CHP 16

Slide 16.
Chapter 16
European Union
Alan M Rugman and Simon Collinson, International Business, 5th Edition, © Pearson Education Limited 2009
Slide 16.2
European Union
• Objectives
• The EU environment
• Conducting a strategic analysis
• Strategy issues.
Slide 16.3
Objectives
• Describe the Single European Market and the
competitive status of the EU in relation to other
triad members.
• Discuss how firms carry out an overall strategic
analysis of the EU market in terms of competitive
intelligence and evaluation of location.
• Relate some of the major strategy issues that
must be considered when doing business in the
EU, including exporting, strategic alliances and
acquisitions, manufacturing considerations,
marketing approaches and management
considerations.
Slide 16.4
The EU environment
Slide 16.5
The EU15 and the EU27

• The EU currently consists of 27 countries.
• The EU15 are the pre-2004 members of the
European Union and are highly integrated
economically and politically.
• The EU27 includes 10 other European countries
that joined in 2004, and Bulgaria and Romania
which joined in 2007, in addition to EU15.
– The 12 new members have not fully been
integrated to the Union.
Slide 16.6
Emergence of a single
European market
• The origins of the EU go back to the formation of
the European Economic Community (EEC) in the
late 1950s, at which time there were six founding
members: Belgium, France, Italy, Luxembourg,
the Netherlands and West Germany.
• By 2007, the EU had grown to 27 countries,
including a number of East European countries
that liberalized their economies after the fall of the
Soviet Union.
Slide 16.7
The objectives of the EU

• Elimination of customs duties among member states.
• Elimination of obstacles to the free flow of import and/or export
of goods and services among member states.
• Establishment of common customs duties and unified
industrial/commercial policies regarding countries outside the
community.
• Free movement of persons and capital within the bloc.
• Acceptance of common agricultural policies, transport policies,
technical standards, health and safety regulations and
educational degrees.
• Common measures for consumer protection.
• Common laws to maintain competition throughout the
community and to fight monopolies or illegal cartels.
• Regional funds to encourage the economic development of
certain countries/regions.
• Greater monetary and fiscal coordination among member states
and certain common monetary/fiscal policies.
Slide 16.8
Table 16.1 Economic profile of the big three (in US dollars)

Note: Data for EU includes intra-EU trade. Exports are calculated by including freight and insurance while imports do not include freight and insurance.
As a result data might not be consistent with other data in this book. When information was not available for 2006, this table presents the latest year for
which information was available. Where EU27 data were not available, data are for the EU25
Sources: Authors’ calculations and Eurostat, Structural Indicators; CIA, World Factbook, 2007; Bureau of Labor Statistics; US Census Bureau; Foreign Trade Statistics
Slide 16.9
The competitive status of the EU

• Productivity:
– High wages, salaries and fringe benefits put some
EU15 firms at a disadvantage in competing with
their US and Japanese counterparts.
– Labour laws in all EU15 countries make it
extremely difficult to fire employees once they
have been employed for a year.
– European firms are working to increase their
productivity and to match that of their major triad
competitors.
Slide 16.10
Figure 16.1 Productivity: percentage increase in output per hour, 1992–2003

Source: US Department of Labor, Bureau of Labor Statistics, February 2005
Slide 16.11
Table 16.2 Hourly compensation costs in manufacturing

Sources: US Bureau of Labor Statistics, April 2007
Slide 16.12

(Continued)
• Investment spending:
– Investment spending in EU countries has traditionally lagged
behind that of other triad countries. Part of this can be
explained by rapid increases in wages and benefits during
the 1980s, which were not offset by increases in productivity.
As a result, EU firms found themselves without the capital to
invest and had to resort to borrowing.
– Demands for loans resulted in higher interest rates, which
also put a strain on investors.
– By the late 1980s EU government spending had risen to
approximately 50% of GDP (in contrast to about 30%
for the United States and Japan).
– Because of this, taxes were raised, thus limiting funds and
forcing interest rates to go even higher.
– More recently EU economies have been doing much better,
stabilizing government spending.
Slide 16.13

(Continued)
• Education:
– In Europe, most vocational training is provided at the high
school level, whereas in the United States and Japan, it is
done later.
– The European university curriculum is more theoretical than
in either the United States or Japan.
– European educational institutions are also more rigid and
less able to adapt to the changing needs of business.
– There is less interaction between European educational
institutions and industry than in the United States and
Japan.
– Many European students receive training that is
inappropriate for the employment needs of European
business and industry.
– The major challenge for European countries will be to
modify their education systems and to make them more
flexible, more practical and better able to adapt to the
changing demands of industry.
Slide 16.14
Table 16.3 The world’s most competitive nations

