Internationalisation of Business and Promising Areas of Investment - Term Paper Example

International Business Table of Contents International Business 1 Table of Contents 1 Introduction 3 European countries: Assessment of the economies 4 United Kingdom 4 Germany 4 Netherlands 5 France 5 Switzerland 6 Prospective sectors to invest in 7 United Kingdom 7 Germany 7 Netherlands 8 France 9 Switzerland 9 Entry Mode 10 Rules and Regulations 13 Conclusion 15 Reference 17 Bibliography 19 Introduction As companies are reaching at their matured stage, it becomes inevitable for them to expand the business in different horizons. Now, in this arena of globalisation, it has become customary to expand a business into overseas market. As countries has become more inter connected, the movement of services, capital, labour and technology have taken a free flow around the globe. Correlation and co-ordination have ensured the efficiency in the phase of scarce resources. Companies are now looking for better opportunities worldwide to expand their businesses through better utilisation of the resources, spread worldwide. While preparing a project on the internationalisation of business, one cannot avoid the term ‘globalisation’. This report starts with an introduction to this term from the perspective of building up growth opportunities for the organisations worldwide. As the company wants to expand its business to the European countries, it is quite important to know about the countries which are prospective enough to let the foreign investments flow in. This report contains a description of the five major economies in Europe. The reasons, supporting the potential of these countries to emerge as prospective economies for business investments, have been articulated for each of the countries. The business potentials and opportunities of different countries may lie in different areas and products. So it is important to have an idea which products in which countries would reap the highest return for the investors. The prospective areas, industries, products and services have been described for each of the countries. Different countries can have different government rules and regulations in place for foreign investments; some of which can hinder in the way of foreign investments. Sometimes there can be hindrance to enter into some particular industries. This can even define the entry mode; the investor should take to enter in the respective market. This report contains suggestion for the preferred entry mode for each of the prospective markets. At later part the report articulates the European regulations and the national laws which can help or oppose the entrance in the respective countries. In all, the report puts forward suggestions for the prospective countries, the prospective products and services in those countries, the preferable entry modes and the related rules and regulations prevailing in those prospective business markets. European countries: Assessment of the economies United Kingdom In this arena of globalisation, not every economy has got the same level of opportunities. It is very much important for an investor to look for the best economy for business opportunities. Although United Kingdom economy has a negative real GDP growth rate of 4.30 %, still according to an economist UK economy is the best shaped out economy in Europe (BBC, 2009). As per a famous economist the policies of UK economy are wisely developed. As per him, the government policies have been quite supportive to stabilise its banking system; hence speed up the recovery of its economy. The fall in the sterling value has helped UK to emerge as a much hunted business horizon for foreign companies. The labour cost in UK is quite lesser than that in most of the countries in Europe (Spiegel Online, 2008). Germany Germany labour cost rank seventh highest as per a report released by Germany’s Federal Statistical office (Spiegel Online, 2008). However the labour cost comparison among the European countries showed that there had been an increase of only 1 percent in the labour cost in Germany. That was in the year of 2007 (Spiegel Online, 2008). Although the labour cost in Germany has been more than those in Denmark and Sweden; but if the wages are measured as in per hour worked, it has been quite apparent that Germany has ranked significantly lower than these two countries. Although the labour cost is quite high in this country, but still it has been quite competitive as the labour cost in other countries are supposed to grow at a more increased pace (Spiegel Online, 2008). Netherlands The country has known as a transportation hub in the European countries. The country has been one of the top three European countries in attracting direct investment from the foreign countries. The Netherland’s economy has been quite open to the foreign investors and mostly dependent on the same. In response to the recent economic downturn, the company has introduced new infrastructure programs and has offered tax splits for the corporate to retain the employees. It can be a significant influential factor for the foreign companies, which would like to expand their business in Netherland. The unemployment in this country is rising; which can be a beneficial factor for a foreign company who would like to have skilled labour for their business set ups. France France is one of those few countries in European Union communities which have withered the recent recession in a better way than many other big names in the respective region. That must be a reason that this country ranks second in foreign direct investment inflow after United States (Central Intelligence Agency, 2010). The economy of France now has been transformed from mostly government intervention to an economy which mostly relies on market mechanism. The government has intended and implemented the privatisation of many large organisations. The government has passed a stimulus plan to introduce tax splits for the small enterprises and encourage investments in infrastructure. This would surely encourage the small budding enterprises to survive the economic downturn. France has also created a strategic investment fund of $25 billion to protect the companies (Central Intelligence Agency, 2010). The unemployment