Today’s global economy is filled with companies of different sizes that have established their operations in foreign markets. International expansions provide several advantages to companies such as diversification, market growth, and better opportunities. There has been a huge trend of American companies going global and the trend is set to continue. A survey done in 2017 by Wells Fargo shows that 81 percent firms in the United States believe that international expansion is necessary for long-term growth ("International Business Indicator: Global business optimism higher than ever", 2017). However, despite the large number of firms in the United States expanding abroad, there are many factors that could cause a challenge for a company to be successful overseas. This paper analyzes some factors that Multinational Companies should consider when venturing into foreign markets like that of the European Union.
Acquiring a company with the European Union or outside
In case I was the head of a company based in the United States and was seeking to acquire a company within the European Union or outside, I would not acquire the company. One of the reasons is that Europe has been in a deteriorating condition from 2007 as a result of the concern from its southern members such as Greece, Spain, Italy, Spain, and Portugal. The European Union has been faced by several problems such as unemployment and fall in GDP. The EU experienced a prolonged recession which made unemployment reach staggering high levels. Before the financial crisis of 2008, the unemployment rate was one of the lowest experienced in the region. The unemployment rate increased after the recession and some countries like Spain experienced an increase in the unemployment rate by over 25% and the rate of unemployment in their Youth reached 50% (Duell, 2016). Europe has not been able to manage the deep recession that hit the country leading to a fall in GDP. A weak global economy and structural economy may impact fiscal and monetary policies.
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The European Union has also been recently faced by Brexit which causes uncertainty in the general economy of the region. Investing in a country like the UK would thus be difficult. There is uncertainty about the new relationship between the United Kingdom and the European Union member states. The recent implementation of Brexit would limit the free movement of capital between the UK and EU. The Euro has also been mostly affected and has experienced a massive drop over the past year. The ever-dropping Euro would mean that investing in the EU would cause significant monetary challenges for the new company.
The European Union is at the center of the Euro zone crisis and the acquiring a firm in the region would mean that it has a shaky financial future. Government structures have changed in the region, there is political instability and there is a huge financial uncertainty. The uncertainty has led to some banks stopping their operations. For a company to be acquired in the EU, its assets should be acquired and secured for it to carry its operations. The financial uncertainty could mean that assets of companies and individuals get frozen. The non-functioning of some banks would mean that acquiring assets of a company with the bank is impossible.
It is thus not advisable to acquire a company in its current state. There are other countries in different parts of the world that do not have money problems and have their economies on a continual growth. A country like Brazil has experienced significant economic growth, the country’s currency is strong, and the region has experienced a GDP growth of 4.1% (Arestis and Baltar 2018).
Advantages and disadvantages of the option chosen
The advantage of acquiring a company in a different region is that the company can experience consistent growth a consistent economic power. For instance, the given region of Brazil has shown that it has minerals, energy, natural resources, and a wide industrial base. The region has a strong economic growth and ever-growing local market which will be highly beneficial for the newly acquired business. Brazil also benefits from tax exemptions for international companies, a low inflation, and a very strong consumer influence. The current economic state in the region is stable and it experiences significant internal growth.
The disadvantage of investing in the region is that the region can have a volatile political environment. Political changes in the region could lead to protests and closure of businesses. The business conditions in the region are also changing fast causing an uncertainty about the future. Brazil further experiences heavy bureaucracy where the government has a strong say in the working of businesses in the region. The legal system in the region is also slow and the acquisition process of the company could take some time. The general level of education in the region is not quite high. The newly acquired business may find it challenging to acquire skilled labor.
Advantages and disadvantages of the option not chosen
One advantage of not acquiring a company in the EU is that it would prevent potential losses in the future. There is a high chance that investing in the EU would lead to a negative growth. Not investing in the region protects one from financial losses and possible bankruptcy. There have been several companies that have left the EU as a result of Brexit ("The number of companies leaving the UK because of Brexit grows", 2018). Choosing not to invest in the EU means that would evade the predicament faced by these companies.
The disadvantage of not investing in the EU is that companies would miss out a potential profit in case the economy stabilizes. While the economic situation in the region is shaky, there is still room for growth and profit for any company. Approaching the market with the right strategy provides a room for potential growth and profit for a company. Additionally, there are several international companies in the EU that are experiencing profits. The EU has a high standard of living and a skilled labor force that could be exploited by investing in the region.
Explain why an MNC may invest funds in a financial market outside its own country.
