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Acquisition of Foreign Companies

When a firm achieves significant success within its local market, it is rational for this business to consider additional growth opportunities. International expansion is a suitable option, and acquiring a foreign company can help succeed here. The leading driving force of this process is that entering the overseas market provides a firm with an increased distribution capability that, in turn, contributes to a higher market share of the business. Once an America-based firm decides to acquire a foreign company, it is necessary to choose a specific market to enter. Various factors explain why multinational corporations invest funds in international markets, and some financial institutions prefer to provide credit to the markets outside of their own country. This paper will describe the advantages and disadvantages of acquiring a company within the European Union and outside of it and suppose which option is more suitable for a firm based in the United States.

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If I were the head of an America-based firm, I would seek to acquire a company outside of the European Union, and various factors explain this choice. The given paper considers the Asia-Pacific region the best area to purchase a company outside of the EU. It is so because merger and acquisition activity in this area generated US$658.8 billion from 3675 deals in 2016, which is more than 40% higher than in 2013 (Faff, Prasadh, & Shams, 2019, p. 267). That is why this fast-growing market deserves specific attention to define its pros and cons.

Advantages and Disadvantages of Acquiring a Company outside of the European Union

On the one hand, it is rational to consider the possible benefits of making this choice. Firstly, while global growth remains moderate, a gross domestic product (GDP) growth of 5.6% in Asia-Pacific markets has “demonstrated a higher level of economic buoyancy” (Faff et al., 2019, p. 268). That is why this region is a growth engine of the world economy. Secondly, Asia-Pacific has a well-developed financial infrastructure that also implies sizeable foreign exchange reserves (Faff et al., 2019). Consequently, there will be no significant challenges for an American firm to acquire a company within this market. Thirdly, Faff et al. (2019) admit that additional advantages include “solid sovereign debt profiles, robust banking sectors, and ameliorated external trade positions” (p. 268).

On the other hand, even though the information above addresses a few significant advantages of the Asia-Pacific region, one cannot state that this market is free from adverse phenomena. The first of them refers to asynchronous monetary policies and exchange rate divergence (Faff et al., 2019). As a result, it is not possible to state that the whole region will be beneficial for acquiring a firm. China, Japan, and Indonesia are the most promising choices here. In addition to that, essential drawbacks refer to “relatively low market efficiency, high stock market volatility, less transparency, and poor regulation frameworks” (Faff et al., 2019, p. 268). This information stipulates that if an American company enters this market, it should be ready to overcome the challenges above.

However, the possible disadvantages that have already been described cannot cancel the fact that Asia-Pacific is the fastest-growing region in the world economy. Irrespective of various problems, market inefficiencies, and cultural barriers, this region remains an attractive option for an American firm to increase its global market share. When such a company manages to enter this market and operate within it successfully, it will be more likely to generate significant benefits. Consequently, there is no doubt that this market is a more suitable option for an America-based business to expand internationally.

Pros and Cons of Operating within the European Union

Even though the information above has explained that the Asia-Pacific region is more suitable, it is rational to compare and contrast these findings to the peculiarities of entering the EU market. It is necessary to ensure that the choice above is justified. To begin with, one should mention the main advantages of the given market. Firstly, the EU mostly includes developed nations, meaning that a target country will offer sufficient resources to perform the acquisition and benefit from it. Secondly, the United States and Europe have similar cultures, and that is why it will not be necessary to change behavioral patterns significantly to run a company within the EU. Thirdly, the US and the EU are partners, denoting a positive stigma that is likely to emerge if an American firm acquires a European company. While the phenomena above are of general nature, the following information will provide more specific ideas.

As has already been mentioned, it is necessary to consider additional advantages of acquiring a firm within the EU. The first positive feature refers to the fact that the EU has merger and acquisition regulations, including Regulation no 139/2004 on the control of concentrations between undertakings (Dicu, Toma, Aevoae, & Mardiros, 2019). These documents are essential because they contribute to the market development, implying such significant phenomena as balanced trade, fair competition, removing of existing obstacles, and others (Dicu et al., 2019). That is why if a US-based company decides to acquire a European company, it can be sure that its activity will not be oppressed or limited by the host country’s activities or regulations.

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In addition to that, the study by Dreger, Schüler-Zhou, and Schüler (2017) provides a comprehensive review of why the EU is attractive for multinational corporations. Even though the article is written from a Chinese perspective, this fact does not diminish research of the European benefits. Thus, scientists stipulate that the EU offers business-friendly conditions that make it rational to operate within its market. Furthermore, essential advantages include the significant market size and “the high level of technology achieved in many EU states” (Dreger et al., 2017, p. 4231). That is why essential benefits are likely to be generated. Furthermore, the EU consists of nations with various income levels, and this distribution allows an acquirer to find the most suitable conditions for a particular case.

At the same time, it is reasonable to consider the disadvantage of acquiring a company within the EU. In general, one can say that these adverse features are side effects of the advantages described above. For example, since most EU countries are developed economies, they have relatively high labor costs (Dreger et al., 2017). Consequently, if a firm enters the European market, it should be ready to bear a higher financial burden compared to that of working within developing economies. Then, even though it has been addressed that the market contributes to establishing fair competition, there are still many rivals in every economic or industrial sphere. That is why it is often challenging to win competition under such conditions.

It is not a surprise that the option under consideration implies both advantages and disadvantages. However, one should emphasize that its adverse features outweigh positive ones significantly. Consequently, entering the European market is not preferable for an American company, because this region does not provide an acquirer with a significant advantage that would outweigh all the drawbacks. That is why the Asia-Pacific region, with its fast growth rate, is an attractive option to consider.

