consumers declines, and loyalties to Starbucks degrades. If too many competitors enter the Korean market, the end effect could be a reduction of market share for Starbucks and a commoditization of the "Starbucks experience". Any type any type of commoditization will have a downward effect on prices and overall profitability.

Conclusion

     Korea underwent extreme economic changes as a result of the economic crisis that occurred in 1997. As a result of this, the overall effect on Starbucks and its operations in Korea should be a net positive. The changes put in place at Korea now require fair practices from Korean firms competing with foreign firms, better lending practices, which could result in more lending capital available to Starbucks for future growth. The changes will go a long way towards stabilizing the Won because the underlying financial markets now have oversight and must observe the same fiscal discipline imposed on its foreign U.S. competitors. Starbucks must constantly monitor the health of Korea's financial markets in order to determine the best strategy for currency management between the Korean won and U.S. dollar. The author believes that currency risk stands as the single greatest threat to profitability for Starbucks' Korean operations today.

Japan's Financial Markets

By Nona Keith-Henson

INTRODUCTION

     The Japanese economy is the second largest market economy in the world. In 1998, it recorded a gross domestic product (GDP) of 481 trillion yen (U.S. $3.67 trillion) and the per capita national income in 1997 was $28,361 (U.S.), ranking Japan fourth in the world. Japan's economic growth has continued, by 2000, the GDP amounted to $4,648,760 million, and per capita increased to $36,634. According to the Japan's Information Network (JIN) the gross national product (GNP) was $4,711,270 million, and the per capita $37,126 in 2000.
          Sales climbed to an all time high of $22,340,865.00 in the Japanese restaurant sector, in 2001, of which Starbucks Coffee Japan, Ltd. is a major contributor. Coffee, just the thing to wake you up in the morning or whenever you just want to relax, is now an integral part of the Japanese diet. All of coffee consumed in Japan is imported, and since Starbucks debut in 1996, the Japanese coffee market has drawn attention. Their coffee gourmet and specialty shops multiplied overnight and now, alongside the lower-price self-serve chains, formed a formidable force trailblazing the café market (JETRO).
          The café market itself has been more actively pursued by foreign food service companies ever since the arrival of Starbucks Coffee. Much of the initial involvement by foreign investors with this market was triggered by approaches made by Japanese companies who were inexorably lured to the products and shop philosophy. As was the case with Starbucks Coffee and its then competitors; Tully's Coffee, Trung Nguyen Coffee, Peet's Coffee & Tea, and a few others. However, most notable is Starbucks, which adopted a unique method of approach to the Japanese market, by selling roasted coffee beans and coffee preparation paraphernalia via the Internet as a way of test marketing, and only after getting a sense that a business launch in Japan stood a good chance of success did the company bring its coffee shops to Japan. Its first shop was opened in Toyko's Ginza district, and was hugely popular. The Starbucks Coffee experience shows that the most important point to ascertain in advancing into the café market is to appeal as much as possible the uniqueness of one's brand.
          This paper will analyze Starbucks integration into the Japanese café market and provide an overview of Japan's financial history, growth, macroeconomic history and trends, the investment opportunities, and it's competitive financial markets.

