Overseas Investment into European Companies

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The desire of nations to facilitate overseas investment has been exhibited in a dramatic increase in different bilateral treaties of investment designed to promote and protect investment between two countries. The globalization of the international economy is having a positive impact on the overall volume of overseas investment. Firms now view the entire world as their market and undertaking foreign direct investment in an endeavor to assure that they have a considerable presence in every part of the world. Most of the firms are now of the belief that it is significant to have specific production facilities based very close to their main customers which, in fact, is creating enough pressures for increased overseas investment.

Globalization

Human societies throughout the world have established increasingly closer connections over many centuries, but the current pace has increased dramatically. Cheap telephone services, Jet airplanes, emails, huge ocean vessels, computers, swift flows of capital have transformed the world into a global village and more autonomous than ever. Multinational firms manufacture products in different countries and sell them to customers all over the world. Raw materials, money, and technology move more speedily across national borders.

Serving the global market is indeed a gigantic step for most of the firms who in the past have concentrated on their local markets and as such have limited data about potential global markets. Before access the international market it is necessary that a strong analysis should be made by the firms of the potential advantages and risks that could be encountered by the firm and capture the entire assessment of the global market. Proper diagnostic evaluation of current resources or business should be made as well a huge volume of research time should be spent on developing the plan to operate globally. This specific diagnostic evaluation will help to assess whether the aim for exploring foreign markets will be ultimately satisfied and whether the related risks of the venture are worth the expected returns. (Leif, 2003)

The phenomenon of globalization has far-reaching impacts on the operations of firms. Due to globalization economies, laws, and social movements have ultimately formed at the international level. Many academics, politicians, and journalists treat such trends as inevitable and welcome. For most of the people in the world, globalization has a huge impact on their traditional ways of life along with threatening living and cultures.

Impacts of Globalization on Overseas Investment

The foremost direct impact of globalization on the small to mid-sized companies in the United States is the quest for profitable revenue growth. In fact, stiff control of costs related to infrastructure and operations is still significant for mid-sized companies along with the costs linked with compliance. U.S firms firmly believe that revenue growth and innovation- through entirely new products and services- are critical for the success of firms. Globalization is considered an important phenomenon for most mid-sized and large firms, yet some focus on avoiding the globalization threat instead of reaping benefits of its opportunities i.e. entering new markets (Friedman, 2005).

The second impact of globalization on small and mid-sized firms is the increased level of responsiveness to global market forces. Most of the executives have apprehensions that their firms are not active up to the required level for responding to factors such as traditional and non-traditional competition, dynamic customer demands, the transformation of talents and sources, etc. Firms, due to the increasing impact of globalization, want to utilize their human and capital, and existing resources, while incorporating innovative technologies for the purpose of exploiting opportunities and options for becoming more responsive.

The third impact on small and mid-sized firms is that they effectively manage uncertainty, short-term in nature, in the economic environment. Executives have been obligated to manage the impact of some important elements such as hurricanes and high or low prices of oil along with different other factors in communities and businesses (Balasubramanyam 2004).

Small and mid-sized companies have restricted resources and focus on accomplishing objectives as quickly as possible. Mid-sized firms in the United cover a broad spectrum while they focus on innovation and growth, IT optimization, and cost. The benefits of globalization for the firms in the United States are lucid on a global level as they impact the domestic policy of America (Mann, 2006).

Barriers and Restrictions in Overseas Investment

There have been significant indirect impacts of globalization on the operations of firms interested in overseas investment. Lower trade barriers, significant increases in communication abilities, and enhanced economic interactions have influenced the external as well as internal environment of U.S firms. In fact, globalization offers the highest potential to U.S firms as the realities of the modern phenomenon of globalization have offered huge benefits.

The indirect impacts on the operations of small and mid-sized firms signify that those firms who depend on global trade have to face certain risks and threats also. There are new costs and shipping delays due to the threats of war and terrorism. Currently, there has been a significant slowdown, even recession, in global investment and trade. As such U.S firms have to adjust to comparatively tighter security scenarios and almost new requirements at the port of entry in the United Sates since the terrorist attacks of September 11. Moreover, War in Iraq has also added a completely new level of scrutiny (Ferguson, 2005).