Reasons for Investing Funds in Foreign Markets

When it comes to a multinational corporation, it is a typical case when it invests funds in a financial market that is outside its own country. Many believe that it is a standard state of affairs, and corporations cannot avoid acting in this manner. However, investing funds in a foreign market is a challenging task. A corporation should consider a few issues to decide whether it is rational to deal with this process. That is why the following information will explain what phenomena can influence the final decision. One should mention at once that all of them refer to the fact that a foreign market offers different and more beneficial conditions.

Firstly, a significant attractive feature relates to the fact that asset prices can be relatively low in a foreign market (Dreger et al., 2017). This fact usually depends on the income level of a target country. In other words, the lower the income level, the smaller the asset prices are. This fact is useful for a multinational corporation because it means that foreign investment is cheaper for this business. For example, if such a corporation plans to increase its market share, investing in an overseas market can be more cost-effective for it.

Secondly, some countries attract multinational corporations because the former offer not very restrictive investment policies (Dreger et al., 2017). As a result, a business decides to invest in such a state because this action will not result in many barriers. Some countries even managed to use this fact as the leading driving force of their economic growth. It refers to Singapore, Ireland, the Netherlands, and others, where governments welcome and encourage foreign businesses. As a result, investing in an international market can be a useful choice to run a business smoothly and freely.

Last but not least, multinational corporations invest their funds outside their own countries to obtain long-term returns. That is why various businesses consider “investments in Greece, Italy, and Portugal” (Dreger et al., 2017, p. 4239). One can explain this strategy by the fact that various countries imply different conditions, advantages, and disadvantages. Consequently, if a corporation can suffer losses in its own country, the foreign market that has obtained an investment of that corporation can generate significant benefits. Furthermore, Park (2017) admits that investing in an overseas market creates new job positions. As a result, the corporation usually obtains a cheaper labor force. That is why these examples prove that dealing with financial markets that are outside host countries can provide multinational corporations with essential benefits.

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Reasons to Provide Credit in Foreign Financial Markets

The modern tendency for globalization has penetrated numerous spheres of life, and the financial sector is not an exception. Advanced technology makes it possible for a company to cooperate almost with any firm from any country in the world. That is why it is not a surprise that some financial institutions tend to provide credit in financial markets that are outside their own countries. This process leads to essential consequences that influence the world economy. Even though it is a typical case in the modern world, it is still reasonable to consider what makes these institutions deal with foreign markets, and the information below will address it.

Firstly, financial institutions provide credit in foreign markets to obtain higher profits (Ghosh, 2016). As has already been described, various markets imply different conditions, and some companies can significantly benefit from the situation that is in a foreign state. In addition to that, if an institution offers a foreign credit, it usually has some close partners in the host nation, meaning that the institution is familiar with the state of the local economy. In addition to that, the business should make sure that its borrower has the potential to return the money. Consequently, a financial company should ensure that the host market is stable and reliable, which would inevitably result in appropriate returns.

Secondly, obtaining direct profit is not the only positive feature. Ghosh (2016) admits that when investors deal with foreign markets, they increase the international diversification of their borrowers. This phenomenon is always of significance because the world economy is subject to instability and various fluctuations. It means that a financial institution has multiple sources of profit and contributes to the fact that its borrowers will not bankrupt simultaneously. For example, when the borrowers from the same country with the financial institution witness stagnation, foreign ones can prosper, which will provide the business with stable income.

Thirdly, in some countries, government activity leads to the fact that foreign financial institutions tend to provide credit. According to Ghosh (2016), it relates to the fact that some nations “have increased the accessibility of expanding services for foreign banks” (p. 184). As a result, those markets that had been closed opened for foreign banks in the aftermath of various events, including a crisis, political reforms, and others. This information denotes that financial institutions can provide credit to markets with weaker political and economic pressure. Thus, the phenomena above show that various factors explain the fact of why credits are given to foreign markets.

Conclusion

Running a firm in the 21st century is a challenging task. Even though modern technology contributes to excellent business opportunities, it also leads to severe issues, and one of them is to achieve international expansion. That is why the given paper has considered this opportunity for an America-based firm and concluded that the Asia-Pacific region is the most suitable area to acquire a firm. This market implies both advantages and disadvantages, but the most significant feature is that it is the fastest-growing region in the world. The benefits of this market are supported by the fact that acquiring a firm in the European Union will not imply such a robust positive feature. Furthermore, multinational corporations invest their funds in foreign markets, while various financial institutions provide these markets with credits. That is why the paper has explained that globalization tendency leads to the phenomena above. In addition to that, a few other essential factors contribute to the state of affairs above.

References

Dicu, R. M., Toma, C., Aevoae, G. M., & Mardiros, D. N. (2019). The influence of deal value’s determinants in mergers and acquisitions with community dimension: Some empirical evidence from the European Union. Transformations in Business & Economics, 18(2A), 510-530.

Dreger, C., Schüler-Zhou, Y., & Schüler, M. (2017). Determinants of Chinese direct investments in the European Union. Applied Economics, 49(42), 4231-4240.

Faff, R., Prasadh, S., & Shams, S. (2019). Merger and acquisition research in the Asia-Pacific region: A review of evidence and future directions. Research in International Business and Finance, 50, 267-278.

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Ghosh, A. (2016). How do foreign banks affect private credit flows? A global and emerging markets perspective. Emerging Markets Finance and Trade, 54(1), 181-202.

Park, J.-I. (2017). Who benefits more from manufacturing foreign direct investment? Examining its earnings distribution effects across earnings quantiles. Economic Development Quarterly, 31(4), 285-298.

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