Multinationals companies frequently expand when searching for new markets. When a company reaches a saturation level in a particular market, their growth potential is minimal and limited. Therefore, the company will begin focusing on new markets so that they can achieve growth that may not be possible in their domestic or local markets. The European Union (EU) is a 27 member economic and political union. The union has a population of about 510 million people. Moreover, they developed an internal single market through a common system of laws and regulations that are applied to all member states. The EU policies ensure there is a free flow of capital, people, services, and goods within the common market ( Hunady & Orviska, 2014) . Therefore, investing in the EU appears to be a strategic decision. However, investing in the EU may have certain challenges such as the Eurozone crisis. The essay will evaluate whether an MNC should invest in European Union (EU).
Acquiring a Company in the EU
If I was an investor, I would consider acquiring a company within the EU. According to the World Bank and the International Monetary Fund (IMF), the EU is the biggest economic block with a gross domestic product (GDP) of over $16 trillion. Moreover, the region is famous for their investor-friendly policies over the past four decades. In 1992, the region accounted for about half of the foreign investment globally ( Hitt, Li, and Xu, 2016) . The region plays a critical role in domestic and international trade. Due to the investor-friendly policies, the region is one of the key trading destinations globally. The EU is not only the largest exporter but also the largest importer globally. Some of the key trade commodities in the region include machinery, agricultural products, aircraft, pharmaceuticals, iron and steel, paper products, clothing, and vehicles.
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Additionally, the investment policy in the region is focused on offering investors with legal certainty and stability, and conducive environments for business according to international standards. Moreover, the region abolished all trade barriers that appeared to hinder free trade. Furthermore, the union has a common currency that increases trade within member states. Not only does the EU have favorable legal policies that favor foreign investment but they also have large natural resources such as coal, natural gas, and oil. Hence, the region has a good blending of both human and natural resources that make the region one of the best investment destinations globally ( Wu & Chen, 2014) . In addition, the EU has many booming industries spread out in the entire region that not only manufacture goods and offer services but also act as a market for various goods and services.
All the countries in the EU act as favorable investment destinations. All industrial sectors in the region have a potential for expansion and there is a demand for adequate foreign investment. The core of the EU economy is the service sector and it accounts for a significant portion of the region's GDP. The key sectors in the region that have immense potential for growth include real estate, aerospace and defense, engineering, automotive, logistics, biotechnology, nuclear, information and communication technology, and nanotechnology ( Hunady & Orviska, 2014) . The EU has many countries that are the best investment destinations globally in the real estates' industry such as Romania, Bulgaria, Poland, Croatia, Czech Republic, and Hungary among other countries. Regardless of the Eurozone crisis, the region has shown a rapid recovery and their economies are on an upward trend. The average economic growth rate in the region is about 1.8%.
Advantages and Disadvantages of Acquiring a Company in the EU
Advantages
The free trade policy in the EU increases competition in the region and ensures that businesses in the region have greater incentives to improve efficiency to greater competition. The increased competition in the EU influences higher investments in the region leading to lower prices and increased quality. Moreover, the free trade policy will allow the acquired firm to market their services and good to a larger market comprising of about 510 million potential customers. The EU is the biggest economic block with a gross domestic product (GDP) of over $16 trillion. Also, the region is famous for their investor-friendly policies over the past four decades. It means that there will be a larger demand for the company’s products thus increasing their output and allowing the business to accrue benefits of economies of scale ( Hitt, Li, and Xu, 2016) . The increased business will not only increase the economic output but also increase GDP growth in the EU.
The free trade policy ensures that tariffs are not used within the union. It prevents retaliation against companies perceived to be owned by foreigners while increasing international trade and maintaining export markets. It means that the demand for goods will increase. It also means that the business can use the company to introduce more American manufactured goods into the EU market. By investing in the EU, the business will have access to wider financial markets ( Wu & Chen, 2014) . It will also create more employment opportunities in the target market. It will also lead to increased income, resource transfer, and productivity. Moreover, the company may receive tax incentives because of the foreign investment.
