The European Union, with a population of over 500 million people in 27 European countries and a combined economy that generated a GDP of $ 18. 39 trillion in 2008, presents a perfect opportunity for an American MNC planning to expand into foreign markets (IMF, 2009). Multinational companies (MNC’s) operate optimally in markets where they have a comparative advantage. Large populations with high levels of disposal income and liberalized economic systems, encourage trade and expansion (Smith, 2007). Financial transactions conducted in a common currency simplify sales and purchases of goods and services.
Considering these factors, Acme should acquire JEL Industries as part of its entry strategy to the European Union market. Some of the benefits of selecting this firm include cheaper costs of production due to the free movement of resources across borders. Labor and materials can relocate anywhere without the imposition of additional tariffs or duties (Smith, 2007). The adoption of uniform standards by the EU contributes to lower production costs than those faced in market with different product specifications.
With regard to sourcing of supplies, the firm will benefit from preferential treaties signed between the union and other trading blocs. Such arrangements will give the firm a price advantage over other players in the industry operating outside the union. A major disadvantage of acquiring a firm operating in the EU is the widespread effect of an economic slump (Story, 2002). The firm’s financial position will worsen as the recession deepens. Recovery of the firm’s fortunes will be dependant on policies adopted by the EU, rather than on managerial interventions and innovations.
An economic downturn within the EU will also influence economic activity negatively and have a depreciating effect on the exchange rates. Consequently, imports will become more expensive and erode any price advantage the firm may have enjoyed. Trade polices adopted by the EU that run counter to the firm’s interests will be effective in all 27 nations (Story, 2002). Bans on certain products and environmental concerns, could force the firm to shut down in the wake of a prolonged embargo on the firm’s goods and services. In conclusion, operating within a union has more advantages that locating in a country outside a powerful trading bloc.
The disadvantages that arise pale in significance when compared to the potential gains in sales volumes and lower costs of production. References IMF. (2009) Report for Selected Country Groups and Subjects. World Economic Outlook Database, April 2009. Retrieved on 16 June, 2009 from http://www. imf. org/external/pubs/ft/weo/2009/01/weodata/weorept. aspx? sy=2007&ey=2009&scsm=1&ssd=1& Smith, C. (2007) International Trade and Globalization, 3rd edition. Stocksfield: Anforme. Story, C. (2002) The European Union Collective: Enemy of its Member States. Edward Harle
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