As the most powerful and dominant economic power in the world, United States has benefitted enormously from the impact of globalization. However, U.S firms, in order to accomplish the set objectives strive to understand the impact of economic, cultural, political, and social ramifications. As such firms maintain a balance between increasing internationalism and national interests (Bhagwati, 2004).

U.S firms have embraced globalization by maintaining the economic and cultural conditions that have led the United States to the status of superpower. Other indirect impacts of globalization on mid-sized and small firms are advancements in transportation and communication, combined with the ideology of free market. (Doak 2005) The combination has provided U.S firms extra demand for goods, services as well as capital unprecedented mobility. Many mid-sized firms of Untied States want to enter new world markets for taking advantage of cheap and abundant labor and policies of government for supporting foreign investments (Bevan 2004).

U.S firms operating globally utilize regional trade agreements and international financial institutions to force firms of developing nations to integrate by privatizing state enterprises, reducing tariffs, and relaxing labor as well as environmental standards. Resultantly, most of the firms have enlarged their profits and experienced sustainable development (Cory, 2003).

Theme of Overseas investment

Foreign and Overseas Investment brings along new ideas, skills and technologies as well as fresh investment to the economy. There can be huge benefits for the local economies and all stake holders. A high and gigantic level of inward investment is in fact a symbol that the country can be termed as an ideal place for the businesses. It also gives positive signals that the culture of is open to new skills, ideas and cutting-edge practices (Bevan A, 2000).

The authenticity of an increasingly international marketplace is that firms will, in fact, base most of their functions and operations in any country that presents best possible opportunity for growth (Ferguson 2005). It also means that the most thriving and successful economies are those that are capable of competing on the global level. This also means that specific types of functions switch away from one country towards others providing same set of facilities and quality of business that is offered in other country. A country can play to its overall strengths and pull investment in the related industries (Brenton, P. 1998).

Generally speaking there are many reasons as to why overseas investment is made, some of them are: to access and approach new foreign markets or better and improved serving of current markets such as investment made in the one country for the purpose of reaching customers in the entire continent; to take sufficient advantage of lower wage costs and lower manufacturing such as outsourcing; to access new and innovative skills and technology specifically in the field of research and development; to locate a business operation close to the group of related or similar companies (Caves 1996).

Specifically foreign investment for the purpose of increasing employment, growth rate and overall prosperity is necessary for the long-term health of the economy due to its primary contribution to underpinning and creating healthy minds, producing skilled persons as well as increasing and improving activities in regional and local environment. Global investors are not only the biggest but most innovative producers and supporters of local economy by brining huge benefits to the host countries. These include knowledge, wealth and job creation along with injection of innovation to the knowledge and organizational structure ultimately adding up to the capacity of country in research and development (Bevan A, 2000).

International investments injected in the countries facilitates the companies to accomplish growth along with the economies of scale that local markets alone are not in a position would allow. The expansion of high level of productivity supports businesses to strengthen and confront competition in the economy as companies are mostly exposed to new practices and ideas (Brenton, P. 1998).

A country’s inward investment effort for promotion combines regional and national agencies in a coordinated and harmonized network. This comprises staff based foreign operation in the main markets from which Overseas Investment is sourced. The concept of Overseas Investment ensures that potential investors have autonomous access to all available support and professional advice they need to make the best commercial decisions.

Recommended Product

The company planning to enter European market is involved in manufacturing, designing and distributing a comprehensive and modern line of power tools and all types of related accessories. The target market of the firm comprises professional, commercial as well as residential construction and woodworking industries.

The company is well-known for power tools manufacturing in United States. It has earned a well praised industry-wide reputation for quality in the line of manufacturing. The tradition of company’s operational excellence continues to exist as an innovative producer backed by world-class performance, reliability and durability.