JAPAN'S ECONOMIC AND FINANCIAL HISTORY

     Following the collapse of the "bubble economy" in the early 1990s, GDP growth stagnated; relatively good performance was seen only in 1995-96, and the GDP actually contracted in 1998. With the aim of creating a more efficient economy, the Japanese government currently is carrying out administrative reforms along with extensive deregulation of various sectors of the economy. In the corporate world major changes are also taking place as companies fight to increase competitiveness by moving away from employment practices such as lifetime employment and the seniority wage system. By late 1999 and early 2000, signs of recovery, such as increasing stock prices and revenue growth in some industries, began to be visible. In addition to the aforementioned government policies, other factors contributing to brightening economic prospects for Japan included growing demand for Japanese products in recovering economies in Asia and rapid growth in information-technology-related industries.
          Despite improvement in some sectors, however, many companies still bear a heavy cost burden from surplus facilities, surplus employees, and excessive debt so Japan in the 'New Millennium' is likely to see an unprecedented level of restructuring and merger and acquisition activity, including major mergers and alliances with foreign companies. The need to restructure to survive is forcing many companies to end traditional lifetime employment practices, and this is reflected in Japan's unemployment rate, which went from only 2.1% in 1990 to 4.8% in March 1999.
          In addition to having to deal with business trends such as deregulation and globalization, Japanese industry is also likely to be profoundly affected in the 21st century by the aging of Japanese society. In 1998 only 16.2% of the population was 65 or older, but by 2025 this figure is expected to be about 27%. This will mean an increase in the tax and social security burden that workers will have to carry, while at the same time it is likely that a drop in savings will depress capital accumulation. It is also possible that the resulting labor shortages will be a factor limiting growth potential (Japan Access).
          At the same time, against a background of increasing competition in the world marketplace, Japan's trade (current balance) surplus continued to grow. Since 1985, Japan has been the world's leading creditor nation. This reflects not only the global competitiveness of Japanese industry, but also extensive overseas investment by Japanese businesses. Following the 1985 Plaza Accord, the yen rose sharply in value, reaching ¥120 to the U.S. dollar in 1988, which was three times its value in 1971 under the fixed exchange rate system. A consequent increase in the price of Japanese export goods reduced their competitiveness in overseas markets, but government financial measures contributed to growth in domestic demand.
          Corporate investments rose sharply during 1988-89, with higher stock prices, new equity issues swiftly increased in value, making them an important source of financing for corporations, while banks sought an outlet for funds in real estate development. Corporations, in turn, used their real estate holdings as collateral for stock market speculation, which during this period resulted in a doubling in the value of land prices and a 180% rise in the Tokyo Nikkei stock market index. In May 1989, the government tightened its monetary policies to suppress the rise in value of assets such as land. However, higher interest rates sent stock prices into a downward spiral. By the end of 1990, the Tokyo stock market had fallen 38%, wiping out 300 trillion yen (US $2.07 trillion) in value, and land prices dropped steeply from their speculative peak. This plunge into recession is known as the "bursting of the bubble economy." This material, based on the "Japan Access" web site, has been prepared for the Ministry of Foreign Affairs by Kodansha International Ltd. and thus does not necessarily reflect the opinions of the Ministry. The post-bubble recession continued through the second half of the 1990's. Some temporary improvement in the economic outlook was seen in late 1995-96, partly due to a fall in the value of the yen and additional demand generated by recovery efforts for the January 1995 Great Hanshin-Awaji Earthquake. In 1997, however, a variety of factors, including a rise in the consumption tax rate, a reduction in government investment activity, and the bankruptcies of major financial institutions, quickly worsened the recession.
          Burdened with a huge volume of bad debt aggravated by still-falling land prices, financial institutions tightened their lending policies, thereby forcing companies to reduce plant and equipment investments. This, combined with falling exports caused by the Asian economic crisis, resulted in lower profits in almost all industries. Employment salaries and wages also fell, further dragging down consumer spending, and in 1998 the Japanese economy suffered negative growth. In 1998 the government established a 60 trillion yen funding framework to provide the public funds necessary to promote economic recovery, and it also allocated an additional 40 trillion yen for emergency measures to deal with reduced lending by financial institutions. The national budget for fiscal 1999 included a large increase in public project spending, and action, such as an increase in tax credits for new home purchases, was taken to reduce taxes. Beginning in February 1999, the Bank of Japan instituted a 0% short-term interest rate policy to ease the money supply, and in March the government poured 7.5 trillion yen in public funds into 15 major banks.
