Question

1. Present a Detailed Report on Global Financial Management and Evaluating Performance.

 

 

Answer 1

1. Reasons behind the acquisition of a company within the European Union

The report recommends the acquisition of companies within the European Union as most of the European economies are highly developed. Thus, it will be easier to create new revenue streams as the economies are expected to see strong growth and a high-income customer base can be found in these advanced economies.

Europe has a very qualified talent base due to high-quality education and a focus on skill-based training. Also, EEA (European Economic Area) allows free movement of capital, people, goods, and services. European clusters are usually full of resources, potential employees, and other sources of support. European expansion will allow the company to get an edge over competitors.

The products and services that have saturated in the USA will get new lease of life in Europe. Europe provides ease of business as there is a common currency, Euro as used by many European countries. This unified currency helps in price stabilization leading to increased economic security (Globalization Partners, 2020).

2. Advantages and disadvantages of the acquisition of a company within the European Union

1. Advantages of European Expansion
   1. New revenue streams: The company can gain new customers and create new revenue streams. Strong ties can be developed with a new client base through this expansion. The European economies are also expected to see growth in the coming years.
   2. Access to top European talent: Europe has a very talented based due to high-quality education. Also, Europe attracts students and professionals from around the world in search of better education and job opportunities. Thus, moving into Europe will imply hiring the best and brightest of people across the EU. The company can bring some employees from the home country and hire talented employees from the home country to get the right mix of employees. Also, the structure of the European Economic Area (EEA) makes it easier for companies to find talent across the EU. EEA allows free movement of capital, people, goods, and services. There are certain areas of Europe which are hotspots for certain industries. The clusters are usually full of resources, potential employees, and other sources of support (Europe Immigration Service, n.d.).
   3. Products and services get a new lease of life: The trends and preferences vary across different regions. Some trends that might have might become outdated or passe in the US have the potential to become a rage in Europe. The products and services of the company’s brand can be introduced to people in the new country.
   4. Competitive edge: European expansion will allow the company to get an edge over competitors. The US companies in any industry or market which enter the European market in the early stage have a higher chance of gaining a foothold before market saturation.
   5. Cost-Saving: Moving some production or manufacturing facilities can be a cost-cutting move as certain products cost less in the EU as compared to in the US. The costs can be saved on shipping and transportation. Also, taxes may be saved by acquiring a company in the EU.
   6. Ease of Business: There is a common currency, Euro as used by many European countries. This unified currency offers many benefits to companies hoping to expand to Europe. It helps in the price stabilization leading to increased economic security. There is no need for constant currency conversions and fluctuations. The company can easily trade and sell its products across most of the Eurozone (Decker, 2011).

1. Challenges of the European Expansion
   1. Communication barriers: Even though English is one of the official languages of the EU, there can be communication breakdowns when a business moves into the European market. These communication breakdowns can lead to American businesses offending European counterparts. Thus, it is important that businesses have an understanding of the culture of the host country and specific norms and cultural preferences of the country to minimize communication issues. For instance, there is a difference between work hours and days in Europe and America (Your Europe, n.d.).
   2. Compliance issues and concerns: Acquisition of a company in a new country means following the rules of that country such as business licenses, tax implications, and other issues. The establishment of the company in the EU can be long and complex. A global professional employer organization (PEO) may be required to hire employees in countries throughout the EU. Taxes such as value-added tax (VAT) should be considered. Some countries, such as the Netherlands, keep taxes relatively low to attract more businesses.
   3. Time zone issues: Depending on the location of the acquired business, US offices can be 4 to 10 hours behind their European counterparts. These time zone differences can be challenging as it can be difficult to connect with Europe without a considerable amount of advanced planning. Working across time zones is require more organization. Also, when employees are several time zones away, it can lead to reduced interaction and engagement.
   4. Demand for goods and services: Before expansion into Europe, it is important to consider if there is demand for goods and services offered by the company in Europe. This is because the consumers may not accept goods and services offered by the US company which can lead to loss.

