European Union Financial Management

Executive Summary: Implications of Running a Company That Is Within Or Outside Of the European Union

The European Union has got stringent regulations and directives; both existing and other potential ones are having a huge impact on businesses and consumers from the United States. Due to the fact that the European Union provides the biggest and the most important trading partner for the United States, the EU is increasingly developing standards that must be met by the American companies if they have to remain competitive in the international marketplace. Considering the propensity of the European Union to prioritize things like protection of the environment, consumer health, privacy and safety, and also minimization of distortions of the free-market that is normally being done by the monopolies; the escalating impact of European Union regulations could be welcomed by many people (Lim, 2001).

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This essay examines some of the questions that would be answered by the head of a firm that is based in the United States, and would wish to operate within the European Union.

Questions

Question One

 Seeking to acquire A Company within the European Union or outside of it

            To begin with, I would not wish to acquire a company within the sphere of European Union. The reason is that the European Union is currently facing numerous financial crises known as the Euro Zone crises. The crisis that has been brought about by the Euro zone has created many problems in the European Union. Different governments within the organization have changed; and this has led to political stability and as a result, there is a strong probability of financial uncertainty. For instance, banks are not working in Cyprus because of political instability. According to financial experts, if a company is to be acquired, it is expected that its assets should be secured, and the company should be able to carry its operations. Within the European Union, assets that are owned by the companies and individuals are frozen. In the event that a company is not allowed to draw money from the bank, the value for acquiring the firm is defeated. At the same time, in the event that a business organization is not in a position of conducting its ordinary financial transactions as a result of the European Sovereign debt crisis, therefore the firm is not able to conduct its daily operations. Most importantly to remember is that acquiring a company within the sphere of the European Union should be avoided by any firm from the United States (Kreppel, 2005).

Question Two

Reasons that can make an MNC to invest its Funds in a Financial Market outside its own Country

There are several reasons that would make the MNC to invest money in a foreign money market. However, the main reason is that the MNC may be in a position of earning higher interest on the funds that it had invested in money market that is found in another jurisdiction or country. To add on that, the exchange rate of the currency that would be used in the trade might appreciate in value as compared to that of its own country. The other reason that would make the MNC to invest in a money market that is found in a foreign country is favorable economic conditions. The investors might be anticipating firms in a given foreign country to perform better than those ones in the investor’s own country. A case in point, softening of restrictions that were imposed on international trade especially by countries in the Eastern Europe brought favorable economic conditions in that region. The other reason that would make the MNC to invest in a foreign country’s money market is because of expectations in exchange rates. There are some investors that normally put their money in financial securities that are denominated in foreign currency that is expected to appreciate in value in the near future. However, that kind of investment always depends on the movement of the currency within the horizon of the investment (Eichengreen & Hausmann, 2010). The other reason for investing in foreign market is because of international diversification. Investors have realized that they can reap benefits by diversifying internationally their portfolio of asset. Financial experts are of the argument that if investor’s whole portfolio is not depending on the economy of one country, differences in cross-border in economic conditions would lead to the reduction of possible risks. For example, asset portfolio that is spread across different countries in Europe is less risky, as compared to the stock portfolio that represents firms in a single country that is found in Europe. Other than that, the ability to access foreign markets enables investors to spread their money across industries that are more diverse as compared to those ones that are available domestically. This argument is mostly true for those investors living in countries where different firms are concentrated in a quite small number of industries (Bondy, Matten & Moon, 2004).

Question Three

Description of the Advantages and Disadvantages of the U.S firm Acquiring a Company in the European Union

Merger and acquisition have got its advantages and disadvantages that basically depending on the new companies’ long term and short term strategies and efforts. This is because of the factors such as market environment, differences in business culture, and changes to financial power around the business captured and costs for the acquirement of the firm. The main advantage of American firms acquiring a firm in the European Union is about creating a wider market, creating a new source of raw materials, and also to tap in huge capital market. The other advantage for not acquiring a firm in the European Union is that it will protect the firm from the stringent measures put by the jurisdictions within the organization. The Brexit issue has also affected the business within the European Union considering the fact that it was the largest source of market within the organization and therefore, it is advantageous for the American firm not to acquire firms in the EU. The other advantage of a U.S based firm acquiring another company within the European Union is that it would enable the company to expand its operations internationally. By trading internationally, there is wider range of market and hence more customers (McCann & Ortega-Argilés, 2015).

The one outstanding disadvantage of acquiring an international firm especially the one in the European Union is the laws and regulations. The other disadvantage of acquisition is that it would likely lead to the replacement of key staffs of the acquired firm. Generally, acquisition is always about creating synergies between the company that is acquiring and the firm that is to be acquired. However, those synergies are not as common as one would think them to be. Therefore, there are instances when some takeovers that appear to be profitable may turn out to be something else, and for that, the purchasing or the acquiring company may end up responding to its mistakes by extracting any value that it can from the assets of the other firm.

Reasons why Some Financial Institutions would prefer to Provide Credit in Financial Markets outside their Own Country

There are many reasons that would make Financial Institutions to offer credit in financial markets that are found outside their mother country. One of the reasons is high interest rates in foreign countries. This is because there are some countries that may experience shortage of funds that can be given out as credit, which could make market interest rates to be quite high, even after putting into consideration the default risk. The other reason for providing credit to the foreign financial markets is as a result of expectations of exchange rates. Financial institutions may consider providing capital to those foreign countries whose value of currency is anticipated to appreciate against that of the mother country. It does not matter whether the credit is in terms of bonds or just a common loan, the crediting financial institution would still benefit if the currency of the foreign county appreciates against that of the creditor’s motherland country. The other reason is about international diversification. Creditors stand a great chance to benefit from the international diversification that would greatly reduce chances of bankruptcy across different borrowers, which might occur at the same time (Schularick & Taylor, 2012).

 

References

Bondy, K., Matten, D., & Moon, J. (2004). The adoption of voluntary codes of conduct in MNCs: A three‐country comparative study. Business and Society Review, 109(4), 449-477.

Eichengreen, B., & Hausmann, R. (Eds.). (2010). Other people’s money: debt denomination and financial instability in emerging market economies. University of Chicago Press.

Kreppel, A. (2005). The EU’s growing impact on American business and consumers. Nieman Watchdog. Retrieved January 22, 2018, fom http://www.niemanwatchdog.org/index.cfm?fuseaction=ask_this.view&askthisid=158

Lim, M. E. G. (2001). Determinants of, and the relation between, foreign direct investment and growth: a summary of the recent literature (No. 1-175). International Monetary Fund.

McCann, P., & Ortega-Argilés, R. (2015). Smart specialization, regional growth and applications to European Union cohesion policy. Regional Studies, 49(8), 1291-1302.

Schularick, M., & Taylor, A. M. (2012). Credit booms gone bust: monetary policy, leverage cycles, and financial crises, 1870–2008. The American Economic Review, 102(2), 1029-1061.

 

 

 

 

 

 

 

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