Globalization has dominated international business discourse for more than a decade. Its impact on modern businesses is highlighted by the opportunities and threats it poses to companies, economies, and governments. Indeed, it is difficult to find a country today that has not been influenced by globalization. Based on the impact that this new way of doing business has on corporate strategies, multinational organizations have been leading other companies in exploiting the opportunities associated with global trade. Selecting the best market entry strategy is one area of operation that has influenced their global business strategies because MNCs have to examine how different market entry options augur with their organizations’ missions, goals, and visions (Gür, 2015).
This paper evaluates the options available for a US multinational company to venture into the international marketplace. Emphasis is made to understand the company’s market entry strategies in the European Union (EU). Lastly, in this report, evidence will be provided to explain why a financial company may choose to provide credit outside its original country or invest in global financial markets. The aim of undertaking this research is to understand the implications of globalization for the financial sector. Here, there is a keen focus on evaluating the current challenges of internationalization with the goal of exploiting new market opportunities.
Acquire a company within the EU or out of it
The acquisition strategy is the most popular way for companies to expand their global operations (Gür, 2015). This strategy is adopted by many organizations because it offers new entrants an existing operational infrastructure that they can simply tap into (McCormick, 2014). Acquiring a company within the EU is be the best option for an American company willing to do business in the EU because this strategy grants access to the wider European market. This plan is informed by several factors, including changes in the market environment, variations in business culture, and legal implications of market entry. Based on the peculiarities of these factors in global finance, the advantages and disadvantages of acquiring a company within the EU are as follows.
Advantages
One of the advantages of acquiring a company within the EU is that it is a faster means of venturing into the European market. An acquisition strategy involves buying an already established company. Therefore, there is no need for going through the process of setting up a new entity to access the European market. This provision makes this market entry strategy faster than other internationalization strategies. At the same time, acquiring a company within the EU is advantageous to the American company because it is cheaper than setting up a new company in the EU. Indeed, the owners of an already existing company within the EU do not have to pay for costs (such as legal and license fees) associated with setting up a new company (McCormick, 2014).
Lastly, acquiring a company within the EU is a less risky option compared to other forms of market entry strategies available to the US firm because EU companies already enjoy the benefits of operating within the European economic bloc. Similarly, they benefit from the goodwill of other European companies in exploiting trade relations within the continent. For example, they enjoy the benefit of free movement of goods and services within EU boarders and are protected by the union’s trade laws (McCormick, 2014). Therefore, this option is a less risky one for the US firm to pursue, relative to the option of setting up a new company in the EU.
Disadvantages
One disadvantage of acquiring an EU-based company to gain entry into Europe is the possible promotion of EU common interests at the expense of the company’s interests (Gür, 2015). This issue is evident in the work of McCormick (2014), which shows that most companies operating in the EU are bound by EU laws and policies, which are aimed at forging the interests of the union and not of the companies that are part of it. There is also likely to be a cultural barrier between the Americans and the Europeans if an acquisition of an EU company is completed (Šarčević, 2015). This clash may affect the operational synergy of the US company because its corporate vision may be American, but the implementation process will be done from a European perspective.
Advantages and Disadvantages of the Option not Chosen
The other option available for market entry is acquiring a company outside the European Union. The same considerations (legal, financial, environmental, and cultural issues) informed the decision not to pursue this move. The advantages and disadvantages of this option are highlighted below.
Advantages
One advantage of acquiring a company out of the EU is that there may be little or no need for retraining workers. The acquiring entity may maintain its operations as they are and possibly only change a few of its aspects without interfering with the fundamental structure of its operations (Gür, 2015). Another advantage of the same strategy is flexibility in the organization’s operations because EU trade laws would not bind it; instead, the company can pursue its interests with little interference from the EU authorities.
Disadvantages
One of the biggest disadvantages of acquiring a company that is outside of the EU is the loss of the world’s largest single market – European Union. In other words, the company will have to renegotiate the entry of its products and services within and outside of the European Union – a move that could have been simplified by acquiring an EU company (Šarčević, 2015).