The company has an ISO 9001 certified designing and manufacturing facility which is among the highly automated and hi-tech in the industry. The factory incorporates the latest in testing equipment and hi-tech machinery. A reputable manufacturer for many years, United States professional power tool producer, company continues to improve and progress on product quality, assuring that each and every product category exceeds the reliability and performance standards anticipated by customers nationwide.

It has received many accolades for quality in manufacturing and design and hold different patents in United States. Products of the company meet global certification certificates such as United States’ UL. With decades of excellence in the field of manufacturing, its customers are assured of receiving the highest quality and most innovative professional tools in the industry. Throughout their business, company has established a reputation for product quality, innovation, end-user focus, value and design (Bhagwati 2004).

Although company was established two decades ago, it was not until 1990s that the company diversified into designing and manufacture of electric power tools. As a first step, they commenced portable electric planers. The company has credited its success in the local power tool market specifically to high quality construction, establishing research and development and an exclusive system of direct distribution. Instead of relying just on wholesalers to market its products to retailers, it employed unique direct sales force. The close association endangered by this particular system provides the company insights into the demand of retailers along with the end user, thereby fueling modernism and innovation (Carkovic, 2003).

Over the years, company traded metal casings for turquoise, shock-resistant; added electronic and multi-speed motors; and developed specific mind-numbing assortment of accessories. Company targeted professional tool users in construction, carpentry, masonry, timber trades with its durable, powerful equipment that mostly cost more than two times as compared with typical tools particularly made for consumer market, concentrating on the high end specifically of the power tool industry alleviated price competition, thereby encouraging profit margins considerably (Brenton, 1998).

Company pursued its new product development in the decade of 1990, focusing on ergonomics along with sound, vibration and dust control. The research and development cost averaged around two percent of the sales. As company reached out specifically to the consumer market, however, it had to take specific care not to isolate its core and basic constituency of some professional tool buyers. Realizing the limitations of the local market, company has ultimately decided and sought global expansion. The company has endeavored to employ a multi-nationalist strategy, establishing export business plan for the target market.

Entry Modes Available for Overseas Investment

Experience in global markets has been shown to as a significant advantage and seems to impact entry mode selection. Firms with greater global experience generally have developed systems and processes for managing global operations. Due to this expertise, companies seem to prefer equity modes of entry that can support them with a control benefit. However, firms without any specific experience of global markets had not had such type of opportunity for developing systems and processes, seem to overestimate the threats and risk related to international entry, and prefer non-equity modes of entry for the sake of minimizing financial risks related with global expansion.

Studies made in this regard have discovered that international ventures of United States having expert management teams and long global experience seemed to prefer equity entry modes. On the other hand, organizations with managers without significant global experience seemed to prefer non equity modes. The dilemma confronted by the overseas investors during entry mode is related with exclusive differentiated products for balancing its overall need to maximize profits gained from its proprietary technology with its desire to safeguard this technology from capturing by the competitors. Two equity entry modes are best suitable to support the decision for entering European market. They are:

FDI Flows: are new and fresh investments by foreign firms made in a particular period of time. These investments are either made by tax or calendar year. While most of the incoming investment is included in the statistics of FDI flows, not all if it will be. For instance, if a foreign investor decides to enhance its facilities in another country but uses domestic finance, this does not appear in the statistics of FDI flow as it includes no inflow of country’s money (Brenton, P. 1998).
Mergers and Acquisitions: Mergers and acquisitions made by foreign firms involve current operations. However they mostly pave the way for essential new investment into the country that can ultimately lead to creating more jobs. Sometimes it happens that merger or acquisition provide protection to jobs that would have been lost otherwise. Foreign investors, in fact, target country’s companies for acquisition as they view it in achieving growth of long-term potential for their operations and are eager to invest to accomplish that growth (Brenton, P. 1998).

Possible Locations for Overseas Investment – United Kingdom

Great Britain comprises England, Wales, and Scotland. United Kingdom comprises England, Scotland, Northern Ireland and Wales. Britain is informally used and generally means the United Kingdom. The Isle of Man and The Channel Islands are not included in the United Kingdom. However, ‘British Isles’ encompasses the United Kingdom, all of Ireland, the Isle of Man, and the Channel Islands (Caves 1996).