rate in France has grown to 10 % in the year of 2009 from a value of 7.4 % in 2008 (Central Intelligence Agency, 2010). Switzerland Switzerland is one of those European countries, which have been noticed as prosperous modern economies. The country has a lower level of unemployment with a higher level of skilled labours. In recent times Switzerland has brought their economic practices in large conformity with that in European Union and hence it has enhanced its competitiveness in the global market. The recent economic downturn has put this country in a trembled situation. However, the Swiss National Bank has successfully implemented the zero interest rate policy to stimulate the economy and avoid the appreciation of their currency, franc (Central Intelligence Agency, 2010). It is very much expected that the country will recover from its recession state and would be able to attain a modest GDP growth in 2010, following the implementation of third fiscal stimulus program. The government is also going to take enhancement techniques to improve the transparency between the banks in Switzerland as well as align the taxation with the foreign tax authorities. So in near future Switzerland is expected to emerge as a developed business market with more transparency in its systems; hence attracting more foreign direct investments. All the above details are very much appreciable for an investor, who would like to expand his or her business in this prospective country. Prospective sectors to invest in United Kingdom Recently in UK the most preferable sector has been agriculture, while compared to other sectors. Similar to Netherlands, the sector in this country has been quite merchandised with less than 2 % of the labour force, still meets up 60% of the total food requirements. UK had been a host of large reserve of coal, oil and natural gas resources. However the reserves have been declining since last few years; from the year 2005, UK has become the importer of the same. The largest contribution to the UK GDP has come from the services industry, specifically from the banking, insurance and other business services. However these sectors are on declining spree. Although government is carrying out a number of stimulus programs, still it seems that as of the time being, it is better to invest in the agricultural sector. Germany German economy has been one of the leading exporters of vehicles, machinery, chemicals and household equipment. The economy of Germany is mostly export oriented. Although, Germany is also known for its automobile industry, but now, as the sector has been hit by the recession quite heavily, it would be quite a risky affair to invest in that area. So it is better to invest in one of the sectors like machinery, chemicals and household equipments. Apart from these, foodstuffs and textiles are other two divisions, this country exports to other countries. This country ranked third in the export of these products with an export amount of $1.187 trillion in the year of 2009 (Central Intelligence Agency, 2010). Netherlands Netherlands is mostly well known for its stable industrial relations. The country has shown most of its activities in food processing, petroleum refining, electrical machineries and chemical industry (Central Intelligence Agency, 2010). The agricultural sector is mostly merchandized; and hence the economies of scale have been quite high for this sector. At the same time the sector requires a much lesser labour cost than the other sectors in this country. The comments above has been validated by the fact that despite of employing only 2 % of the total labour force in that country, the sector provides enough surpluses for the food processing industry as well as for exports to other countries. The country has been the host of 7th largest banking sector (Central Intelligence Agency, 2010). However recent recession has put this sector in the financial turmoil. So it does not seem as a preferable sector in this trembled situation. The company can invest in any of the sectors mentioned above as those sectors are strong enough to consume foreign investment and at the same time reap a good return for the investors. The agricultural sectors seem to be very good as the sector employs lesser cost with higher economies of scale; so the return is supposed to be high for this sector. France France has been one of those countries which are seemed to be quite unaffected by the recent financial downturn. Some of the strong sectors in France are power, defence and public transport industry. Another significant sector in France is tourism industry. The country is the most visited country around the globe with an inflow of 75 million foreign tourists every year. France ranked third around the globe to have the third largest amount of income from the tourists. So tourism seems to be an attractive industry to invest in as this is supposed to result in higher income for the investors. Apart from this, the science and technology seems to be quite promising. The president has recently proposed a $ 52 billion plan for strategic investment in science and technology sectors (Central Intelligence Agency, 2010). So in near future the sector is expected to show a well developed investment opportunity for the foreign investors. Switzerland The economy of Switzerland is mostly benefited from its well developed service sector. The significant industries in this sector are financial services, manufacturing industry specialising in high technology knowledge based production. Their agricultural sector is quite small with a contribution of 1.5 % to the real GDP (Central Intelligence Agency, 2010). So it will not be very much preferable to invest into this sector. Apart from this as Switzerland is also a model place for tourism industry; investing in this sector may reap good returns for the investors. However it may come with a bit of risk as the travel and tourism business, most of the times are seasonal. Financial services have been quite good in Switzerland and the prospects are quite high for this industry as Government has taken certain measures to make the sector more transparent and acceptable. However recent economic downturn has hit this sector very badly around the globe; and this country is