Why a Multinational Company May Invest Funds in a Financial Market outside its Own Country
Globalization offers a great opportunity for companies to expand their markets and increase their profitability (Editorial Board, 2016). This reason explains why there has been a trend by some multinational firms to invest their funds in financial markets outside their original countries. The possibility of improved risk management also provides an impetus for MNCs to invest their funds in financial markets outside their countries because global markets offer stable returns, relative to what they may get by confining their operations to local markets (Claessens & Van Horen, 2014). This strategy is supported by the modern portfolio theory, which encourages investors to diversify their risks beyond one portfolio (Francis & Kim, 2013). In the context of this analysis, a portfolio could be understood to mean a country’s financial market. The global market offers another portfolio for investment, and (by extension) an opportunity for enhanced risk management. For example, an African-based conglomerate may choose to invest its funds in Asian, European, or American markets to avoid political risks in their host nations. This strategy offers them a new line of defense in case an adverse event occurs in its original country. Therefore, MNCs could invest in overseas financial markets to reduce their exposure to operational risks.
Companies could also invest their funds in overseas markets to improve their financial infrastructures. Financial institutions that want to increase their stakeholder value often pursue this strategy (Editorial Board, 2016). They do so to benefit their investors because such a move promotes greater accountability, transparency, efficiency and competitiveness in their operations. From an investor’s perspective, such a strategy gives credence to the organization’s operations.
Why Some Financial Institutions Choose to Provide Credit outside their Countries
Some financial institutions may choose to provide credit to companies, institutions or governments outside their countries for varied reasons. First, they may do so to exploit high interest rates of lending to international firms (Editorial Board, 2016). This benefit may be enjoyed by such MNCs because they may be operating in an environment bound by constraining legal frameworks. For example, their host governments may impose a low lending rate that makes it difficult for them to be profitable. Therefore, depending on the legal framework they are operating in, they may choose to lend money to overseas clients to improve their profitability.
Financial institutions may also choose to lend money to people outside of their host countries as a way of increasing their local and international profiles. Being able to lend money to other parties outside their host countries increases their reputation in the market because people may start to see them as credible and reputable institutions. The positive brand reputation may not only improve their local ratings but also shore up their international interests because it is a marketing platform on its own, as international borrowers could attest to doing business with them.
Some financial institutions may also choose to provide credit outside their original countries as a source of investment and market expansion, especially if their primary business is lending (Editorial Board, 2016). For example, banks may find it profitable to do so because lending money is their primary business. Promoting such operations outside their host markets may mean expanding their empires beyond their primary borders. By extension, this strategy implies that they could create more market opportunities for trade. The sheer magnitude of the global market also means that it may provide a limitless credit market for financial institutions. Therefore, it is plausible to find some financial institutions focused on providing credit outside their countries.
Conclusion
Venturing into the global financial market creates many challenges and opportunities for financial institutions. This report shows that companies may choose to invest in financial markets outside their host nations, as well as provide credit to entities outside their home countries to shore up their global image, improve their risk management profiles, and to enhance their operations. Based on these considerations, the US company needs to adopt market entry strategies that exploit some of these advantages. This reason explains why it is essential to acquire a company within the EU. Indeed, doing so is the faster, efficient, and cheaper way of reaping the benefits of international trade.
References
Claessens, S., & Van Horen, N. (2014). The impact of the global financial crisis on banking globalization. Washington, DC: International Monetary Fund.
Editorial Board. (2016). Global financial management (1st ed.). Schaumburg, IL: Words of Wisdom LLC.
Francis, J., & Kim, D. (2013). Modern portfolio theory: Foundations, analysis, and new developments. London, UK: John Wiley & Sons.
Gür, N. (2015). The G20 and the governance of global finance. New York, NY: SETA.
McCormick, J. (2014). Understanding the European Union: A concise introduction. London, UK: Macmillan International Higher Education.
Šarčević, S. (Ed.). (2015). Language and culture in EU law: Multidisciplinary perspectives. London, UK: Ashgate Publishing, Ltd.