          Based on the concept of "free, fair, and global," the Japanese government is implementing radical reforms in the financial market-the so-called "Big Bang." Deregulation in this sector is aimed at facilitating the participation of private investors in Japan. An amendment to the Securities and Exchange Law has removed barriers between the banking, securities, and insurance fields, thereby enhancing the attractiveness, competitiveness, and vigor of the securities market. The ban on holding companies has been lifted, and the scope of operations enlarged for security houses and banks (Japan Access).
          With the amendment of the Foreign Exchange Control Law that went into effect in April 1998, foreign exchange was totally liberalized. This enabled enterprises and individuals to freely transact deals and settle accounts with their foreign counterparts. December 1998 saw the implementation of a series of financial system reform laws that included provisions deregulating stock commissions and non-life insurance premiums, removing restrictions on over-the-counter securities derivatives, and permitting the sales of investment trust products in banks.
          In addition, as part of the liberalization of pension fund restrictions, the government has decided to implement defined-contribution plan pensions, the Japanese version of the 401(K) plans in the U.S., thereby widening the scope of options available for asset investment Japan's central bank is the Bank of Japan, established in 1882. Its supreme decision-making body is the seven-member Policy Board, chaired by the governor of the Bank of Japan and including representatives of private financial institutions, commerce, industry, agriculture and forestry, and the Government. The greatest responsibility of the Bank of Japan, like central banks in other countries, is to maintain the value of the nation's currency through such measures as adjustment of the official discount rate, manipulation of banks' reserve requirements, and operations in bond and bill markets. Recently emphasis has been placed on the coordination of macroeconomic policies with the central banks of other nations so as to stabilize foreign exchange rates and smooth international financial transactions.
          One feature of the Japanese financial sector is the classification of banks by different areas of activity. The categories include long-term credit banks, city and regional banks, trust banks, mutual savings and loan institutions, and credit associations. These categories evolved in the postwar era, when Japanese corporations had to rely heavily on borrowed funds because of their low reserves of accumulated capital. Capital supply channels were diversified according to the type of funds required in an effort to create a more efficient financial system. But today the distinctions between the different areas of specialization are becoming increasingly blurred.
          In the area of international finance, the revised Foreign Exchange Law of 1980 removed most restrictions regarding international capital transactions. From around this time Japanese financial institutions began to expand and strengthen their capabilities in the field of international business, and both banks and securities companies accelerated their entry into overseas financial markets. The overseas expansion of Japanese financial institutions and the growth of their international capital transactions focused increasing attention on Tokyo as a world financial center. This was accompanied by mounting overseas demand for the deregulation and internationalization of Japan's money and capital markets. In 1984 the Government responded to this demand by abolishing restrictions on the conversion of foreign currency into yen, establishing a yen-denominated banker's acceptance market, and deregulating interest rates for large-denomination time deposits. In addition, membership of the Tokyo Stock Exchange was opened to foreign securities companies, and foreign banks were allowed to engage in trust banking activities. A succession of other measures was also implemented, including the relaxation of restrictions on Euroyen transactions. The Government is implementing further liberalization of financial services. Deregulation of interest rates on time deposits was completed in June 1993, while all deposit interest rates, including liquid deposits, were completely deregulated in October 1994. At the same time, the barriers separating banking and securities business were lowered in April 1993, as provided by a package of reforms of the financial system passed in June 1992. Subsidiaries of banks have been allowed to undertake activities in the securities business, and subsidiaries of securities firms are able to participate in banking operations. Banks in Japan come in various forms. Commercial banks, also known as retail banks, cater directly to the general public. In the past, they did so largely through a network of bank branches, although increasingly these are giving way to ATM machines, the telephone and the now the Internet. Wholesale banks largely transact with other banks and financial institutions. Investment banks, also known as merchant banks, concentrate on raising money for companies from private investors or in the financial markets, by finding buyers for their equity and corporate bonds. Which was the business investment route sought by Starbucks Coffee International.

