The paper discusses in detail international trade, investment theory and its practice within business operations of EU member countries. It also describes the role of the European Union and significance of the Single European Market for EU-based business. Trade is the voluntary exchange of goods, services, assets, or money between one person/organization and another. International trade, therefore, is a trade between residents of two countries.
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Increased recognition of benefits gained from the attraction of foreign direct investment (FDI), such as productivity growth and employment, has instigated a revival of interest in the factors that make countries an attractive location for multinational enterprise. The EU, therefore, has a role to restore peace and stability across Europe and other countries that experience conflicts. Its goal is to harness international expertise in the field of conflict elimination and peace building to ascertain that all stakeholders, including EU organisations, can access a strong, unbiased analysis, so as to facilitate more evidence-based policy judgments (Antje, 2009, 1).
As a value-based community, the EU enshrines human rights and democratic principles within its own and Member States’ institutions and structures. This ensures that consumer rights are maintained, hence, encouraging business between member countries. Foreign investment is more prolific when all favourable conditions are maintained; one of the most crucial conditions is safety of investors (Bretschger, 2011, 3).
An integrated Europe could benefit from both political and economic advantages. For instance, a Frenchman believed that unity of European nations could enhance their competing ability against states with a larger source of funds (Stela, 2010, 9). The EU integration provides those states with higher economic growth in the world markets. This became possible with integration of the subsidised taxes and tariffs imposed on imports within the EU. The EU, therefore, creates an assimilated economy that enables its member states to compete in the world market.
The significance of the Single European Market for an EU-based business
An enormous project such as that of the Single European Market needs ample time for implementation. Partners of Member States, as well as EU institutions, must identify and eradicate problems. They also need to agree on how to apply the recent legislation. Although the database is merely efficient, analysis enables us to make some conclusions. Results of the partial integration of EU insurance markets hint at importance of challenges to cross-border sales of, among other things, insurance products. A merger with a foreign insurance company has the crucial advantage to acquire necessary know-how about national conditions. However, challenges of such mergers may affect business negatively and they are worth being noted down.
In general, obstacles can be grouped into policy induced obstacles and natural obstacles.
Since a new business is essentially based on trust, the average consumer is extremely risk averse. Preferences thus are highly biased towards local organisations and established channels of distribution. According to a ZEW questionnaire, global players in the European insurance market regard consumer interest in buying products on a cross-border scale as extremely small. Additionally, consumer loyalty to domestic companies, language and other cultural differences are regarded as highly relevant barriers. On the other hand, suppliers miss a reliable information basis. Problems that are relevant for every single business contract, such as information asymmetries, are reinforced with a growing spatial and cultural distance between the two partners.
Legal and tax systems in general are yet additional obstacles that hinder the evolution of a level playing field for the insurance industry (Rainer, 2002, 23). Conventions regarding the terms of business contracts also have an influence on customers’ readiness to switch to a rival product, let alone if produced from abroad. Price sensitive behaviour, for instance, is favoured in the UK where customers must actively take steps to renew their insurance policies each year. In continental Europe, on the contrary, renewal of contracts for the most part is automatic unless a contract is cancelled one to three months ahead.
Policy induced obstacles
The responsibility for tax policy mainly lies with the EU Member States. There are varied types of taxes in the business environment. With respect to insurance, one has to differentiate between the taxation of insurance companies and the taxation of an individual policy holder. Since taxation is not harmonised on EU scale, a diversity of both different tax rates and different taxation systems exist. In fact, the treatment of premiums paid by individuals varies widely among EU countries, for example, by way of different rates for indirect taxes relevant for premiums (José, 2010, 16).
The advantages of shopping across borders can be offset by the fact that taxation regime remains that of the country where consumer has his residence. This anecdotal evidence demonstrates that cross-border taxation issues obviously are costly in fields that show no EU harmonisation. Taxation issues, therefore, are of a fundamental and strategic importance for a company to build up offices or subsidiaries, alter their domicile or undertake direct cross-border business.
Extensive customer protection based on the general good principle is a basic problem for retail markets. First, since consumer protection (under the general good principle) is based on the domicile of consumer, companies have to adapt to the rules of 15 different countries. This means an immense barrier to market entry for SMEs (Tinne, 2011, 8). The immense costs for transfer of small amounts within the EU payment systems certainly prevent retail customers from cross-border deals.