not an exception to that (Central Intelligence Agency, 2010). So keeping the impact of recession in mind, it would be better to avoid this sector. Manufacturing sector, specifically with high knowledge based production, seems to be the most attractive ones to expand the business. Entry Mode The company, which would like to enter into the foreign market, can do that in different modes. The company can set up its business on the foreign ground starting from the very beginning or else it can go for consolidation processes. Mergers and acquisitions as growth strategies are quite famous among the market players (Graziado School of Business and Management, 2009). Setting up a new business altogether is quite an expensive way to go with, but still some companies may like to take this path to expand its business to the foreign countries. Mostly companies take this path in countries where there are strict laws hindering the mergers and acquisitions to take place. Setting up a new venture in an unknown place means that the company would not know much about the culture, business customs, taxation, rules and regulations of the foreign country. At the same time they would not have any existing customer base, which would mean that the company would have to start from the very beginning, where the people are unaware about their products or services. A large chunk of money would go to advertise and market their products or services. More over being new in the country it would be very difficult for the company to recruit the right calibre for their business operations. Deciding on their pay structures, paying taxes, aligning the business as per the rules and laws of the country, all these may sound quite troublesome for a company which would like to have its business on the foreign stage. In some places a company can go into merger with the foreign company. In merger, two companies come together and form a new company altogether. Most of the times in this case, the control is evenly distributed among the companies entering into merger. In this case there can be possibility for managerial conflicts to arise within the merged organisation. So some times big names do not want to go for merger as they would like to have the full control of the organisation. Mergers mostly happen within two big companies. When in a sector both the companies are big enough with good financial state and no single company has the resources to buy the second one; most of the times they prefer to consolidate themselves under one name. Most of the times, acquisition is the best way to move on in foreign countries. This is quite similar, even in case of expanding business in European countries. Acquisition can have different variations like the home company can acquire only a percentage of the company or it may acquire the whole of the company. Acquiring a company would give it the full control over the business entity. As the acquirer would have full control over the management, the managerial conflicts would be in a much lesser amount than in merger. However companies go for hostile take over; in such a situation management would have to face the rage of the employees of the target company. Hostile takeovers are very much unusual in international expansion of business. In this case the company may look at acquisition as a first option to enter into European countries. After deciding on the country and the products or services the company would like to invest, it becomes very much significant to choose one company to acquire. It is better if the company is well known in its respective industry; although may not be the industry leader. Proper valuation of the target company is quite significant from both the parties. The acquirer must decide on a specific company looking at the valuation, financial statements and reputation of the respective one. In this case the acquirer would have certain advantages. The acquirer can use the local brand reputation of the company and then build up their own brand upon the same. In that case the local people would be more accustomed to the products or services they would be providing. The acquirer needs not to build the customer base from its scratch; rather it would have a wide customer base to market their initial products. The acquirer can retain the local employees of the target company as these employees would be more knowledgeable about the business customs and operations of the company; so the acquirer does not need to hunt for the right calibre. Having local employees on board would help the acquirer company to know about the culture and customs of the respective country, which is very essential for a company which would expand its business in the foreign countries. Although acquisition seems to be an attractive proposition to enter into European countries, however there can be certain hindrance in some of the regions which can compel a foreign company to go for mergers in the home country. France is one of those countries, where mergers are more preferable rather than acquisitions. It offered a $ 25 billion in strategic investment fund to prevent the native companies from getting acquired by the foreign companies. In such a case merger may be a better option rather than acquisition. Rules and Regulations Rules and regulations regarding foreign investment, taxation and business are quite significant information for an industrial investor who would like to expand his or her business across the borders. Among the European countries many countries are there which prevent participation of foreign industrial investors in some of its sectors. Netherlands restricts foreign investments in public utility sectors (United States Government Accountability Office, 2008).These sectors does not allow foreign investors in these sectors as these sectors are quite significant for their security purpose. Electricity, airlines, water, railways and other transportations are among those restricted sectors. However the country does not restrict investment typically for the government owned investors. Some high profile transactions have raised alarm regarding foreign investments within a certain fraction of people. The country does not have any intention to change its foreign investment laws as of now (United States