STARBUCK'S MARKET GROWTH

     One of the most successful among the latest ventures accomplished in the Japanese market by a foreign company is Starbucks Coffee, which arrived in Japan in 1996. Starbucks chose the Ginza district of Tokyo for its first location. This area was the most suitable, having a number of advantages such as: (a) The district has a long history as the cradle of the café culture, and has consistently played a significant role as the leading area in the café industry throughout recent history; (b) Women, who make up the main-target segment of the population, work here in great numbers; (c) This district exerts a strong influence as the source of the latest trends, and placement here helps brand establishment at an early stage; (d) People with experience of living or working overseas often gather here in large numbers, and many of them are already familiar with the Starbucks name and products. Another point that helped the success of Starbucks Coffee was the deep understanding the company had of the changes occurring in the Japanese café market. The self-serve-style, low-price format of coffee shop operation introduced in the early 1990's, typically represented by a competitor, Doutor Coffee, was deployed swiftly with a great number of stores. Until then, the standard notion had been that coffee drinkers would sit at tables for many hours. The low-price coffee shops not only brought about menu price reduction, but also imposed a fast-food-like value system on the coffee-drinking culture. Starbucks Coffee, witnessing the coffee version of fast food materializing, deepened its conviction that Japan was also ready to accept the 'take-out coffee' idea.
          Starbucks' pricing reflects a good analysis of the Japanese market, too. At the time Starbucks arrived, the Japanese café market largely consisted of two groups: one dedicated to serving coffee, which led the industry in the 1980s, and one with a low-priced self-serve format which began to gain strength in the early 1990s. In terms of menu pricing, the former offered a cup of coffee served at the table for 400 yen and up, while the latter set up in self-serve format for 200 yen, each forming a market of its own, and each totally different from the other.
          Starbucks Coffee priced its coffee at a mid-range 280 yen and succeeded in securing a customer base. Starbucks was adamant in completely forbidding smoking on its premises in a market where smoking was an integral part of café culture in Japan. It also introduced a broad variety of flavored coffees previously unknown to Japanese coffee drinkers. These and other concepts behind their offerings contributed to greater demand, and the multi-facetedness of their mode of operation contributed to the creation of a female customer base, a first in the Japanese café market which had theretofore been predominantly male customer-dominated. This winning strategy put Starbucks prominently in the public eye. When Starbucks came to Japan, low-price coffee shops accounted for an overwhelming share of the market. Then the largest chain, Doutor Coffee, already counted 450 shops, taking the first signs of change as a cue, and seeing that Doutor Coffee virtually monopolized the low-price category, Starbucks seized the right opportunity to take a bold step into the Japanese market. Their approach was one of the factors in their success. In addition to Starbucks, other foreign chains such as McDonald's Japan, Kentucky Fried Chicken Japan and Denny's Japan have mounted successful operations. There are some common threads that unite these competitors; all had conducted thorough analyses of the Japanese market before actually starting up operations. However, contributing greatly to the staying power of the brand, Starbucks' powdered green tea-based Matcha Frappuccino has proven to be a great hit as a standard menu item. While the core menu items remain the same the world over, constant endeavors to develop additional items with local appeal end up helping update the freshness of the format in which the customers are served.

JAPAN'S MACROECONOMIC HISTORY AND TRENDS