By acquiring a company in the EU, the business will also be acquiring their competitive advantages. Moreover, it will create new markets for professionals in the host country. Although they may not create many new jobs, they will invest in higher paid jobs that need higher skills. It will assist in elevating the level of skills and knowledge in the host country through resource transfer. In addition, there will be a transfer of more advanced managerial or marketing practices and technologies between the parent company and acquired company ( Hitt, Li, and Xu, 2016) . Also, it may improve the supply chain process by ensuring that products have a wider audience. Moreover, due to the transfer of technologies and skills, it may accelerate economic growth in the host country.
Disadvantages
However, investing in the EU may have various disadvantages. When the company allocates its resources in the EU other than the company’s home country, it may hinder or minimize domestic investment. Acquiring a company in the EU may be costlier than if the company decided to export commodities to the region. Therefore, the company should have adequate resources before making the decision. Also, it may have an adverse effect on exchange rates because it may cause one country to have favorable exchange rates at the expense of another. Investing in the EU may make the company vulnerable to external risks such as the Eurozone crisis ( Hitt, Li, and Xu, 2016) . Furthermore, acquiring a company in the EU is capital intensive from the investor’s point of view and be economically nonviable or a risky decision. Therefore, the investor should critically evaluate the available decisions before making the decision.
Advantages and Disadvantages of Acquiring a Company Locally
Advantages
Investing domestically has various advantages such as lower transportation costs that are often taken into account in production costs. However, investing in the EU will be accompanied by additional freight costs. Investing domestically is may be cheaper because the products will not be subjected to either export or import tariffs. Also, they may experience tax benefits. Moreover, when a company invests in a foreign country, there may be a mismatch between cash outflows and cash inflows because of different currencies (Bradshaw, 2017). Due to fluctuating exchange rates, the generated income may be unable to cover all costs. In contrast, investing domestically ensures that all revenues and costs are in the same currency thus reducing the risks of having foreign currencies.
Some consumers prefer buying local goods even if they are more expensive due to nationalism. Investing domestically will ensure that the company takes advantage of nationalism. Furthermore, investing locally is more appropriate because the company has experience and knowledge about the domestic market including their tastes and preferences ( Chan, 2016) . Investing in the EU may involve learning new consumer preferences and it may affect their income if they are unable to meet their needs.
Disadvantages
Domestic production may occur in two ways: investing in a new product or acquiring existing local businesses. Furthermore, acquiring a local company may be quite expensive. In most cases, domestic production is often expensive because of labor costs and taxes. A similar product may be produced at a cheaper cost in a foreign country and it may be more affordable to import the good than producing it locally. Furthermore, most sectors in the US are saturated. Gaining a better market share often involves acquiring new clients from competitors ( Wu & Chen, 2014) . Also, there may little room for expansion or increasing net income and revenues.
Motives for Multinationals Investing in Foreign Financial Markets
Multinational companies often invest their funds in foreign countries due to transactional financial leveraging, political change, taxes, and exchange rates. The prevailing political environment may cause MNCs to provide incentives or invest into financial markets outside their country. Furthermore, the foreign exchange rates may be quite favorable for the business to transfer their funds into the financial markets especially because of US MNE (Bradshaw, 2017). Additionally, the level of taxes at the foreign level and local country may also show to be profitable. Moreover, transferring funds between the two countries may be inexpensive. Also, bilateral netting may significantly minimize or reduce various risks such as counterparty credit exposures by modifying gross payments because of change hands into various smaller net payments. It may reduce counterparty credit exposures after a termination or through the entire life of the transaction.