Question 2a: Impact of the Emerging Countries
Currently, China, Brazil and India have been emerging as crucial global leaders, which have consequently aroused political concerns in both Europe and the United States (National Intelligence Council, 2012). These nations are not only getting more and more assertive in the international institutions like World Trade Organization (WTO), but their economic influence is being felt all over the world. The merging of these nations foreshadows their emergence as powerful contemporary economies, but the situation is creating anxiety among the nation-centric class attention as well as for the current relationships connected to trans-nationalized build-up. This paradigm shift and its consequent confusions characterize the process today. The effect is not only global, but it is also internal as the economy of each nation is being molded to fit current worldwide production. The rise in this conflict lowers the descending kinds of production nationally against the escalating forms of international capital (Harris, 2006).
The skyrocketing growth of the above nations and especially China poses a very great threat to EU multinational companies. This follows the notion that Europe has been leading in export of finished goods. This trend is, however, almost changing with China leading in exportation of most products into the international market. Other than urban construction works, China is shaping its future to be the best global export platform as well as the internal commodity platform. It is for this purpose that virtually all the countries want to produce and sell their products in China, something that has made China the world’s third largest exporter and the world’s third importer. Export rates of these nations have been rising at worrying levels, something that is making them gain prominence constantly. As a result, many consumers in the international market are shifting their taste from that of the European products to those of China (Atlanti-Community.Org, 2011).
Though Germany sells more products abroad, China contributed 60% to the global export growth in the past few years. Having overtaken Japan as an exporting giant, China is profoundly integrated in the international production chain with half of its foreign sales and about 30 percent of its industrial products being produced by transnational organizations. China has also outdone other nations around the globe to become the intermediate destination for international direct investments, earning US$52.7 billion in 2003 and 480 billion since 1990. China has been posing threats to the multinational companies not only in Europe but to the rest of the world including the United States. In 2002, for instance, it produced 28% of the world’s ore, 23% of stainless steel, 24% of zinc, 17% of copper, and 21% of aluminium (Harris, 2006). Due to growth in its industrial sector, China has become the largest importer of platinum, tin, chemicals and the third largest importer of nickel in the world. China is also the highest producer and consumer of coal and the second largest exporter. Additionally, China has become the world’s third highest market for cars with Ford, GM, Toyota, Honda, DaimlerChrysler and Hyundai producing in China alongside other local firms. This is a big blow to companies in Europe such as Allgemeine.
Question 2b: Strategies that EU and UK Might Embrace
With the intensifying threat, posed by the rise of these nations, the EU and the UK are obliged to come up with new strategies to protect their local markets and retain their prominence in the international market. For quite a considerable period of time, the EU has had debates concerning the building strategic relations with the emerging nations (Godement, 2010). The rhetoric, however, remains just that EU ties with these nations remain dreary and uninspiring. In dealing with the rising nations, EU ought to learn from the US strategy towards the same nations. EU should renew commitments to the Asia-Pacific region as the United States has currently being doing. The EU should also engage in renewed courtships as well as alliances with these nations in order to deal with their skyrocketing rise. This is mainly crucial, especially considering recent Euro-zone crisis and the EU’s hopeless search for contributions from Asia to the Euro rescue fund.
Product differentiation is yet another strategy that EU multinational companies may utilize in order to cope with monstrous competition from the rising nations. This factor goes along with product diversification, which means producing many forms of products that are closely related. It is important because it ensures that customers have a range of products to choose from and hence cannot turn to other producers for substitute goods (Godement, 2010). Products in this case are produced with minor modifications in their attributes. This follows the prominent perception of human demands that are considered to be the same across the world. One of the major benefits that companies would get from adopting this strategy is that they will be able to produce large volumes of products with almost similar techniques.
Another advantage of standardization is that it preserves reputation of the country that hosts the supplying corporation helping in reducing costs of design, alteration or modification, stocking and handling the product, and making the delivery systems efficient. This consequently aids in saving energy used in sound decision making concerning manufacturing of products as well as managerial time. Standardization also facilitates a quicker accumulation of learning experiences as a result of learning-by-doing approach (EconomyWatch, 2010). Another strategy that EU would embrace is creating a closer relationship with Asia-Pacific countries, as well as the other rising nations, through constant interactions in order to perceive their culture (Debating Europe, 2012). This might, in one way or another, help in improving ways of production and developing products that might even be exported to these nations. It is also obvious that due to the high products manufacturing in China by most European investors, the effects have become pronounced in Europe as “redundancy”. Such investors should come up with new methods of producing their products locally in order to provide employment to the common man.