     In September 1985 the five major industrial nations agreed on joint action to devalue the high-flying dollar. In the following 12 months the dollar dropped dramatically, from over 240 yen to under 160 yen. Japan's economy suffered a recession due to this appreciation of the yen that continued into 1986. As a result, the Government and the Bank of Japan adopted fiscal and monetary measures to increase domestic demand, with a view to encouraging economic recovery and reducing the current account surplus. The most important of these measures included the lowering of the official discount rate to 2.5%, the setting aside of an additional 5 trillion yen for public works, and income tax reductions amounting to over 1 trillion yen. In response, the manufacturing sector adopted policies aimed at boosting domestic demand. The recession consequently bottomed out at the end of 1986, starting a demand-led recovery, and the economy maintained its strength with an average real growth of 5.2% between fiscal 1987 and 1990. The external imbalances also started to show signs of correction. The current account surplus, which had reached 4.4% of GDP at its peak in fiscal 1986, had by fiscal 1990 shrunk to 1.1%.
          Meanwhile, in 1988-89, the so-called "bubble economy" swelled with dramatic rises in stock and land prices. With the objective of countering this phenomenon and preventing the inflation expected to result from the outbreak of the Gulf crisis in August 1990, the Government and the Bank of Japan switched to a belt-tightening policy. The bubble then burst, stock prices tumbled, and the economy shifted to a lower gear. From around the middle of 1991 the economy experienced a severe slump. The Government and the Bank of Japan turned once more to less stringent policies. Of particular note was the comprehensive economic package of August 1992, which included additional public works spending and was aimed at a domestic demand-led economic recovery. Funds earmarked for these measures totaled 10.7 trillion yen, the largest such package ever put together. In fiscal 1992 the economy barely avoided zero growth, falling to 0.4%, and a year later it sunk to a postwar low of 0.2%. The private sector was confronted with the need to slash excess inventory, equipment, and personnel --the legacy of over-investment during the 'bubble' years. The Government responded by adopting a series of emergency economic measures and including in the fiscal 1993 budget a stimulatory public-works spending package underwritten by an increased issue of construction bonds. The Bank of Japan, meanwhile, ratcheted down the official discount rate to a record low of 1.75% in September 1993. These policies resulted in the economy finally turning up in October 1993, led by public works investment and housing starts. The growth rate climbed to 0.5% in fiscal 1994. The nascent recovery was slowed, however, by a succession of blows dealt to the economy starting in the summer of 1994--the yen took off, breaking the 100 yen to the dollar mark in June, the Kansai area was rocked by a devastating earthquake in January 1995, and the financial sector struggled under a heavy burden of non-performing loans. The Bank of Japan addressed the situation by lowering the official discount rate to 1% in April 1995 and to 0.5% in September of that year. In fiscal 1995 the growth rate recovered to 2.3%.
          During this time Japan maintained its position as the world's second-largest economy. According to the 1996 edition of the Organization for Economic Cooperation and Development's National Accounts and the Economic Planning Agency's statistics, Japan's GDP in 1994 was $4.7 trillion, ranking second to the United States' $6.6 trillion. Japan's per capita GDP ranked top among the 24 OECD member countries in 1994 at $37,618. Japan has continued to claim the highest per capita GDP among the Group of Seven industrial countries since 1986. In terms of net external assets, Japan took first place at the end of 1985. Japan was overtaken by Germany at the end of 1990 but regained the top position at the end of 1991 and maintained it through the end of 1995, when it posted 77.0 trillion yen.