Government Accountability Office, 2008). The foreign investment transactions take place under prudent supervision. If any transaction seems to be threatening for the security of Netherlands, the Central Bank or the finance ministry has the authority to block any of those transactions (United States Government Accountability Office, 2008). A foreign company must approach the Central bank to receive a ‘declaration of no objection’, whenever the company would acquire at least 10 % of ownership in any Dutch company. As per the financial supervision act the authority to review and give the approval for all the mergers and the acquisitions lies with Central Bank of Netherlands. (United States Government Accountability Office, 2008). UK does not have any such framework to control and monitor foreign investment, designed for the security reasons. Still, as per various laws the government possesses the authority to restrict any trade transaction which is seemed to be against the interest of UK. The country is subject to the European Union law. The European Union merger regulation, which is in place from the year 1990, has framed up the policy on foreign investment (United States Government Accountability Office, 2008). As per the Industry act of 1975 has given the British government the authority to intervene in the acquisition of major manufacturing units which are supposed to put an adverse effect on the national interest. Another act named as Enterprise act of 2002 provides the government the authority to intervene into any transaction and block the same if the merger or acquisition is seemed to be against the public interest. The British government has restricted foreign investment in specific companies which are important for national security of UK (United States Government Accountability Office, 2008). Germany and France, both the countries have their foreign investment laws which are aligned with their national interests and intervene into any transactions which are against the same. Foreign investment in German is regulated by German foreign trade and payments act, amended in the year 2004. This amendment has tightened the control over the foreign investment in defence related organisations. As per this law any transaction which would led to more than 25 % ownership in defence related enterprises would be subjected to special supervision and review (United States Government Accountability Office, 2008). Many countries specify this review time period; France is one of them. In case of this country the review must complete within 2 months. As per a law 2004-1343, France has specified 11 sectors, investment within which need to have earlier consent of the French government (United States Government Accountability Office, 2008). According to a senior official in French government is not opposed to foreign investment and it is reviewing its regulations related to this area (United States Government Accountability Office, 2008). Conclusion It becomes very much obvious for a company to use merger and acquisition as growth strategies in foreign countries. The five European countries, chosen here, are among the top eleven countries in attracting foreign investment (Central Intelligence Agency, 2010). So it is quite apparent that these countries posses a number of opportunities for the foreign investors. Each of the countries has various industries. However the equation might have changed in this recession and the strong industries may not look as attractive as they were before. Right now each of the economies has reported negative GDP growth, although they are supposed to revive in near future. In UK and Netherlands the agricultural sector seems to be quite attractive to invest in. Investment in this particular sector is not strictly regulated by the laws in those countries. In UK the company can invest in any of the agricultural products including potatoes, cereals, vegetables and oilseeds. Apart from these the company can invest in cattle, poultry, fish and sheep. In Netherlands the agricultural products mostly include potatoes, grains, fruits and sugar beets. France restricts and strictly regulates power, defence and public utility industries to have foreign investments. These are the stronger sectors in France. As these sectors are quite regulated the company can invest into the tourism sectors. The sector is the third largest in income, worldwide. So investing in this sector would make the native company to face less regulation and at the same time would result in a profitable investment for the company. Germany also offers a wide range of profitable products and sectors. House hold equipments, chemicals, textiles are some of them. The company can invest in any of them as long as transactions are not adverse to the national interest. Switzerland is known for its high technology oriented manufacturing sector; so it is better to invest in this strong and stable sector. Zeroing down on one country and on one product or service would need an in-depth analysis of all the countries as well as of all the sectors. As the countries have just crossed a recession, it is quite apparent that some equations have been changed in this period and some are yet to change. Some sectors have been quite good at pre recession time, but are not so good right now. Still these sectors can be promising in future. While whichever sectors have seemed to be quite attractive these days, may fed as the time passes. Many countries are in talk to change their regulations. I near future where some countries would slack their foreign investment policies, some courtiers would tighten it more. Entering into a foreign country in a particular sector would need a continual assessment of the economy, the future prospective of the respective sector, the laws and regulations of the country as well as for the specific sector. Reference BBC. June 14, 2009. UK's economy the best in Europe. [Online]. Available at: http://news.bbc.co.uk/2/hi/8099408.stm [Accessed on March 08, 2010]. Central Intelligence Agency. 2010. Netherlands. [Online]. Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/nl.html [Accessed on March 08, 2010]. Central Intelligence Agency. 2010. Switzerland. [Online]. 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