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:
Would you seek to acquire a company within the European Union or outside of it? Why?
Describe the advantages and disadvantages of the choice you made.
Describe the advantages and disadvantages inherent in the option you did not choose.
Explain why an MNC may invest funds in a financial market outside its own country.
Explain why some financial institutions prefer to provide credit in financial markets outside their own country.
Full Answer Section
Disadvantages of acquiring a company within the EU:
- Cost: Acquiring a company in the EU can be expensive. EU companies are generally more expensive than companies in other parts of the world.
- Competition: The EU is a competitive market. There are a number of large and well-established companies in the EU. This can make it difficult to compete and achieve market share.
- Cultural differences: There are cultural differences between different EU countries. This can be a challenge for businesses that are expanding into the EU for the first time.
Advantages and disadvantages of acquiring a company outside of the EU:
Advantages:
- Cost: Acquiring a company outside of the EU is often less expensive than acquiring a company in the EU.
- Less competition: Markets outside of the EU are often less competitive than the EU market. This can make it easier to achieve market share.
- Access to new markets: Acquiring a company outside of the EU can give my firm access to new markets that it would not otherwise be able to reach.
Disadvantages:
- Tariffs and trade barriers: Tariffs and trade barriers can make it more expensive and difficult to do business in markets outside of the EU.
- Currency risk: Currency fluctuations can make it difficult to predict costs and profits when doing business in markets outside of the EU.
- Political instability: Some markets outside of the EU are politically unstable. This can be a risk for businesses that are expanding into these markets.
Why an MNC may invest funds in a financial market outside its own country:
There are a number of reasons why an MNC may invest funds in a financial market outside its own country. Here are a few examples:
- Higher returns: MNCs may invest in financial markets outside of their own country in order to seek higher returns. For example, an MNC may invest in a stock market in a developing country, where there is the potential for higher growth.
- Diversification: MNCs may invest in financial markets outside of their own country in order to diversify their portfolios. This can help to reduce their overall risk.
- Currency appreciation: MNCs may invest in financial markets outside of their own country in order to benefit from currency appreciation. For example, an MNC may invest in a bond market in a country with a strong currency.
Why some financial institutions prefer to provide credit in financial markets outside their own country:
There are a number of reasons why some financial institutions prefer to provide credit in financial markets outside of their own country. Here are a few examples:
- Higher margins: Financial institutions may be able to charge higher margins on loans in financial markets outside of their own country. This is because there is often less competition in these markets.
- Less regulation: Financial institutions may be subject to less regulation in financial markets outside of their own country. This can make it easier and more profitable to do business in these markets.
- New markets: Financial institutions may provide credit in financial markets outside of their own country in order to access new markets. This can help them to grow their business and increase their profits.
Overall, the decision of whether to acquire a company within or outside of the EU is a complex one that depends on a number of factors, such as the industry, the specific company being acquired, and the overall business strategy of the acquiring firm.
Sample Answer
As the head of a US-based firm, I would seek to acquire a company within the European Union. Here are the reasons why:
Advantages of acquiring a company within the EU:
- Access to the single market: The EU single market is the world's largest single market, with over 440 million consumers. Acquiring a company within the EU would give my firm immediate access to this huge market without having to worry about tariffs or other trade barriers.
- Common currency: The EU uses a common currency, the euro. This makes it easier to do business across different EU countries, as there is no need to exchange currencies.
- Common regulations: The EU has a number of common regulations that apply to businesses in all member states. This makes it easier to comply with regulations and run a business across the EU.
- Political stability: The EU is a politically stable region. This is important for businesses, as it reduces the risk of political instability disrupting their operations.