SIGNIFICANT INVESTMENT OPPORTUNITIES

     Several years ago, the high cost of doing business in Japan, the strong yen, and a highly regulated market led many U.S. financial services firms to reduce their presence in the market. That trend has turned around since Japan initiated deregulation in the financial sector, effective as of April 1, 1998, deregulation has significantly liberalized financial services and is providing excellent investment opportunities for U.S. suppliers of financial services. Although the yen has not returned to the favorable levels of the 'bubble' days, it is a significant contributing factor for very favorable investment opportunities. This is evident not only in the financial service sector, but also in all service industries and others that do not require heavy capital investment in factories or manufacturing facilities. For example, U.S. software suppliers are continuing to find the investment climate optimal and are seeking appropriate opportunities. Japan's current credit crunch continues, and will lead to new opportunities for investment in the manufacturing sector. Depending upon the power of the yen, ongoing deregulation in various sectors of Japan's market should spur U.S. and other foreign investment. The Government of Japan will liberalize the retail power sector over the next several years. Deregulation in this sector should create good opportunities for U.S. investment in facilities for independent power production.
          Within the restaurant/retail market for coffee import statistics follows, as Japan does not produce any coffee beans at all and relies on imports for its entire supply. The upscale trend in coffee beverage demand has been accompanied by a changeover to domestic coffee products (made from imported beans that are roasted and ground in Japan). Whereby, in 2001.the total volume of coffee imported $409,797 tons, with an overall value of $83,246 million Yen (JETRO).
          What the most efficient split is between bank lending and other sorts of lending is debatable. Economists argue endlessly about whether an economy such as the United States, in which firms rely more heavily on the equity and debt markets than on banks to fund their investment, is better than one such as, say, Germany, in which banks have traditionally been the main source of corporate finance (the Economist). In Japan, the financial sector consists of the following seven stock markets; Japanese Bond Market, Nagoya Stock Exchange, Osaka Securities Exchange, Tokyo Commodity Exchange, Tokyo Grain Exchange, Tokyo International Financial Futures Exchange, and the Tokyo Stock Exchange. Within each, Capital Markets represent securities such as bonds and shares. Governments and companies use them to raise longer-term capital from investors, although few of the millions of capital-market transactions every day involve the issuer of the security. Most trades are in the secondary markets, between investors who have bought the securities and other investors who want to buy them. This is in contrast with money markets, where short-term capital is raised. Money Markets on the other hand represent any market where money and other liquid assets (such as treasury bills) can be lent and borrowed for between a few hours and a few months. This is in contrast with capital markets, where longer-term capital changes hands.
Japan's Capital Markets and Portfolio Investments: Japan maintains no formal restrictions on inward portfolio investment, and in fact foreign capital occupies an increasingly important place in Japanese capital markets. However, corporate practices such as cross-shareholding limit the percentage of shares in individual firms and in the overall market that foreign investors can actually purchase, while informal restrictions on management participation of foreign shareholders limit the attractiveness of Japan's equity market to foreign investors.
Mergers and Acquisitions in Japan: Stock market-based takeovers of listed firms via tender offer, as widely practiced in the United States and parts of Europe, seen as both friendly and hostile, remain extremely rare in Japan. Japan's famous aversion to such activity is starting to fade, accelerated by the unwinding of extensive corporate cross-shareholding brought about by implementation of improved accounting standards. Tender offers for listed firms may increase as newly-listed firms in the over-the-counter (OTC) market -- which are less likely to become predominantly "cross-held" -- increase. Historically, of the roughly 400 foreign investment mergers and acquisition transactions in Japan since 1991 (including divestitures of overseas firms held by Japanese), only five cases involved tender offers for companies listed in Japan, which was an improvement over the previous two decades, where there was only one such case. The "acceleration" of tender offer activity in the 1990's stems directly from the 1990 elimination of the prior-to-offer reporting requirement (which stipulated that the Finance Ministry be informed of any tender offer nine days before its announcement) and the extension of the tender offering period to 60 days.
          The friendly transfer of wholly-owned and majority-owned subsidiaries is a more common form of mergers and acquisitions in Japan. Similarly, there are signs that owner-operated unlisted firms, which .80 of 115 traditionally would only sell out as a last resort before bankruptcy, are becoming more amenable to acquisition by foreigners. Particularly in the more modern, more service-oriented sectors of the economy, purchase by foreigners is becoming less of a badge of shame than in years past. Still, there remain a number of key factors limiting greater entry into the Japanese market through mergers and acquisitions with unlisted firms -- including tax policy, weak accounting and disclosure practices, Japan's underdeveloped OTC stock market, which if more developed would reduce the risks involved, lack of readily available information on firms that might be acquired, and the relative lack of a merger and acquisition "infrastructure" in the form of specialists skilled in making matches and structuring these deals.
          The past year saw introduction of two new exchanges geared towards encouraging start-ups and venture capital investments. In December, 1999, the Tokyo Stock Exchange (TSE) introduced "Mothers," a less-stringent listing criteria for emerging companies. In April, 2000, the TSE announced it would tighten listing requirements and screening procedures (requiring new companies to post a full year of earnings before being listed) to prevent firms with mob connections from listing on the exchange. NASDAQ Japan, in partnership with the Osaka Stock Exchange, opened June 19, 2000, with eight listed companies. NASDAQ announced that listing requirements will be the same as for NASDAQ's New York exchange. Although the new exchanges have relatively few listed firms, as yet, and suffer from lack of liquidity, analysts expect the exchanges to develop a healthy competition and provide needed capital for entrepreneurs (JETRO). This birth of NASDAQ could turn out to be even more explosive than the "Big Bang" program of sweeping financial system reforms, and a domestic version of the online U.S. exchange, the biggest in the world, could start as early as the end of 2000. The new market will be managed jointly by the U.S. National Association of Securities Dealers, which operates the U.S. exchange, and the entrepreneurial communications firm Softbank Corp. Once Nasdaq Japan is established, domestic investors will be able to trade shares on the U.S. market directly from Japan, and local start-ups will have a much quicker route to market listing, opening up investment and capital procurement opportunities. Moreover, increased competition with other exchanges is expected to lead to the general rejuvenation of Japan's financial markets.

