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Global expansion is one of the strategies used to boost an organization's competitiveness. Most businesses multiply internationally by acquiring local firms in the countries where they are expanding. The parent corporation would profit from the acquisition of a business in a country with a robust economy. The corporation would also benefit from a rise in market share, which would increase competitiveness. Running a business in a separate company can also aid in the process of diversification (Sorour 2013, p.65). The European Union is made up of 28 countries, and these countries offer a single market that benefits foreign direct investment. The countries that fall under the EU focus on economic and political issues that face them. The decision by the Bright Food, a Chinese Corporation to set its operations in the European Union will come along with both benefits and challenges. This paper highlights on the expansion of Bright Food to the EU through internalization as well as challenges and advantages that it will experience in the process.
Rationale for investing in the EU
The EU provides an attractive platform through which Bright Food will enhance its financial performance and productivity. One of the factors that make the European Union a suitable base for the business is the availability of a ready market for the produce. There are various countries that are members of this union and this implies that by investing in the EU, it is easier for a company to get the attention of a large consumer base (Gutek, Barbara and Theresa, Welsh 2000, pp.89-90). A large market for the Bright Food products will contribute to an enhancement in its sales and this will in return contribute to an increase in its net profits.
The attractiveness of the EU to the Bright Food business is also caused by the strong economy that the countries falling under it enjoy. This provides a suitable market in which the company can benefit in terms of an increase in its returns both in the long-term and in the short-term (Groh and Wich 2012, pp.67-78). The countries in the European Union have in the past two decades witnessed an increase in the Foreign Direct Investments and this has contributed to sustainability in Europe. This implies that Bright Food will benefit immensely from the economic growth in enhancing its sales.
Finally, the free trade and reduced tariffs enjoyed in the EU also makes it attractive for the operation of the Bright Food. This makes it easy for the company to makes sales to countries that are members of the union without having to be slapped with high tariffs. With the free trade, the company will easily cut down on its costs of production leading to an increase in its net returns (Zadakbar, Khan and Imtiaz 2014, pp.173-175). In terms of aggressive competition in the market, the company will be forced to come up with strategies that will be instrumental in improving its production base.
Advantages of investing in the EU
One of the main advantages that come along the move by the firm to start operating in the EU is the free movement that is a part of the union’s regulations. This implies that the Bright Food Corporation will find it easy to trade in various regions in those countries that fall under the umbrella of EU without having to be slapped with high tariffs or charges. With the firm’s products being sold to a large consumer base, there will be an increase in its revenue generation thus enhanced profitability levels (Lukyanenko, Krasnikova and Podvysotskiy 2010, pp.34-45).
The move by the company to invest in the EU implies that it will benefit from the single market that is available. Availability of a market for company’s produce will play a key role in the growth of the productivity of the firm (Fung 2013, p.16). The EU also boasts of its strong economy, and this will be instrumental to the increased company’s sustainability. As a part of the strong EU economy, the company will also enjoy a high consumer confidence in the region (Zarifah and Nabiha 2012, pp.44-46). Companies such as Diageo PLC and P&G Inc. have in the past enjoyed success as a result of their operations in the EU. With a high consumer confidence, the company’s sales will significantly increase.
Unification of the monetary system in the EU makes it a better business hub for foreign direct investment (Liu, 2013 p.34). All the members of the EU have a similar currency, the Euro, and this makes investments into the European Union to avoid risks of foreign exchange rates as well as the availability of a labor market (Slaheddine 2015, p.44). With all the countries operating in the EU having a similar currency, regional trading will not be impacted by the high rates of currency exchange, and thus leading to a reduction in its costs of production and enhancement in the firm’s profit maximisation.
Challenges that will affect the ability of the company to successfully operate in the EU
There are various challenges that will affect the quest by Bright Food to successfully operate in the EU and attain its profitability goals. The issues can be divided into political, economic and social factors. In terms of political factors, the EU has in the past two years been faced by the challenge of some of its members threatening to pull out while others such as Britain have already pulled out. This has in return impacted business in the region negatively. With such a challenge in place, the performance of the organization will be affected negatively.
Social and infrastructure issues may also impact the productivity of the company. the company has specialised in the production of Chinese foods which may not have such a large market in the EU (Nath 2009, pp.20-50). Distribution of food requires an effective supply chain, and this may affect the firm’s quest to reach the consumers on time, thus leading to a reduction in its sales and returns. Some of those regions in the EU member countries have infrastructure issues which may affect the productivity of Bright Food.
As a part of the economic factors, there are various issues in place that may end up reducing the productivity of the company. One of these challenges is the aggressive competition that exists among the companies in the region. With the aggressive competition that exists in the region, the company may end up facing challenges of reduced sales and revenues, either in the long-run or short-run (Pholphirul 2009, pp.56-67). The single currency that is used by the European Union members contributes to a slow economic growth rate and high-interest rates, and this affects the productivity levels of a foreign company (Steger and Amann 2012, p.98). Common policies applied in the EU contribute to market inefficiencies and discrepancies, and this may affect the operations of the acquired company.
Recommended entry strategy for an organization getting into the EU
The recommended mode of entry into the EU will be the licencing technique. Licensing entails the move by an organization in one country agreeing to permit an organization in a different country to use its copyrights, trademarks and processing. The first step in the entry process will be the establishment of an operational base through which the company will set its business (Francois and Wooton 2010, pp.873-877). The next step will then entail negotiations with food companies such as Dominos and KFC that are already in the region on access to their trademarks and copyrights. The company will then have to receive licences from the necessary regulatory bodies in the region and it has to ensure that it abides by the set rules and regulations. Upon the completion of agreements with those companies that are already in operation in the EU on operations under their copyrights and trademarks, the company will then start operating.
Licencing as an entry strategy comes along with various benefits. Some of these advantages include exposure to low risks processing and production risks, linkage of parent entity and the subsidiaries is enhanced and this plays a role in the enhancement of productivity, reduction in the costs of production and there is an option for the company to purchase stocks and royalties of the other company (Stittle and Wearing 2008, pp.87-89). The technique may, however, be faced with issues of low returns, aggressive competition because the licensor becomes a competitor and there is a limited form of participation.
Reason for investment of an MNC in a foreign country
One of the main reasons why Multinational Companies invest funds in a financial market that is outside its country is their quest for earning high-interest rates on the invested in the outside markets, thus an increase in its productivity. The MNC also invest in the foreign financial markets expecting for an appreciation of the foreign currency exchange rates. The appreciation of the foreign currency exchange rates tends to be beneficial to the company especially in terms of productivity growth. Companies will also invest in the foreign countries with the aim of reducing transaction costs (Boglioni & Zambelli, 2016). Finally, MNC will always invest funds in the foreign financial markets with the aim of portfolio diversification. Portfolio diversification refers to the spreading of risks, and this means that by investing funds in foreign markets provides the company with an opportunity to mitigate financial risks that may come along with investing funds in a single country.
Global expansion in the EU is a viable option and this attributed to the benefits that come along with the move. The EU boasts of a strong economy with a high consumer confidence and this of benefit to the MNC investing into the region. With the benefits that come along with operating in the EU such as free movement and low tariffs and taxes, a strong economic growth and sustainability; it will be vital for the Bright Food Corporation to set its operations in the region. The company will also be guided by set market regulations and this implies that there will be limited cases of unfair competition. It should, however, be noted these companies investing in the EU may face challenges of strict market regulations and policies that may in one way or the other affect their operations. Other challenges include political climate in the region and supply chain issues. All in all, it will be vital for Bright Food to expand into the European Union.
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