Question

The most popular way for international expansion is for a local firm to acquire foreign companies. One of the most benefits for international expansion is global distribution capability that helps expanding the market share. There are different implications of running a company that is within or outside of the European Union. If you were the head of a firm based in the United States, please answer the following questions, providing the rationale behind your answers: Would you seek to acquire a company within the European Union or outside of it? Why? Describe the advantages and disadvantages of the choice you made. Describe the advantages and disadvantages inherent in the option you did not choose. Explain why an MNC may invest funds in a financial market outside its own country. Explain why some financial institutions prefer to provide credit in financial markets outside their own country.

Answer 1

Requirement 1

I will not seek to obtain a company within the European Union. The European Union is in the middle of a austere financial catastrophe called the Euro zone crisis. This has formed numerous difficulties in the European Union. The governments have altered leading to political unpredictability and there is a strong outlook of financial indecision. For example, in Cyprus banks are not operative. If a company is to be attained, its assets must be protected and it must be able to carry on its processes. In EU, assets of companies and individuals are stationary. For example if a company is not permitted to draw cash from the bank the value of obtaining the company gets crushed. Likewise, if the business is not able to carry out usual financial transactions because of the European Sovereign debt crisis, then the company cannot carry on its operations. It is prudent to evade obtaining a company in the European Union.
There are other countries where such problems do not exist. For example, a company may be acquired in Brazil where there is strong currency, a 4.1 % GDP growth rate, and a sound financial system.

Requirement 2

The advantages of obtaining a company in Brazil are that it is a regional economic power. It has natural resources, minerals, energy, and a broad industrial base. It has steady financial growth and a strong rising local market. Brazil has been nominated because it has low inflation, tax exemptions, and strong customer assurance. The economy is large, there is internal growth, and outstanding infrastructure.
The cons of the alternative that I have recommended are that there is a unstable political environment, the business situations change fast, and there is a substantial bureaucracy. The other cons are that the legal system is slow and difficult. The general level of education is not high and a small part of the population has higher education.

Requirement 3

An MNC may finance funds in a financial market oversized its own country to profit itself of a better investment prospect. The MNC may identify opportunities that are more profitable or more safe in a foreign market outside its own country. The second reason is that there may be financial crisis or slow economic recovery in the home country. So an unappealing economy at home may inspire the MNC to invest abroad. In addition if there are intimidating economic factors in its own country the MNC may decide to invest in a financial market outside its country. If the stock market at home is uncertain, if the currency of the home country is likely to weaken, or the home country runs up a huge budgetary deficit, the MNC may decide to invest in financial market abroad. Several MNCs select countries for investment where the local currency is likely to appreciate. Higher returns are an important factor that attracts MNC to invest in financial markets outside the home country.

Requirement 4

Financial institutions favor to deliver credit in financial markets outside their own country since they get higher rates of returns than in their own country. Competition from other financial institutions and government regulations may dampen the interest rates in the financial markets in their countries. For example, the very low discount rates by the Federal Reserve in the United States dampen the interest rates including the long term interest rates in United States. If the financial institutions want to earn a higher interest rate they lend through their international branches in countries where the interest rates are higher. This lending (giving credit) brings a higher rate of interest to the financial institution. The profitability of the institution increases. From a different perspective if the supply of funds in the home market is very high. For example, the Fed in the US ensures that the level of liquidity among banks is high and this pushes down the rates of interest at which banks can lend in the United States. The financial institutions seek markets where the supply of funds is low. Globalization of financial markets makes it possible for financial institutions to provide credit in such countries where the interest rate is high and the security of funds is also high.