Individual project concepts and implementation

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, apparently being able to get more out of UK labor pools due to some combination on policies and practices (Conyon et al, 2003). 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 China or Japan, the EU is relatively similar to the US in its legal regime and capital markets. There are definitely some cultural differences but those cultural gaps are not as great as the gaps with major Asian nations, either. As such, expanding into the EU will be much easier than expanding to one of those other markets – or any BRICS market, for that matter. The only markets that make more sense for an American firm would be Mexico and Canada, because of NAFTA and close cultural and trade ties. But all told, the EU holds a lot of advantages. Even just the prevelance of English is typically higher for EU nations than for any of the leading emerging markets (
That said, the EU is one market, but 28 different countries, and there are significant differences between them. It can still take time to understand the differences not just between Europe and the US, but the differences between the individual countries in the European Union (Lamson, 2016). This complexity can be challenging, and will necessitate that your choice of acquisition in the EU has these capabilities and this knowledge base built in.
On the economic side, the sophisitication and size of the EU holds a lot of appeal, but it is a slow-growing market. It is a fairly resilient market, but there are individual nations within the EU that are struggling to find their way economically, and there are strong countries that make for great markets. Then there are some that sit in between. Ultimately, it is important for the company to absorb a lot more knowledge with this chosen strategy because of just how large and complex the EU is.
3. Choosing a different option besides the EU carries with it a different set of advantages and disadvantages. Major emerging markets such as Brazil, China, India, or other parts of Southeast Asia hold an appeal for their high growth potential. Markets that are populous, but have sufficient infrastructure that a new entrant can reach the people with its products, hold substantial potential for growth and that is something that is not to be found in most of the EU. That said, this upside comes with significant risk.
There are other advantages as well. For example, many large emerging markets have favorable cost structures or legal regimes that encourage investment. The EU encourages investment as well, but has a stricter legal environment, in part to protect its member nations, citizens and environment. This is not always the case in other foreign markets, even the largest and most attractive ones. In addition, many of the largest foreign markets are also ones that have developed strong ties with the United States over the years. This may not be an advantage versus the EU, but it is definitely something to consider that might sway one country over another, for example, when choosing between emerging economies.
There are several disadvantages worth considering. Whereas many major EU markets use English as a primary language of business, and have cultures that are familiar in many ways to our own, this is not the case everywhere in the world. A study of English language proficiency shows mainly EU nations among the most proficient, and leading markets like China, India, Russia and Brazil well back (EF.com, 2019). The linguistic and cultural barriers make doing business in these countries riskier than doing business in the EU.
There are also concerns with political, economic and legal stability in many high-growth nations. For an American company, the legal regimes of BRICS or other large emerging market nations can be very different, and not favor US interests at all. Moreover, those nations are not as stable politically or economically – the high volatility is great when the economy is growing rapidly, but when the economy is not growing as rapidly it can present a challenge to any company that is seeking a stable source of income from its foreign investments. If the company only wants growth, then this is not a disadavantage, but for many American firms high volatility would be a disadvantage.
There is another consideration, in that if the US company needs to send some managers to the new acquisition, this will be easier in Europe, because of the high standard of living. While one can certainly live well in an emerging market city, the reality is that it is more challenging to find people who can thrive in those environments, versus finding someone who can thrive in a place like Sweden or the Netherlands.
4. There are a few different reasons why an MNC might want to invest funds in a foreign market. One is that the foreign market can provide a source of growth that is greater than the opportunity in the domestic market. Some markets grow faster, and companies do like to maximize their returns, and that can spur such investment.
There are other reasons as well, such as the desire to reduce risk. For example, in some cases a company is buying goods from a certain country and faces foreign exchange rate risk. Buying into a company in that country can help to offset that risk, by providing a source of cash flow in the other country to match with the cash outflows. This type of operating hedge reduces exchange rate risk for a company, in some cases significantly (Pantzalis, Simkins & Laux, 2001). A good example of this is when Wal-Mart started opening stores in China, which gave it better ability to pay Chinese suppliers.
In addition to growth and risk management, another reason why an MNC might invest capital in markets outside of its own country could be simply to win market share, build international networks and brand prestige. These moves are usually transactional in nature, and can be measured in ROI, but sometimes companies like to play the long game. There are instances where companies were aggressive in their international expansion early on, but they developed the skills needed to thrive in global markets, and effectively cut out a lot of the competition that might have otherwise arisen. A couple of good examples of this would be Guinness Stout, which was an early exporter, a move that however profitable it was at the time allowed the company to 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.
References
CE Intelligence. (2019) EU – market entry strategies. CE Intelligence.com. Retrieved December 5, 2019 from http://www.ceintelligence.com/content_manager/contentPages/view/eu-market-entry-strategies
Chapman, K. & Edmond, H. (2010) Mergers/acquisitions and restructuring in the EU chemical industry: Patterns and implications. Regional Studies. Vol. 34 (8) 753-767
Conyon, M., Girma, S., Thompson, S. & Wright, P. (2003) The productivity and wage effects of foreign acquisitions in the United Kingdom. The Journal of Industrial Economics. Vol. 50 (1) 85-102.
EF.com (2019) English proficiency index. EF.com. Retrieved December 5, 2019 from https://www.ef.com/wwen/epi/
Export.gov (2019) European Union – market entry strategy. Export.gov. Retrieved December 5, 2019 from https://www.export.gov/article?id=European-union-Market-Entry-Strategy
Girma, S. (2002) The process of European integration and the determinants of entry by non-EU multinationals in UK manufacturing. DOI:10.1111/1467-9957.00305
Girma, S. (2005) Technology transfer from acquisition FDI and the absorptive capacity of domestic firms: An empirical investigation. Open Economies Review. Vol. 16 (2) 175-187.
Lamson, M. (2016) 5 things you need to know before doing business in Europe. Inc. Magazine. Retrieved December 5, 2019 from https://www.inc.com/melissa-lamson/5-things-you-need-to-know-before-doing-business-in-europe.html
Pantzalis, C., Simkins, B. & Laux, P. (2001) Operational hedges and the foreign exchange exposure of US multinational corporations. Journal of International Business Studies. Vol. 32 (4) 793-812.