Operating a Multinational Company

Posted: August 27th, 2021

Operating a Multinational Company

Name

Institutional Affiliation

Operating a Multinational Company

The most popular way for international expansion is for a local firm to acquire foreign companies. One of the most benefits of international development is global distribution capability that expands the market share. There are different implications of running a company that is within or outside of the European Union. As the head of a firm based in the United States and interested in operating or running a company within the European Union, several issues should be addressed as discussed in the following questions.

Would You Seek to Acquire a Company Within the European Union or Outside of It? Why?

My immediate decision as the head of the firm will be to avoid acquiring a company in the European Union. Acquiring a company within the European Union will be a hard decision due to various reasons. First, the European Union is currently at the heart of several financial crises (the Eurozone crisis). The majority of governments within the European Union have changed their policies creating economic uncertainty and political instabilities. Therefore, this implies acquiring a company will be bureaucratic and as well, costly (Greer, Fahy, Palm, & Rosenblum, 2019, p. 177). Equally, most firms are struggling, especially after the closure of banks in Cyprus, thus hindering attaining potential growth objectives. More so, the systemic fragmentation limits the acquired firms to reach their possible scale. Besides, investors within this market will be required to cope with fragmented rules, marketing, and sales regulations (“Expanding into the European Union with an existing company,” n.d.). Significantly, the EU market lacks standardized loan providers within the respective nations. As well, the risk providers are regulated by their country (Greer, Fahy, Palm, & Rosenblum, 2019, p. 211). Thus, this increases the potential of credit risks for acquired companies.

Likewise, all its assets and resources must be secured and protected under fair laws for a company to be successfully acquired. The company operations must remain free and fair, safeguarded by the government. However, both personal and corporate assets are frozen in the European Union due to strict government regulations. For example, if an acquired company is not allowed to borrow money from specific banks, its acquisition value will be lost. Equally, the EU is being faced with a sovereign debt crisis (“Expanding into the European Union with an existing company,” n.d.). Hence, it will be difficult to operate efficiently due to challenges affecting standard financial transactions. Therefore, I will neither seek nor recommend to acquire a business within the European Union. My preferred market to acquire a company will be the Asian market, such as a Chinese Company which will enjoy a steadily growing gross domestic product, strong current, and a robust financial system.

Describe the Advantages and Disadvantages of the Choice You Made.

Doing business in China is different since it is a regional economic power. China has a substantial industrial base, adequate energy sources, cheap labor, and natural resources. It has a fast-growing and stable domestic market and economic growth. The reasons for choosing China are its healthy consumer confidence index, tax incentives, and low inflation rates (“Expanding into the European Union with an existing company,” n.d.). Thus, the Chinese economy is extensive, with excellent infrastructure and internal growth, which offers potential stability for the acquired company to attain its potential.

Similarly, China has one of the largest populations and a fast-growing middle class, which means a vast consumer market. The size and diversity of the consumer market will be an advantage to acquire a company in China (Madura, 2014, p.179). Besides, by developing businesses in China, companies can easily reach other countries in the region and can benefit from strategic trade agreements. Free movement of goods and services, non-tariff restrictions, and customs duties. Therefore, there is a standardized trade policy and external tariffs among Asian country member states like transport policies, customs procedures, fiscal capital, and financial services. 

On the contrary, the disadvantages of acquiring a company in China include an unstable political environment, massive bureaucracy, and the rapidly changing business environment.Equally, the legal system in China is complicated and slow (Madura, 2014, p.183). Although China is one of the world’s major investment destinations and officially a well-functioning business environment, bribery and corruption remain significant obstacles. Acquiring a company will be hindered by corrupt individuals and government personnel since the political system’s federal structure means that many regulators can influence government officials. Further, China is interpreted as a harbinger of vigorous growth. Thus, this means that some sectors of the economy are still underdeveloped. The consumer base, the regulatory environment, and the investment landscape are not as fully developed (Madura, 2014, p.208). On a different note, due to China’s diversified economy, many acquired companies in the country choose to do so in partnership with local firms. In this way, therefore, the transition is less disruptive for consumers, giving a company an immediate insight into the local economy.