US multinationals decide to in other financial markets because they understand the uncertainties of foreign entity cash flows and various market fluctuations on the return of assets. Netting of payments into a single payment or a single payment system often adds security towards the company's investment. However, all the factors of transactions, political change, taxes, and exchange rates are benchmarked or compared with other sovereign entities within the currency board market ( Chan, 2016) . Denmark and Bulgaria are examples of EU members that are tied to the Euro. Also, market imperfections may be corrected through arbitrage processes and the MNCs may feel market efficiency and stability despite the diversifiable risk and systemic risk being on the brink of different financial activities. All in all, MNCs often invest in the financial market in other countries so that they can earn higher interest rates on their funds or when the exchange rates of the currencies involved are expected to favor the MNC.
Reasons why Some Financial Institutions Prefer Providing Credit in Other Countries
One of the main reasons is when the other country outside their own have a good credit rating. The European Commission, Department of Justice, Department of Treasury, and the Federal Trade Commission are some regulatory international judicial bodies tasked with approving the international multinational agreements. The bodies notify the companies about the merger approval while notifying financial institutions of the credit rating of the new organization structure. Firms often control and manage bilateral counterparty exposures mainly by using credit enhancements that reduce their chances of experiencing potential losses exposure when a default occurs or when dealing with high-risk counterparties (Bradshaw, 2017). Many developed markets such as the US and EU are made of multinationals with good credit ratings due to financial analysis and practices.
Political and environmental risks include factors that influence the stability of a host country’s social, political, and economic environment in addition to government action regarding bureaucratic procedures, capital repatriation, product usage, credit, local personnel usage, equity ownership restrictions, patent rights, legal requirements, and tax codes among other policies ( Chan, 2016) . Multinational companies acquire letters of credit so that they can explore various opportunities in export and import transactions. MNCs often control the supply chain of various goods and services into a market so that they can offer cash reserves and strengthen cash flows. Moreover, reporting and credit ratings ensure that the MNCs are solvent.
Ultimately, financial institutions offer credit in the foreign market if they are confident that they can acquire higher returns especially if the interest rates are higher in the internal market and there are stable economic, social, and political conditions so that the risks associated with default are low. Additionally, they may also offer credit in foreign markets so that they are not exposed to risky economic conditions in a particular country. The EU credit rating agency framework addresses some critical concerns of investors (Bradshaw, 2017). The US Export/Import Bank also offers similar services for MNCs that export goods and services to the EU. However, MNCs should focus on the return of assets instead of developing additional liabilities in the EU capital market.
Conclusion
The essay has evaluated whether an MNC should invest in European Union (EU). According to the current market conditions, the EU offers a promising chance to invest funds. MNCs seeking to invest in successful markers often have greater appetite and risk tolerance and will continue investing in foreign countries. Expanding abroad or acquiring a foreign company may have a favorable outcome while providing the business with a chance to enter a new phase or level of success. Nevertheless, investing in a foreign country is accompanied by various risks and it is essential for the business to evaluate the economic climate of the foreign country before making the investment decision. The business may also consider hiring a financial expert who works internationally so that the business may have a clear picture of the current economic landscape in the target market ( Chan, 2016) . The financial expert will assist the MNC to predict future growth and analyze market stability. Due to the increasingly globalized economy, investing in Europe is becoming a favorable option for most MNCs. However, MNCs must weigh the disadvantages and advantages of investing in foreign countries and domestically before making a decision.
References
Bradshaw, M. J. (2017). Foreign direct investment and economic transformation in Central and Eastern Europe. In Foreign Direct Investment and Regional Development in East Central Europe and the Former Soviet Union (pp. 41-58). Routledge.
Chan, S. (Ed.). (2016). Foreign direct investment in a changing global political economy . Springer.
Hitt, M. A., Li, D., & Xu, K. (2016). International strategy: From local to global and beyond. Journal of World Business , 51 (1), 58-73.
Hunady, J., & Orviska, M. (2014). Determinants of Foreign Direct Investment in EU Countries–Do Corporate Taxes Really Matter?. Procedia Economics and Finance , 12 , 243-250.
Wu, J., & Chen, X. (2014). Home country institutional environments and foreign expansion of emerging market firms. International Business Review , 23 (5), 862-872.