The United Kingdom is among the major recipients of overseas investment in the Europe. Projects of investment and expansion by the foreign companies regularly result in creating and maintaining high level of employment. According to an estimate, about one third of the entire projects are in the manufacturing sector, while other sectors receiving overseas investment are; software, electronics, IT, and pharmaceuticals/biotechnology. United Kingdom is regarded as one of the most favorite places for investment purposes in the Europe (Friedman, 2005).

UK firms have competitive advantages derived from the economic stability established and supported by the Government. The overall skills of the workers combined with robust telecoms and IT infrastructure places UK among the best candidates for overseas investment by the company.

Although UK is among the top locations for overseas investment, at the same time it is also the top location in Europe for headquarters operations, research and development activities, telecommunications, and financial services. International projects for overseas investment in the Europe are on continuous increase and as such among the top candidate for receiving overseas investment (Kansas, 2005).

Possible Locations for Overseas Investment – Bulgaria

For the purpose of attracting foreign investment, Bulgaria has designed and implemented most liberal laws related to overseas investment. In 1997, the ‘foreign Investment Agency’ was established to supervise and monitor the regime. Overseas investors have the autonomy and diversified options to enter into joint venture, purchase firms in the privatization process, commence new ventures, or acquire portfolio shares.

Amendments have been made in the law related to the privatizations to ensure efficiency and transparency of the privatization process. By the year 2000, almost seventy eight percent of the state owned enterprises were sold in which overseas investors mainly participated by purchasing outright (Turnock, 2005).

There are six free zones in Bulgaria where overseas firms can receive preferential or equal participation. The most profitable zone is located at Ploydin. It is pertinent to mention that capital markets in Bulgaria are still small and underdeveloped. In 1998, new Bulgarian stock exchange was incorporated with nine hundred and ninety eight companies (Kelly, 2003).

Regulations in Bulgaria to Help Overseas Investment

Bulgaria has independent market focused legislation and has implemented the standardized legislation of European Union. The commercial law, segments investment law, and laws of privatization do not create difference between domestic and overseas investment. The business forms in Bulgaria are; joint stock company; private limited company; limited commercial partnership; sole partnership; representative or branch office; one-man private limited company; and one-man joint stock company. Overseas investors are allowed to participate in the privatization process by obtaining shares through ‘Bulgarian Privatization Agency’ and also through different ministries as well as local authorities by auction or public tender.

Possible Locations for Overseas Investment – Spain

In order to fulfill the expectations of overseas investment to ensure growth, an aid and incentive system has been implemented by the Central Government as well as certain municipal and provincial authorities to encourage the hiring and training of employees with specific features, the establishment of new firms, research and development and investment projects.

As Spain is the member of European Union, overseas investors can access certain European aid programs that can support by providing extra incentives to encourage overseas investment. These supportive measures for encouraging overseas investment include; regional and state incentives for employment and training; incentives for certain industries; incentives for making investment in particular regions; State incentives focusing of SMEs; incentives for internationalization of aid by European Union (Leanne, 2005).

Most of the obtainable aid is mainly dependable on the characteristics of every investment project which means if there are better prospects of the investment project, there will be more possibilities of finance and aid. Government of Spain offers distinctive employment incentives to the overseas investors, comprising mainly of significant reductions in social security contributions by the employer to promote the steady hiring of employees and supporting the conversion of provisional contracts into perpetual contracts (Margaret, 2005).

Regulations in Spain to Help Overseas Investment

Certain tax benefits and financial aid have been provided by the Spanish government to support the activities in specific industries which are included in the priority sectors due to their growth as well as affects on the overall economy. For example, activities in energy, research and development, mining, technological development, agro-food etc are encouraged by the Central Government. Moreover, similar benefits are provided by the Governments of Autonomous Community for most of the above-mentioned industries (Mann, 2006).