SUMMARY

     Japan's economic slump began with a stock-market crash in 1989 and hasn't ended yet, largely because deflation lowers wages and keeps consumers and businesses from spending. Despite the lack of spending, personal bankruptcies rose by a third in 2002 and many weak corporations hang on stubbornly, thanks to a culture that discourages corporate bankruptcy; they turn to banks, which now carry ¥150 trillion ($1.2 trillion U.S.) of bad loans. The government's traditional solution has been to pour money into public works projects, but while downgraded government debt keeps rising, not to mention health-care costs, now at 6% of GDP, the new projects have not increased the demand.
          Junichiro Koizumi, the prime minister, promised painful economic reforms in 2001, thus far largely ineffectual, failing to support the reform plans of his finance minister, Heizo Takenaka. The government's new Industrial Revitalisation Corporation, designed to help restructure failing firms, is off to a very slow start. Mr. Koizumi will pressure Toshihiko Fukui, the new head of the Bank of Japan, to adopt anti-deflationary monetary policies. However, as long as Japanese politicians keep changing the rules to prevent troubled companies from sinking, foreign brokers and banks will remain nervous.
          However, the current poor state of Japan's economy is partly due to the poorer state of its banks, which carry $1.25 trillion in bad loans and $342 billion in interest rate swaps. As big equity investors, they have been battered in Japan's stockmarket and face new competition from the revamped public post office for deposits. The banks have resorted to dubious moves to bolster capital, such as participating in foreign-currency swaps or selling shares illegally. They stay solvent because politicians depend on the banks to finance Japan's massive construction industry and businesses in the banks' keiretsu (shadowy, informal business groups) want them to keep making loans.
          Junichiro Koizumi, the prime minister, has been unable to enact much reform. Heizo Takenaka, whom Mr Koizumi appointed as head of the Financial Services Agency in September 2002, proposed initial reforms but encountered resistance. Furthermore, the government's main agency for bad loan collection is understaffed and overwhelmed. The FSA is at least keeping an eye on banks' efforts to raise capital, and Toshihiko Fukui, the new head of the Bank of Japan, will probably also advocate reform, albeit more discreetly (Economists.com).
          By comparison and following the lead of Starbucks Coffee International, Seattle-based coffee chains Seattle's Best Coffee and Tully's Coffee have also populated the Japanese market. Seattle's Best Coffee is one of America's more reputable brands, but its Japanese operations cannot be considered quite up to speed. It has placed an area franchisee each in the Kanto and Kansai regions as leverage toward shop multiplication, but it suffers from internal disunity over strategy formulation. Tully's Coffee has successfully distinguished itself from Starbucks, its senior on the local market, with its separation of smoking areas and by offering ice cream made by the big-brand American company Dankens. It is now working hard to expand the number of its shops, and has embarked on its franchise scheme to accelerate shop openings. The food menu included original Japanese items, but the American style of selling coffee beans and tea on the storefront was adopted unmodified.
          Consumers in the café market are becoming increasingly diversified in age and gender distributions, and there is still plenty of room for new companies. There is a strong possibility that foreign companies joining the Japanese market can firmly establish themselves with their brands if they can assertively project their brand identity while paying careful attention to changes and trends in the Japanese market. In the café market, independently operated shops, which define the character of the Japanese food service market, continue to account for the mainstream. Accelerated business format innovation, however, has been de rigueur ever since the arrival of the low-price self-serve Doutor Coffee chain and, later, by Starbucks Coffee, credited with the staging of a specialty coffee boom. While the market is in a contracting trend, switchover from independent operation to operation under a chain regime is now underway, with a high probability of the market re-entering the expansion mode in the years ahead.
          Coffee prices have continued to fall even as cocoa prices have rebounded; the oversupply of coffee has caused new economic misery in Latin America. The price of robusta beans, used in instant coffee, hit 30-year lows in April 2001, thanks to increased competition: while Colombia's coffee farmers suffer from their country's civil war, Vietnam is exporting greater amounts, and plantations in Africa may eventually become producers. Attempts to regulate coffee prices have mostly stalled, though growers might find better prices over online auctions. Today's economic outlook focuses on cutting out the middleman. In the financial services sector, the term 'disintermediation,' has become a buzz word, as competitive and technological changes have done away with the need for established intermediaries. In Japan and globally, banks have seen much of their business slip away, such as lending to companies that now tap capital markets direct. Theorists reckon that many retailers will be disintermediated as the Internet allows customers to transact directly with producers without needing to visit a shop, however, Starbucks has meet the challenge.
          With prices in flux, the plight of coffee farmers has become a rallying point for anti-globalization groups such as Oxfam, which made Starbucks, the most ubiquitous upscale-coffee provider, a symbol of globalization and of coffee-farmer exploitation. In response, Starbucks now sells "fair-trade" coffee, for which farmers are guaranteed a certain price, just in-the-nick of time because they have approximately 450 stores in and within the proximity of Berkeley, California, where the sale of coffee that is not fair-trade, organic or shade-grown is under current 'banning' consideration.

References

For South Korea's economic infrastructure

Duck, L. W. (December, 2002). New Government’s labor policy: Pursuit of social integration and growth opportunities. Korea Focus, 11 (1).

Hill, C.W.L. (2003). International business with Global Resource CD, PowerWeb and World Map (4th ed.). New York: McGraw Hill.

Friedman, T.L. (2000). The lexus and the olive tree. New York: Random House.