Source: Adapted from IMD and World Economic Forum, The World Competitiveness Report, 1989 and 2007–2008
Slide 16.15
Conducting a strategic analysis
Slide 16.16
Competitive intelligence
• Using competitive intelligence:
– External information gathering
– Internal infrastructural analysis
• A coordinated infrastructure is used when there is a high
degree of similarity among national markets and business units
share resources in an effort to help each other increase overall
sales.
• A market coordination infrastructure is used by firms that
compete in similar national markets but do little resource-sharing
among their businesses.
• A resource-sharing infrastructure is used by firms that
compete in dissimilar national markets but share resources such
as R&D efforts and manufacturing information.
• An autonomous infrastructure is used by MNEs that compete
in dissimilar national markets and do not share resources.
Slide 16.17
Evaluating locations
• Typically, regional incentives will be higher when:
– the region is economically depressed;
– many jobs are being created;
– the company is making a large investment;
– the investment is likely to attract other investors.
• Before agreeing to any contract it is important that
the deal be “locked in” and that any repayment of
subsidies be made clear up front.
Slide 16.18
Evaluating locations (Continued)

•Other evaluation criteria
– Access to customers
– Quality of labour
– Expansion prospects
– Level of wage costs
– Attractive environment
– Access to suppliers
– Non-financial regional assistance
– Absence of restrictions for expansion
– Infrastructure
– Level of rents
– Public transportation.
Slide 16.19
Comparison of investment incentives in selected EU countries based on an

Table 16.4
actual project evaluation
Source: Adapted from Maria Brindlmayer, “Comparing EC Investment Incentives and Getting the Best Deal,” Journal of European Business, November/December 1990, p. 38
Slide 16.20
Table 16.5 Comparison of location factors: one example

Source: Adapted from Maria Brindlmayer, “Comparing EC Investment Incentives and Getting the Best Deal,” Journal of European Business, November/December 1990, p. 38
Slide 16.21
Strategy issues
Slide 16.22
Strategy issues
• Strategies that need to be considered when doing
business in the EU include:
– an overall strategic analysis;
– the feasibility of exporting;
– the value of strategic acquisitions and alliances;
– marketing considerations;
– manufacturing approaches;
– management considerations.
Slide 16.23
Business strategy matrix

• The horizontal axis (“national responsiveness”)
represents political sovereignty and the need for a
firm to be nationally responsive.
– Takes into account both consumer tastes and
government regulations.
• The vertical axis (“economic integration”)
represents globalization through economic
integration.
– This includes the need to develop economies of
scale, to use a value-added strategy and to reap
the benefits of increased coordination and control
of geographically dispersed activities.
Slide 16.24
Business strategy matrix (Continued)

• Quadrant 1:
– The MNE does not need to be concerned with national
responsiveness. It is in a market, driven by high integration
and its strategy must be on achieving price competitiveness.
Firms are often centralized in structure and thus can use
mergers and acquisitions to benefit from high economic
integration.
• Companies selling microcomputers frequently operate in
quadrant 1.
• Quadrant 2:
– Low integration and low national responsiveness. The
potential of obtaining economies of scale and benefits of
national or regional responsiveness are both small. MNEs
are vulnerable to triad competitors. In this quadrant there is
no advantage in centralized quality control or economies of
scale and no ability to adapt activities to individual countries.
• MNEs selling inexpensive toys that are undifferentiated fall into
this quadrant.
Slide 16.25
Business strategy matrix (Continued)

• Quadrant 3:
– High integration and high national responsiveness
characterized by strong price competitiveness and select
target positioning. This is the most challenging quadrant to
implement as the firm’s organization structure is complex, but
it is the one in which many successful triad-based adaptive
multinationals operate.
• Auto firms fall into this quadrant.
• Quadrant 4:
– Economic integration is less important than national
responsiveness. MNEs must focus on adapting products to
satisfy the specific demands of each country. In this case
integration is minimized in favor of a decentralized strategy
of national responsiveness that is designed to appeal to
select niches and target groups.
• Companies selling food products and designer clothes use this
approach.
Slide 16.26
Exporting
• Custom duties and taxes:
– Goods manufactured outside the EU are subject to custom
duties at the point of entry.
– Duties are determined by the EU-wide tariff system that
establishes common rates regardless of entry point.
– Excise taxes are levied on some goods (alcohol, tobacco
and gasoline).
• Product standards.
• Conducting export operations:
– In recent years many US exporters of both goods and
services have consolidated their operations with those of
European companies, thus helping them to surmount EU
barriers.
Slide 16.27
Table 16.6 Direction of EU trade