Financial aid comprises nonrefundable subsidies as well as certain reliefs in interests on the loans or combination of both. There are programs for official restructuring which were mainly initiated for supporting specific industries such as textiles, steel, shipbuilding etc (Norman, 2006).

The Council of Ministers, in compliance with the Electricity Industry Law of 1997, approved the Plan aimed at promoting Renewable energies which described the overall strategy in the field of energy. The purpose of this Plan is to foster the development of renewable energies and to ensure that diversified sources related to renewable energy can adequately cover twelve percent of primary consumption of energy in the year 2010. Encouraging innovation, technological improvement and development projects has become one of the primary priorities of Spanish Government. For this purpose the Government has approved a plan for the scientific research which is partly financed by the European Union Structural Funds (Sapirito, 2005).

Cultural Differences between the Host and Home Countries

Foreign direct investment is growing swiftly than world trade and output of world for many reasons. Despite the normal decline that has happened in the area of trade barriers and witnessed over last three decades, business organizations still carry fear of protectionists’ pressures. Business executives view foreign direct investment as a primary way of circumventing trade barriers of future (Radelet, 1999).

The second reason is that most of the current increase in foreign direct investment is driven by the economic and political changes that have been taking place in most of the developing nations of the world. The general transformation towards free market economies and political institutions has, in fact, encouraged foreign direct investment (Cherlin, A. 2005).

Across much off eastern and Central Europe, Asia and Latin America, the economic deregulation, economic growth and privatization programs that are open to the outside or foreign investors and the exclusion of many restrictions that have been applied on foreign direct investment have specifically made these countries more attractive to most of the foreign investors. In cultural differences existing between the host and home countries, it is pertinent to highlight that people should obtain cooperation to accomplish aims of the organizations. Difference in the goals of people makes such cooperation complex to establish as well as maintain. Opportunism of people supports in managing cultural differences. According to a segment of scholars, individuals will not maintain their promises, will present distorted or incomplete information, and will violate agreements to confuse others.

In order to control this opportunism, contract which describes responsibilities and roles are written. However, when it is not possible to write contracts which encompass all conditions, organizations are formed. Potential disputes can be solved by hierarchy than by bargaining. People with different cultural background should execute complete trust. If trust prevails between people no hierarchies are required.

Strategies to Achieve Major Objectives

The main goals of expansion in foreign market are to diversify and spread operations in unexplored areas and identify lucrative target markets. Some of the main goals are; increase sales of the company; locate and establish distribution system in the foreign market; participate actively in the global marketplace, taking lucrative advantage of the foreign market; and show substantial profit in export initiative in three to five years.

For achieving the above-mentioned targets and goals, certain resources are available to the firm which can be utilized effectively to support the mission. They are:

Financial Resources: Allocation of additional capital budget; half-time employee position; minimum three-to-five year commitment; potential of Branded program funds through regional and state trade group.
Non-Financial Resources: Product inquiries from Europe; staff Expertise; some member expert in local languages like Spanish; several employees with travel experience in Europe; families of some staff members based in Europe.
Additional Human Resources: Company can consider hiring particular consultancy firm; company can consider hiring new staff to support exporting; some distributors are available with experience especially in South American Market; experience with checking and requesting references of buyers.
Miscellaneous Resources: The company’s product is currently sold domestically, through distributors and in some cases directly through retailers, as such company can benefit from this experience; experience of designing strong promotional strategies; sufficient capacity to enhance sales by almost twenty to thirty percent.

Conclusion

A rapid growth has been recorded in the flow of overseas investment but there has been a significant shift in the direction. Historically most of the overseas investment has been heading towards the developed nations of the globe as firms mostly based in developed countries invested in the foreign markets. It can be concluded on the basis of the arguments presented in the paper that overseas investment not only benefits the investor but plays a vital role in the host or recipient nation as the entire amount of capital that is invested in stores, factories, office buildings etc ultimately results in the prosperity of the nation. The greater in the economy is the capital investment the more favorable and likely are prospects of future growth.

References

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