Japanese Bankers Association. Stabilizing the Financial System: Tackling bad loans. Retrieved April 18, 2003 from http://www.zenginkyo.or.jp/en/jbank/index.html

Korea Real Estate Information Center web site. Retrieved April 15, 2003 from http://www.kreic.com

Korea Trade – Investment Promotion Agency. General trade information. Retrieved April 17, 2003 from http://www.kotra.or.kr/eng/html/sub2.html

Ministry of Commerce, Industry, and Energy. Retrieved April 14, 2003 from http://english.mofe.go.kr/down.php?t=eh_news_press&f=ExImTableMar03.doc

Ministry of Construction and Transportation. Construction and transportation policy directions. Retrieved April 18, 2003 from http://www.moct.go.kr/EngHome/Polices/Polices_sub02.htm

Ministry of Finance and Economy. Retrieved April 14, 2003 from http://english.mofe.go.kr/

Ministry of Information and Communications. Retrieved April 15, 2003 from http://www.mic.go.kr/eng/

Sung-tae, S. (June, 2002). Korea’s foreign exchange market to be completely liberalized by 20011. Korea Herald.

For Japan's economic infrastructure

Central Intelligence Agency (CIA). (February, 2003). The world factbook 2002: Japan. Retrieved from the World Wide Web on April 15, 2003 from http://www.odci.gov/cia/publications/factbook/geos/ja.html

Friedman, T.L. (2000). The lexus and the olive tree. New York: Random House.

Hill, C.W.L. (2003). International business with global resource CD, PowerWeb and World Map (4th ed.). New York: McGraw Hill.

Ministry of Economy, Trade, and Industry. (1998, Dec. 24). Overview of the Interim Report on the Subcommittee of Basic Policy Directions Electricity Utility Industry Council. Retrieved from the World Wide Web from on April 18, 2003 http://www.meti.go.jp/english/report/data/gNR1101e.html

Pomfret, J. (2003, April 16). Beijing Said to Conceal Extent of Disease. The Washington Post, pp. A18. Downloaded on April 18, 2003 from http://www.washingtonpost.com/wp-dyn/articles/A33525-2003Apr15.html

USDA Japan Exporter Guide US food exporter’s guide to Japan 2002 (2002, March 29). GAIN report #JA2514. Retrieved from the World Wide Web on March 20, 2003 from http://www.fas.usda.gov/gainfiles/200203/135683861.pdf

U.S. Department of State, Bureau of East Asian and Pacific Affairs. (June, 2002). Background Note: Japan. Retrieved from the World Wide Web from on April 16, 2003. http://www.state.gov/r/pa/ei/bgn/4142.htm 

For South Korea's finacial markets

Friedman, T.L. (2000). The lexus and the olive tree. New York: Random House.

Heyne, P., Boettke, P., & Prychitko, D. (2003). The economic way of thinking (10th ed.). Upper Saddle River, NJ:Prentice-Hall, Inc.

Hill, C.W.L. (2003). International business with Global Resource CD, PowerWeb and World Map (4th ed.). New York: McGraw Hill.

Kim, J. (2002). The IMF-Induced Economic Reform and Limits to the Korean Democracy.

SaKong, I. (Winter 2000-2001). Korean Economic Restructuring: Current Status and Prospects. The Korea Society Quarterly. Retrieved from http://www.koreasociety.org/TKSQ/TKSQ%20PDF/TKSQ_1-4/05-Il-Sakong-Korean-Econ-Restructure.pdf on April 16th, 2003.

Starbucks Coffee Korea Co. Limited (2003). Retrieved from the World Wide Web at http://www.istarbucks.co.kr/english/star_korea.asp on April 18, 2003.

For Japan's finacial markets

Anonymous. (March 2001). Japan Access - Japan Information Network. Ministry of Foreign Affairs by Kodansha International Ltd. Retrieved April 16, 2003 from http://www.jinjapan.org/stat/index.html.

Anonymous. JETRO's Japanese Market Report series. Retrieved April 16, 2003 from http://www.jetro.go.jp/ec/e/market/jmr/index.html.

Annual Report on National Accounts. (April 15, 2002). Economic and Social Research Institute Cabinet Office. Retrieved April 16, 2003 from http://www.jinjapan.org/stat/stats/05ECN21.html.

Anonymous. (April 17, 2003). http://www.ec.

Hill, C.W. (2003). International business with Global Resource CD, PowerWeb and World Map (4th ed.). New York: McGraw Hill.

U.S. Department of State FY 2001 Country Commercial Guide: Japan The Country Commercial Guide for Japan was prepared by U.S. Embassy Tokyo U.S. & Foreign Commercial Service and the U.S. Department of State.