An MNC may decide to invest in a financial market outside its own country to create a better business opportunity. The company may find opportunities in the outside country to be more lucrative and more secure for international companies. The outside country could be experiencing financial stability and investing funds in the outside country would serve to protect the company’s assets.
Another reason why an MNC could choose to invest in an outside country is that it could its home country could be experiencing a financial crisis or a slow economic growth. These financial factors are unattractive and could negatively affect the MNC. The company could opt for investing in an outside country that could have an economic climate that is more favorable compared to its home country. For instance, if the stock market in the home country is uncertain or the currency in the home country is weakening, the MNC may decide to invest in financial markets outside the region (Valdez and Molyneux, 2015).
MNCs that choose to invest abroad usually invest in countries where the local currency has a high chance of appreciating. An MNC could anticipate that the currency which they will invest in will appreciate in the near future. The exchange rate of the currency involved with the currency could appreciate and the country would protect its liquid assets. The MNC may also be able to earn better interest rates on funds that have been invested in the financial market outside the country.
Investors can achieve better and long-term results when they choose to diversify their assets. Diversification of assets in different countries can occur by investing in industries, asset classes, and stocks in different countries. Studies have shown that it is a bad idea for a company to have more than its equities in stocks from any one given country. A country that has had a strong economy throughout history has also faced significant economic challenges. History also shows that there have been other countries with strong stock markets that ran into difficult economic situations (Johanson and Mattsson, 2015).
Explain why some financial institutions prefer to provide credit in financial markets outside their own country
Financial institutions usually opt to provide credit for financial markets outside their home country since they could get higher rates compared to that in their home country. The difference in interest rates could be caused by stiff competition from other financial institutions in the home country. The government could also put in place strict regulations that lead to low-interest rates. An example of low-interest rates can be found where the Federal Reserve in the United States depressed the interest rates in the United States. The reduction of the interest rates was also extended to the long-term interest rates causing a reduction in profits for companies (Bhutta and Keys, 2016).
Financial institutions that want to take advantage of higher interest rates in other countries lend their money through their international branches. Giving credit this way brings higher interest rates for financial institutions. This translates to higher profitability for the financial institution. Outside countries could have higher borrowing rates. For instance, the Fed in the United States ensures that banks are liquid and thus pushes down interest rates which banks lend to the country. However, outside countries could have huge markets with a low supply of funds. International financing has made it possible for financial institutions in other countries to provide credit in countries that have high interest rates. The demand for currency in outside countries could also mean that there is a high security of funds.
Financial institutions may also opt to provide credit in outside financial markets to diversify their credit portfolio. Diversification of their credit ensures that the company’s profits do not depend on the economic conditions in only one country. The economic future of any given country is usually difficult to predict with accuracy. Investing in different countries is a way which financial institutions can spread their risks. For instance, investing in different firms in the European countries is less risky compared to a stock portfolio firm in a single European country. Additionally, accessing foreign markets allows investors to spread their funds throughout a diverse group of industries which could be available domestically.
In conclusion, multinational companies that choose to invest in foreign markets can realize significant advantages and disadvantages. Investing in the European Union presents several challenges and it would be a bad decision acquire a company in the region. There are other countries like Brazil that offer better investing opportunities and a stable financial environment. Multinational companies can choose to invest funds in outside countries to take advantage of strong currencies and strong economies of other countries. Financial institutions provide credit to financial markets outside their own country to take advantage of high interest rates in other countries.
References
Arestis, P., & Baltar, C. T. (2018). A Model of Economic Growth for an Open Emerging Country: Empirical Evidence for Brazil. Structural Change and Economic Dynamics .
Bhutta, N., & Keys, B. J. (2016). Interest rates and equity extraction during the housing boom. American Economic Review , 106 (7), 1742-74.
Duell, N., Thurau, L., & Vetter, T. (2016). Long-term unemployment in the EU: Trends and policies. Bertelsmann Stiftung, Brussels .
International Business Indicator: Global business optimism higher than ever. | Global Focus. (2017). Retrieved from https://wholesale.wf.com/global-focus/international-business-indicator/
Johanson, J., & Mattsson, L. G. (2015). Internationalization in industrial systems—a network approach. In Knowledge, networks, and power (pp. 111-132). Palgrave Macmillan, London.
The number of companies leaving the UK because of Brexit grows. (2018). Retrieved from https://readyforbrexit.co.uk/the-list-of-companies-setting-up-hqs-or-bases-on-mainland-europe-ahead-of-brexit-grows/
Valdez, S., & Molyneux, P. (2015). An introduction to global financial markets . Macmillan International Higher Education.
