International Acquisition EU or not EU?

On the question of whether to expand into the European Union or not, there are a few different considerations for an American firm. While the EU has a fairly complex regulatory environment that could prove challenging, the decision as to where to expand internationally still has to be more of a market-based decision. That means looking at an ROI or net present value type of calculation, weighing the cost of entering the market against the size of the market opportunity. That calculation might show that the EU is the best choice for international expansion, or it might not.

There is a lot of information available about expanding into Europe, so at least the decision to enter the EU market or not can be made with a fairly robust set of information guiding it. Each of the 28 member nations publishes material for exporters, and there are US Commercial Service teams deployed across Europe to help American companies enter these markets (Export.gov, 2019). Furthermore, European markets are among the most mature and sophisticated in the world. For an American company seeking expansion, they will find that Europe has robust legal systems, the opportunity to employ a land and expand strategy, access to capital markets and financial institutions, along with plentiful potential partners or acquisitions in most fields. The member nations of the European Union are sufficiently sophisticated to handle any chosen market entry strategy for the American exporter (CE Intelligence, 2019).

Typically, different industries have different preferences for how they would enter the EU market. Almor (2001) notes that a contingency approach is typically required, because each situation is different, and firm responses tend to vary as a result of the particular conditions of their industry and the EU market at the time the entry is being considered.

Acquiring a company is a specific option, and if I was an American manufacturer that wanted to acquire a firm in another market, I would obviously have to consider that particular market’s potential. Acquisition is a common means of entering markets in Asia, where local knowledge requirements are high. Acquisition is less necessary in the NAFTA area, because those countries can typically be accessed without the need for an acquisition in the target country.

One of the considerations for acquisition in manufacturing specifically is the value of access to the other EU markets. Entering a market such as the UK has relatively low friction, but there are challenges and the EU’s regulatory environment is one of them. However, an American company can buy a British firm, for example, and then manufacture to the other EU countries. Or they can buy a company anywhere in the EU – the key is the access to growth from the Union’s other major nations (Girma, 2002).

Sometimes, acquisition of a company in the EU is done mainly to take advantage of shifts within the EU production system – for example taking advantage of lower cost labor markets in the south of the EU but high end technological expertise in the north. The EU is one of the most sophisticated markets, and the ability to shift production based on both high level expertise and on lower wages is one of the big advantages of working in the EU, and one that will be quite familiar to American firms as it tends to mirror the way the US labor market is structured as well (Chapman & Edmond, 2010).

One interesting study makes a good case for acquisition as a mode of market entry, especially in the UK. Foreign firms are more productive than domestic firms,...

This makes acquisition a better mode of market entry than building a greenfield subsidiary or by partnering with a local firm, because of the benefits of knowledge transfer from the American firm to the UK one. Whether this holds across all EU nations is not known, nor is the length of time that the UK will still be in the EU. Other studies suggest that this might not even hold across all UK firms, just the stronger ones (Girma, 2005).
The ease of doing business in Europe, the size of the market, and the ability to enter via acquisition in a culturally similar market like the UK or Ireland makes expansion into the EU a viable choice. If all other factors are equal, Europe’s robust financial markets, mature market structures and legal regime all make a strong case for expanding into the EU rather than outside of it.

2. There are several advantages to expanding into the EU. First, it is one of the largest markets in the world. Compared with other major markets like...…be a global brand in the 21st century. Another example might be KFC, which moved quickly to expand, knowing that people everywhere love fried chicken. There are some local competitors, but being a fast-mover was a strong competitive move for KFC, and allowed it to capture substantial market share in a lot of countries around the world.

5. Financial institutions might prefer to provide credit in financial markets outside of their country because they want to gain the benefits of diversification. In general, each country has its own interest rates, and there should not be any meaningful arbitrage opportunities because money can move relatively freely across borders. So higher rates in one country should be offset by higher inflation. That said, each market has its own unique characteristics, and a financial institution might want to invest in an external market if it feels that market is growing more rapidly. Credit is typically one of the best ways to start expanding internationally.

Many of the world’s largest banks are international in nature. Part of this is just wanting a bigger footprint, and pursuing growth wherever that growth lies. But part of it is also pragmatic in nature – in an increasingly globalized world, larger multinational companies want to work with banks that do business in the same countries that they do. So for the bank building an international presence helps it to build deeper relationships with key customers. This holds true for the world’s largest banks like HSBC and BNP Paribas, as it does for more regional players like Scotiabank, which has extended beyond its Canadian home base to countries throughout the Americas, following Canadian trade patterns.

Financial institutions also have the same risk management motivation that other companies do. Interest rates theoretically reflect financial risk, but some countries have other forms of risk, in particular in the developing world where the development pathway can be somewhat erratic. Strength in one nation can help to offset weakness in other, such that a bank can manage its risk much better

All told, international expansion allows any business to do business where its customers do business, but also to build a more diversified portfolio, tap into new growth opportunities, and manage risk more effectively. Each international market has its own advantages and disadvantages, and as such any decision to enter international markets will reflect the way that the company evaluates these pros and cons.…