The most popular way for international expansion is for a local firm to acquire foreign companies. One of the most benefits for international expansion is global distribution capability that helps expanding the market share.
There are different implications of running a company that is within or outside of the European Union. If you were the head of a firm based in the United States, please answer the following questions, providing the rationale behind your answers:
1. Would you seek to acquire a company within the European Union or outside of it? Why?
2. Describe the advantages and disadvantages of the choice you made.
3. Describe the advantages and disadvantages inherent in the option you did not choose.
4. Explain why an MNC may invest funds in a financial market outside its own country.
5. Explain why some financial institutions prefer to provide credit in financial markets outside their own country.
Global financial management
In the recent past, businesses and organizations have been working hard to beat off competition and win over a larger market share than their competitors. One of the easiest ways that companies in different regions have been using to be on the top is joining regional trade blocks in an attempt to have bigger and powerful bargaining power. One of the famous and powerful economic and political blocs that have been widely used by organizations, particularly in Europe is the European Union. For decades, the European Union has been acting as a unified trade and monetary body for close to 28 countries located in Europe. The primary objective of the union is to make its members more competitive in the global market as well as balancing the needs of its member state. For years, the union has been known to eliminate all border control of the member states which in turn allows for free flow of capital, goods, services, and people as they attempt to grow and expand (Nugent, 2017). Additionally, the member states often enjoy from environmental protection strategies and efforts, research, and development as well as energy designed and implemented by the union. This assignment will attempt to identify the basic reasons that can push firms and countries to join this worldwide economic and political bloc.
Over the years, the European Union has been changed to match the needs and wants of the changing business environment as well as that of the member countries. Despite the fact that the current European Union was formed in 1993, research shows that the organization itself was formed in 1945 by founding fathers such as Jean Monnet, Robert Schuman and Winston Churchill with a sole objective of reducing if not eliminating the constant and bloody wars between neighbors in Europe back then (Nugent, 2017). Given its achievement over the years, I would seek to acquire a company within the European Union for the reasons provided below.
Despite having a common political interest among its members, the European Union is more focused on the economic gain of its member countries more than the political gain of the members. Therefore, the union designs and implements schemes of laws and regulations that are meant to create in different ways a cohesive economic entity of its member states. Research shows that the union has successfully minimized if not abolished border tax within its member countries to allow for the free transfer of goods, services, people, and capital in large quantities within the Union. Additionally, through its trade policies, the Union has made it possible for its members to use a common currency known as the Euro which is to create a large pool of skilled labor, thus providing an opportunity for easy distribution and allocation of labor (Wendt, 2009). Therefore, by joining the European Union, the company is likely to enjoy cheap and efficient labor, a common pool of financial power, increased trade as well as the increased market for the company products.
Notably, this economic bloc has worked hard to design and implement a customs union with a common external tariff. Research shows that as much as the economic rules and regulations made by the company promote internal competition within the member states, it also gives them a competitive advantage over other companies outside the union as they can bargain for better prices for their products and labor as a unit. Therefore, companies within the union can achieve higher profits and return on their investments by bargaining as a bloc to customers outside the union. Moreover, countries within the union can enjoy from the common policies for agriculture, transportation and trade as there is a free transfer of knowledge and skills from one nation to another (Wendt, 2009). Therefore, a country that is within the union is set to enjoy equity and stabilization in the currency and economy provided by the union.
The prospect of joining one of the largest political and economic organizations in the globe today has helped in modernizing and improving the living standards of most countries in the region. Member countries often show their commitment to human rights, the rule of law, and a market economy, which in turn promotes collaboration, integration, and cooperation within the members. Some of the benefits enjoyed by the member states include:
Tax-free trading between the member states – as discussed earlier, the union has put efforts in minimizing if not eliminating border tariffs which means that people, goods, and services, as well as capital, can freely move within the union. As a result, there is decreased the cost of trade within the union thus increasing the revenues for individual companies and promoting them to grow to new heights (Wendt, 2009).
Opens up more opportunities – the fact that the union has 28 member countries that work together in political and economic matters, there is a higher chance that a company joining the union will enjoy from the increased marketplace and larger market to sell their goods and services. Movement of products and resources within the union is free which in turn creates more opportunities for the member states. The increased marketplace opens up more opportunities for job and education for a company and its employees, particularly those from non-developed areas (Isani & Schlipphak, 2017).
On the other hand, some of the disadvantages of joining the union include:
Communication barriers – despite the fact that the union has worked hard to introduce a common currency that can be used by all member states, their main challenge has remained to be the communication barrier. Moreover, the fact that the union has 28 member countries that have different national language makes it hard to communicate to all member citizens from different countries. Different languages and cultures within the union have a negative impact on the unity of the bloc, which may have an impact on the operations and success of individual companies within the union.
Irrespective of the fact that those joining the union can enjoy notable advantages, those countries and companies that are not within the union also have their own set of advantages and disadvantages. Some of the notable advantages of not joining the union include:
They enjoy the full autonomy of their company – once a company or a country joins the union, it is forced to some if not all the authority to the union particularly when it comes to the designing and implementation of the trade policies (Bakker & De Vreese, 2015). The union is also known for taking power from individual countries, which means companies within the union cannot do contrary to the union as they take an oath to honor and follow all the treaties of the union.
The company can serve its interest – one of the many advantages of not joining the European Union is the fact that a company can serve its interest without worrying about the feelings and perspectives of other companies and countries. As a result, the company can set its tariff, tax rates and market targets. The policies, decisions, and rules set by the union are not implemented to protect the individual interest of member countries or their companies (Bakker & De Vreese, 2015).
Disadvantages of failing to join the European in the long term include the fact that the company may incur the exchange rate cost as it will not qualify to use the common currency used by the union. Research shows that the union sets a particular tariff for nonmembers, which mean that a company that is not within the union is likely to fail to enjoy the benefits of a common currency.
Multinational companies have been investing in the foreign portfolio for years. Some of the notable advantages of this practice include portfolio diversification as it gives investors an opportunity to engage in the international diversification of assets. Additionally, investing in a foreign portfolio gives a company an opportunity to enjoy from international credit as they can borrow in foreign countries to fund their operations (Isani & Schlipphak, 2017,).
Provision of credit to foreign companies gives an opportunity for a company to diversify its risk, thus, eliminating if not minimizing the chances of losing their investments. Additionally, this practice gives an opportunity for a company to capture and exploit emerging markets and opportunities both locally and in the international market. This diversification provides a base for growth and expansion for a company. Finally, foreign companies are known to offer high rates, which in turn improve the revenues and returns of local companies.
Bakker, B. N., & De Vreese, C. H. (2015). Personality and European Union attitudes: Relationships across European Union attitude dimensions. European Union Politics, 17(1), 25-45. doi:10.1177/1465116515595885
Isani, M., & Schlipphak, B. (2017). In the European Union we trust: European Muslim attitudes toward the European Union. European Union Politics, 146511651772583. doi:10.1177/1465116517725831
Nugent, N. (2017). The government and politics of the European Union. Basingstoke: Palgrave, Macmillan Education.
Wendt, C. (2009). A common tax base for multinational enterprises in the European Union. Wiesbaden: Betriebswirtschaftlicher Verlag Gabler.