Explain Why an MNC May Invest Funds in A Financial Market Outside Its Own Country

An MNC invests in the financial market in foreign nations, possibly because it is likely that investment currency can deteriorate in value in the future. As such, a multinational company can get a higher interest rate on the funds invested in the financial market outside its home country (Madura, 2014, p.339). Such companiesleverage their economic potential to raise capital in an efficient and cost-effective approach. Therefore, MNC can invest in financial markets to take advantage of the best investment opportunities that might evolve in the future. The majority of multinational companies tend to see more profitable, growth, sustainability, and safer opportunities in overseas markets than in their home countries. 

Likewise, there could be a possibility of a high-interest rate in this country. An increase in the related currency exchange rate is expected to be higher in a foreign market than a local one. Therefore, some multinational companies choose investment countries whose local currencies are most likely to appreciate(“Expanding into the European Union with an existing company,” n.d.). Thus, high returns are an essential factor for multinational companies.

Similarly, the country of origin may be experiencing a financial crisis or slow economic recovery. Therefore, an unattractive local economy may induce multinational companies to invest overseas. If the country’s economic factors are frustrating, multinational companies can choose to invest in financial markets outside the country. Suppose the national stock market is uncertain, or the national currency is at risk of weakening, or the home country suffers from a huge budget deficit. Therefore, the only safest place to invest and assured potential return is in the foreign financial markets. 

Subsequently, equity capital is another motive for MNC to invest funds in foreign countries. Preference shares retained earnings, and common bonds are components of equity capital (Campbell, 2011, p. 203). For MNC, it is essential to analyze their capital flows and mitigate the risks associated with exchange rate fluctuations. Otherwise, the issuance of new shares may cause the stock price to fall because investors no longer believe that its stock is worth its pre-issue price (Campbell, 2011, p. 309). Therefore, an MNC invests stocks on the global financial market to ease its loan burdens in their homeland nation. 

Explain Why Some Financial Institutions Prefer to Provide Credit in Financial Markets Outside Their Own Country.

Financial institutions’ prominent role is to ensure financial liquidity and permit a higher level of economic activities. Therefore, some financial institutions prefer loans in financial markets to foreign nations since they want to diversify their loans instead of depending on a particular country’s economic conditions. Similarly, these financial institutions can earn more in foreign financial markets when the interest rate is high compared to their homeland country (Campbell, 2011, p. 124). Thus, financial institutions are unlikely to face a nation’s credit deficit when their economic conditions are right.

Financial institutions also prefer to borrow in financial markets outside their home country because they generate higher returns than their home country. Competition between financial institutions and other government regulations may lower interest rates in a foreign country or international financial markets (Campbell, 2011, p. 143). The investment rate is influenced mainly by financial institutions since they facilitate how people invest and save in an economy. When financial institutions want higher interest rates, they provide loans through international offices in countries with higher interest rates. Such loans granted bring higher interest rates to financial institutions; hence this tends to improve the firm’s profitability (Campbell, 2011, p. 411). Financial institutions are always looking for markets with insufficient supply to extend their market share. It is challenging to operate within an extensive market such as the United States, where the Federal Reserve is always providing a high level of liquidity, thereby reducing the interest rate at which the United States of America banks can borrow. Therefore, a financial market’s globalization allows financial institutions to provide credit in countries with high-interest rates and high currency insurance.

References

Campbell, D. (2011). Mergers and acquisitions in Europe: Selected issues and jurisdictions. Kluwer Law International B.V.

Expanding into the European Union with an existing company. (n.d.). Retrieved from https://www.nibusinessinfo.co.uk/content/expanding-european-union-existing-company

Greer, S. L., Fahy, N., Palm, W., & Rosenblum, S. (2019). Everything you always wanted to know about European Union health policies but were afraid to ask. Health Policy.

Madura, J. (2014). International financial management. Cengage Learning.