How a firm can make an entry into EU economic zone - Essay Example

Introduction European Economic Area (EEA) is an economic zone comprising of the members of EU, Norway, Iceland and Liechtenstein. It was established in 1994 in order to facilitate trade between different member countries and to outline a uniform framework for member countries to actually trade with each other without any significant barriers to entry. In order to make a successful entry into any new market, it is important that the international firms must take into consideration particular factors related to that economic zone. Each zone has its own unique characteristics in terms of its demographics, culture, economics, legal framework, political environment as well as other issues which can directly have an impact on the organization and the way it is going to operate in that region. EU shares a larger cultural heritage which is relatively similar across all countries with most of the countries speaking either German or French with English being dominating language in UK only. The cultural similarity coupled with integrated economic zone has actually made it easier for international firms to actually make an entry into this region. However, due to uniqueness of the culture, economic integration, geo-demographics as well as legal and social factors, new businesses can easily tap into the great potential offered by EU economic zone comprised of many countries of the region. This paper will look into how a firm can make an entry into EU economic zone and how different external factors may have an impact on the business prospects of the company in that region. Demographics EU Economic zone is a highly diverse culture with over 500 million population comprising of 27 member countries. The overall diversity of the population and rich culture therefore provide easy mobility of manpower and labor force across the region. There are stronger patterns of migration in the region due to free mobility and as such labor force is moving towards countries with relatively better economic prospects. There are particularly two types of migration patterns i.e. people are moving from former industrialized countries such as Germany and UK to other sunbelt countries such as Spain whereas labor force from poor countries in the region is moving towards relatively rich countries.( Tremlett, 2006). These trends may suggest that there may be skill shortages in different countries and reliance on the external sources for labor. It has been argued that there are three important trends in the demographics which will dominate the future of demographics in EU region. First there is an ageing population in the region which means that the firms entering into this region may not be able to find adequate and able manpower to take active part in manufacturing concerns specially.( Kotkin. 2012) Secondly, life expectancy is on the rise therefore any firm looking into enter into services sector and cater to the needs of ageing market. Any business looking to make an entry into this market may therefore be able to achieve relatively higher level of growth as compared to firms which may be looking to enter into any other sector. Further, there is an increasing flow of immigrants which can actually destabilized the overall ratio of available manpower and may create clusters within the clusters to get an access to the skilled and able labor force within the region. Political Factors Current economic situation in the region is causing political rift among the members too as it has now been widely anticipated that EU core members may either leave or force other smaller members to leave the union. Increasing economic burden on the countries like UK and Germany to actually pay off for the sovereign debt of countries like Ireland, Greece, Spain and Italy making it difficult for these countries to actually normalize political pressure in their own home countries.( Laughland, 2012) On a global level, EU therefore is drifting towards destabilization as a one political unit and break-up or changes in the rules of doing business in the region therefore could result into serious business repercussions for new firms making an entry into the firm. It is therefore critically important that firm must make an entry into that country of the economic zone which sustain itself without the actual help from EU or other member countries.( Vigna. 2012) It has also been argued that the rise of the rest may render EU as non-viable economic unit because economic power is shifting towards countries like China and Brazil. Such shift in the economic power of other countries may therefore render overall political effectiveness of EU as low as member countries may look for other avenues for their economic survival. Economic Situation The overall economic situation in EU zone is relatively difficult as many countries in the bloc are facing sovereign debt crisis. Countries like Italy, Spain, Portugal and Greece are facing serious consequences of having higher levels of public debt. Due to integrated nature of the economy, other members of the economic bloc are affected too and are making their contributions towards creation of sustainable support fund for these economies. There is also austerity movement going on across different countries where governments are cutting back on welfare and other expenses. This factor can result into serious reduction in the purchasing power of the consumers and resultantly there will be a decline in the overall consumer demand. This factor therefore may not prove one of the encouraging factors for the firm to actually make an entry into the market where overall consumer demand may not be healthy in the foreseeable future as it is shrinking.( BBC News, 2012) Market Entry Mode In order to make a successful entry into a market which is relatively more volatile now and is going through political and economic crisis, it is important a more secure mode of entry must be made in this market. Considering the given situation, it is important that the firm must start with the exporting of its products and services in EU market. Exporting is a relatively low risk option in current scenario and will offer opportunity to the firm to further gain knowledge about the market and become accustomed to doing business in the region. Exporting has limited financial costs and risks as it is only contained to the value of the exports made. It is also critical to note that by adapting exporting as a market entry method, a firm can enter into a foreign market gradually. Rather than investing heavily through Greenfield projects, it is more advisable to actually start with the market entry through exporting. Once market is established and essential knowledge about the market is obtained, it can than actually enter into the market by making larger investment and penetrating into the market on its own.( Duane , 2008) Conclusion Europe is a culturally diverse country however, due to its integrated nature; its economy is integrated too. This nature of the economy offers it relative advantage over others as member countries can actually trade with each other with barriers to entry and higher levels of tariffs. It is however, important to understand that during recent times, EU’s economic zone is going through difficult political as well as economic situation. Difficult economic situation as well as vulnerability of governments to various economic shocks actually can make any company more vulnerable to external economic shocks if making an entry into this market. In order to make an entry into a market where population is ageing and there is an established pattern of migration, a global firm must adapt exporting as an initial method of making entry into this economic block. Through exporting, not only risk will be minimized but the firm will be able to gain sufficient knowledge of the market to make a full-fledged entry on the later stage. References 1. BBC News, 2012 - Eurozone economy shrinks by 0.2%. [ONLINE] Available at:http://www.bbc.co.uk/news/business-19252724. [Accessed 18 October 2012]. 2. Duane , I 2008. Understanding Business Strategy: Concepts and Cases. 1st ed. New York: Cengage Learning. 3. Kotkin. J, 2012. Whats Really Behind Europes Decline? Its The Birth Rates, Stupid. [ONLINE] Available at: http://www.forbes.com/sites/joelkotkin/2012/05/30/whats-really-behind-europes-decline-its-the-birth-rates-stupid/. [Accessed 17 October 12]. 4. Laughland, O, 2012 The conversation: Can Europe survive the current crisis? [ONLINE] Available at:http://www.guardian.co.uk/commentisfree/2012/may/11/greece-germany-eurozone-crisis-perspectives. [Accessed 18 October 2012]. 5. Tremlett, G 2006. Spain attracts record levels of immigrants seeking jobs and sun. [ONLINE] Available at:http://www.guardian.co.uk/world/2006/jul/26/spain.gilestremlett. [Accessed 17 October 12]. 6. Vigna. P 2012. Europe’s Byzantine Politics and the Spanish Bailout. [ONLINE] Available at:http://blogs.wsj.com/marketbeat/2012/10/17/europes-byzantine-politics-and-the-spanish-bailout/. [Accessed 17 October 12]. Read More