1. Advantages and Disadvantages inherent in the option you did not choose.
   1. Advantages of not choosing to expand in the European Union
      1. Complex and Cumbersome process: Even though there is a common set of rules which applies to European Companies, there may be different rules for some aspects. These rules will determine which authorities need to liaise with or what arrangements the businesses have to follow.
      2. Brexit and the EU: After Brexit, the EU will no longer include a very important economy of Britain. This means that the company cannot automatically enter Britain by entering the EU. A different set of rules and regulations need to be followed.
      3. Language barriers: There can be communication breakdowns when a business moves into the European market. English is the official language but locals prefer to use their national language. For instance, locals in Sweden prefer to communicate in the Swedish language. These communication breakdowns can also lead to American businesses offending European counterparts.
      4. Time zone issues: Depending on the location of the acquired business, US offices can be 4 to 10 hours behind their European counterparts. These time zone differences can be challenging as it can be difficult to connect with Europe without a considerable amount of advanced planning.
2. Disadvantages of not choosing to expand in Europe
   1. World’s largest single market: European Union is an economic zone consisting of 27 economies. It generates a GDP of about 17 trillion EURO (nominal) which makes it the largest economy in the world. The member states include some of the world’s wealthiest countries. The company can also get access to a huge source of suppliers. A single EURO currency is more cost-effective and less risky. The businesses will have to deal with one set of rules leading to reduced bureaucracy, paperwork and expenditure. There is free movement of labor, capital, goods and services.
   2. Loss of new revenue streams: The company can gain new customers and create new revenue streams in the European economies. Also, these countries are expected to see high growth in the coming years.
   3. Loss of access to top European talent: Moving into Europe will imply hiring the best and brightest of people across the EU. There are certain areas of Europe that are hotspots for certain industries. The clusters are usually full of resources, potential employees, and other sources of support.
   4. Products and services get a new lease of life: Some trends that might have might become outdated or passe in the US have the potential to become a rage in Europe. The products and services of the company’s brand can be introduced to people in the new country.
   5. Competitive edge: European expansion will allow the company to get an edge over competitors (Finance, n.d.).

1. Reasons for MNC investing funds in the foreign financial market
   1. Economic conditions: The investors invest in firms located in a foreign country as they expect to achieve more favorable performance than performance in the home country of investors. For example, as restrictions are loosened in Eastern European countries, it has created favorable economic conditions in the country. Foreign investors and creditors are attracted by such economic conditions.
   2. Exchange rate expectations: Investors usually invest or purchase financial securities denominated in a currency that is expected to appreciate against the domestic currency. The investment performance will depend on the movement of currency over the investment horizon. These changes in currency exchange rates and currency controls play an important role in the size of investment returns. For instance, how the exchange rate between the U.S. dollar and the currency of the international investment changes determines investment returns. If the Indian company invests in the USA, the appreciation of the US dollar will lead to an increase in investment returns. However, foreign currency controls may be imposed by countries that restrict or delay investors from moving currency out of a country.
   3. International diversification: The companies can reap financial benefits from international diversification of their asset portfolio. The risk can be reduced as the entire portfolio is not dependent only on a single country’s economy. The cross-border differences in economic conditions will lead to risk reduction. Thus, investors can spread their funds across a more diverse group of industries. The companies get the opportunity to invest in companies or sectors that may not be available in their home country.
   4. Growth: The international investing allows companies to grow their assets and experience growth through investment in foreign economies, particularly in emerging markets.

1. Financial institutions prefer to provide credit in foreign financial markets because of:
   1. High foreign interest rates: There can be a shortage of loanable funds in some countries. This leads to a rise in market interest rates, even after considering default risk. Foreign creditors can capitalize on these higher interest rates by providing capital to overseas markets. However, there is a caution that high-interest rates reflect relatively high inflationary expectations. Inflation can cause depreciation of the local currency which can offset higher interest rates. There are several other factors that influence currency movements. That is why creditors believe that the interest rate advantage will not be offset by the depreciation of the local currency.
   2. Exchange rate expectations: The creditors can increase the value of their money by lending/supplying capital to countries whose currencies are expected to appreciate against the domestic currency. The creditor benefits when the currency of the denomination appreciates against the home currency as they get returns in form of interest and capital appreciation.
   3. International diversification: As the creditor's supply funds in different countries, there is a reduced probability of simultaneous bankruptcy across borrowers. However, the effectiveness of this strategy will depend on the correlation between the economic conditions of countries. If the countries to which funds have been lent have similar business cycles, diversification across countries will be less effective (SW Learning, n.d.)