EU Market Entry Strategies for American Manufacturers

EU Market Entry: Strategic Overview

On the question of whether to expand into the European Union, there are several important considerations for an American firm. While the EU has a fairly complex regulatory environment that could prove challenging, the decision about where to expand internationally still has to be primarily a market-based decision. That means applying an ROI or net present value 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 great deal of information available about expanding into Europe, so the decision to enter the EU market can at least be made with a robust set of data. 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, Europe offers robust legal systems, the opportunity to pursue a land-and-expand strategy, access to capital markets and financial institutions, and plentiful potential partners or acquisition targets in most industries. The member nations of the European Union are sufficiently sophisticated to accommodate virtually any market entry strategy an American exporter might choose (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 generally required, because each situation is different, and firm responses tend to vary as a result of the particular conditions of their industry and the state of the EU market at the time entry is being considered.

Acquiring a company is one specific option. An American manufacturer that wanted to acquire a firm in another market 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 to purchase an existing company in the target country.

One key consideration for acquisition in manufacturing specifically is the value of gaining access to other EU markets. Entering a market such as the UK involves relatively low friction, but challenges remain — the EU's regulatory environment is one of them. However, an American company can acquire a British firm, for example, and then manufacture for sale to other EU countries. Alternatively, it can buy a company anywhere in the EU; the key is the access to growth that the Union's other major nations provide (Girma, 2002).

Sometimes, acquisition of an EU company is pursued mainly to take advantage of shifts within the EU production system — for example, leveraging lower-cost labor markets in southern Europe while benefiting from high-end technological expertise in the north. The EU is one of the most sophisticated markets in the world, and the ability to shift production based on both specialized expertise and lower wages is one of its major advantages. This structure will be quite familiar to American firms, as it mirrors the way the US labor market is organized (Chapman & Edmond, 2010).

One notable study makes a strong case for acquisition as a mode of market entry, especially in the UK. Foreign firms are found to be more productive than domestic firms, apparently because they are able to extract more value from UK labor pools through their own policies and practices (Conyon et al., 2003). This makes acquisition a more attractive entry mode than building a greenfield subsidiary or partnering with a local firm, owing to the benefits of knowledge transfer from the American firm to the acquired UK company. Whether this finding holds across all EU nations is uncertain, and so is the length of time the UK will remain in the EU. Other studies suggest that productivity gains from acquisition may not hold uniformly across all UK firms — only the stronger ones tend to benefit fully (Girma, 2005).

The relative ease of doing business in Europe, the size of the market, and the ability to enter via acquisition in a culturally familiar market like the UK or Ireland all make expansion into the EU a viable choice. If all other factors are equal, Europe's robust financial markets, mature market structures, and stable legal regime collectively make a strong case for expanding into the EU rather than into other international markets.

Advantages of Expanding into the EU

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 such as China or Japan, the EU is relatively similar to the US in its legal regime and capital markets. There are cultural differences, but those gaps are not as pronounced as they are with major Asian economies. As such, expanding into the EU will generally be much easier than expanding into those other markets — or any BRICS market, for that matter. The only markets that might make more intuitive sense for an American firm are Mexico and Canada, given NAFTA and close cultural and trade ties. Overall, the EU holds many advantages, including significantly higher English-language proficiency rates than most leading emerging markets.

That said, the EU is one market comprising 28 different countries, and there are meaningful differences among them. It can take considerable time to understand not only the differences between Europe and the US, but also the distinctions among individual EU member states (Lamson, 2016). This complexity can be challenging and will require that any chosen acquisition in the EU brings the right capabilities and regional knowledge base.

On the economic side, the sophistication and scale of the EU hold considerable appeal, but it is a slow-growing market overall. It is fairly resilient, yet individual nations within the EU range from those that are economically struggling to those that represent very strong markets. Ultimately, a company pursuing this strategy must absorb a substantial amount of knowledge about the EU given its size and internal complexity.

Why Multinationals Invest Abroad

There are several reasons why a multinational corporation might want to invest funds in a foreign market. One is that the foreign market can offer a rate of growth that exceeds the opportunity in the domestic market. Some markets grow faster than others, and companies naturally seek to maximize returns, which can drive such investment decisions.

There are other motivations as well, including the desire to reduce risk. In some cases, a company purchases goods from a certain country and faces foreign exchange rate risk. Buying into a company in that country can help offset this risk by providing a source of cash flow in the foreign currency that matches the cash outflows. This type of operating hedge can significantly reduce exchange rate exposure (Pantzalis, Simkins & Laux, 2001). A clear example is when Walmart began opening stores in China, which gave it greater capacity to pay Chinese suppliers in local currency.

Beyond growth and risk management, another reason an MNC might invest capital in foreign markets is to win market share, build international networks, and enhance brand prestige. These moves are usually transactional in nature and can be evaluated in ROI terms, but sometimes companies take a longer view. Some companies were aggressive in their early international expansion and, as a result, developed the skills needed to thrive in global markets while effectively preempting competition that might otherwise have emerged. Two illustrative examples are Guinness Stout, which was an early exporter — a move that, whatever its immediate profitability, established it as a global brand in the 21st century — and KFC, which expanded rapidly, recognizing that its product had broad international appeal. Despite some local competition, KFC's first-mover strategy allowed it to capture substantial market share across many countries.

Conclusion

All told, international expansion allows any business to operate where its customers operate, while also building a more diversified portfolio, tapping into new growth opportunities, and managing risk more effectively. Each international market has its own advantages and disadvantages, and any decision to enter a foreign market will ultimately reflect how the company evaluates these trade-offs in light of its own strategic goals and capabilities.

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, 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, 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, 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, 32(4), 793–812.