Note: EU data for 1996 is EU15 data for 2005 is EU25. Exports and imports from and to the EU are intra-EU trade
Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006
Slide 16.28
Table 16.6 Direction of EU trade (Continued)

Note: EU data for 1996 is EU15 data for 2005 is EU25. Exports and imports from and to the EU are intra-EU trade
Source: Adapted from IMF, Direction of Trade Statistics Yearbook, 2003 and 2006
Slide 16.29
Conducting export operation

• Those MNEs that do choose to export to the EU must
carefully select their agents and distributors. Five steps
are critical to this process:
– Examine the legal and business considerations involved in
appointing foreign intermediaries and establish criteria that
reflect the particular geographic market.
– Assemble a list of potential candidates by using the various
directories and by consulting with other sources of
information.
– Qualify such candidates by applying certain criteria and by
conducting a preliminary interview.
– Visit the proposed intermediary to obtain additional
information about its resources and facilities, to get a proper
feeling for the intermediary’s compatibility with the
organization and to check the objectives of the agent or
distributor.
Slide 16.30
Conducting export operation

(Continued)
– After selecting an agent or distributor:
• negotiate an agreement that is fair and mutually beneficial;
• comply in good faith with the terms of the agreement;
• continue communication between the parties;
• make occasional adjustments in the relationship in response to
changing circumstances.
Slide 16.31
Strategic acquisitions and alliances

• A Harvard Business Review study analyzed 49 strategic
alliances and concluded that the chances of success in a
strategic acquisition and alliance are improved if the parties
keep five guidelines in mind:
– Acquisitions work better than alliances when developing core
businesses.
– Alliances are effective when firms want to gain entry into new
geographic markets or businesses that are tangential to the core
business.
– Alliances between strong and weak companies typically do not
work well.
– Alliances that last are characterized by an ability to move beyond
the initially established expectations and objectives.
– Alliances are more likely to be successful when both sides hold an
equal amount of financial ownership. In addition, more than three-
quarters of the alliances that were studied ended with one of the
parties acquiring full control.
Slide 16.32
Marketing considerations
• Pricing
• Positioning
• Direct marketing.
Slide 16.33
Manufacturing considerations
• Reducing costs
• Factory networks
• Research and development alliances
– European Research Cooperation Agency (Eureka).
Slide 16.34
Figure 16.3 Pan-European manufacturing systems

Source: Adapted from Nigel Dunham and Robin Morgan, “The Search for a Truly Pan-European Manufacturing System,” Journal of European Business, September/October 1991, p. 44
Slide 16.35
Management considerations
• Effective management approaches must be
tailor-made to meet the needs of the local
situation. The primary focus must be on adjusting
to cultural differences.
Slide 16.36
Barriers to EU market access

• The two most common trade law entry barriers
are countervailing duty laws (CVD) and
antidumping (AD) laws.
• Countervailing duties: import tariffs intended to
protect domestic producers from harmful
subsidization by foreign governments.
• Antidumping duties: import tariffs intended to
protect domestic producers from foreign products
sold at less than their cost of production or at
lower prices than in their home market.
Slide 16.37
Table 16.7 EU antidumping cases investigated by sector, 2002–2006

Source: Commission of the European Communities, “Working document to the 25th annual Anti-dumping report,” 2006, p. 75
Slide 16.38
Figure 16.4 Competition and shelter-based strategies

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Slide 16.

The EU15 and the EU27

The objectives of the EU

Table 16.1 Economic profile of the big three (in US dollars)

The competitive status of the EU

Figure 16.1 Productivity: percentage increase in output per hour, 1992–2003

Table 16.2 Hourly compensation costs in manufacturing

The competitive status of the EU

The competitive status of the EU

Table 16.3 The world’s most competitive nations

Conducting a strategic analysis

Evaluating locations (Continued)

Comparison of investment incentives in selected EU countries based on an

Table 16.5 Comparison of location factors: one example

Business strategy matrix

Business strategy matrix (Continued)

Business strategy matrix (Continued)

Table 16.6 Direction of EU trade

Table 16.6 Direction of EU trade (Continued)

Conducting export operation

Conducting export operation

Strategic acquisitions and alliances

Figure 16.3 Pan-European manufacturing systems

Barriers to EU market access

Table 16.7 EU antidumping cases investigated by sector, 2002–2006

Figure 16.4 Competition and shelter-based strategies

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