CHAPTER 17

European Union

Chapter summary

1. The overall objective of the European Union (EU) is to create a market in which there are no
economic barriers to trade between the member countries. When this is achieved, the EU will be
the largest economic bloc in the world. However, there are two areas in particular in which
additional progress must be made: free movement of goods and the practice of government
procurement. In addition, many new entrants into the EU (and a few of the original members)
have yet to be integrated in terms of adopting the euro and are not yet allowed free movement of
labor and passport-free travel. They also threaten the possibility of a unified regional foreign
policy.
2. The current competitive status of the EU lags behind that of the United States and Japan in a
number of areas, including productivity, investment spending and education. Greater economic
strides will be needed if the region is to compete effectively with its triad counterparts.
3. In preparing to do business in the EU, multinational enterprises (MNEs) should focus on the
competitive nature of the targeted industry and the evaluation of location. Competitive
intelligence gathering involves external information gathering and internal infrastructural
analysis. Location evaluation entails the consideration of such factors as regional incentives,
operating costs and distance from major markets.
4. Many aspects of strategy need to be considered when doing business in the EU, including (a)
an overall analysis of the environment; (b) the feasibility of exporting; (c) the value of strategic
alliances and acquisitions; (d) marketing considerations, (e) manufacturing approaches and (f)
management considerations. Managers need to weigh the choices of economic integration and/or
national responsiveness very carefully.
5. The EU has a large internal market. Firms located in the EU can use a new type of nontariff
barrier (NTR) to entry to keep out rival firms, namely, trade remedy legislation such as
countervailing duty laws (CVD) and antidumping (AD) laws. Recent research has found that the
use of both CVD and AD is a shelter strategy designed to protect uncompetitive domestic
firms. However, the more successful EU firms concentrate on the development of sustainable
firm-specific advantages rather than on the use of CVD and AD laws.
Answers to review and discussion questions:
1. What are the ultimate objectives of the EU? Identify and describe them.
The ultimate objectives of the EU include (a) elimination of customs duties among member
states; (b) elimination of obstacles to the free flow of import and/or export of goods and services
among member states; (c) establishment of common customs duties and unified industrial and
commercial policies regarding countries outside the community; (d) free movement of persons
and capital within the bloc; (e) acceptance of common agricultural policies, transport policies,
technical standards, health and safety regulations and educational degrees; (f) common measures
for consumer protection; (g) common laws to maintain competition throughout the community
and fight monopolies or illegal cartels; (h) regional funds to encourage the economic
development of certain countries/regions; (i) greater monetary and fiscal coordination among
member states and certain common monetary/fiscal policies.
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2. Will the EU bring about the Single European Market? What type of changes will have to
take place for this to happen? Identify and describe three of them.
The EU certainly hopes to bring about an SEM. However, this will require a number of changes.
One is the free movement of goods, which will mean the elimination of technical standards,
administrative barriers and fragmented local markets. Two more will be a common procurement
policy and the acceptance of the euro by all EU members.
3. What is the competitive status of the main EU economies in terms of labor productivity
and investment spending? Based on your answer, what is your overall evaluation of this
status?
Labor productivity in the EU15 is lower than in the United States and Japan. Investment
spending has been poor for over 15 years, due to low productivity, high taxes and low profits. If
the EU15 is to become competitive, it must significantly improve productivity and increase
investment spending so that it comes up to world-class levels.
4. How can firms doing business in the EU use competitive intelligence? Identify and
describe two major steps that can be used in this process.
One of the major steps is to gain information on competitors through government-controlled
company registration offices, trade associations and regional and local publications. Another is to
analyze how firms manage their infrastructure and to use this information to follow their
successful competitors.
5. What types of regional incentives do countries offer MNEs willing to set up operations in
their locales? Identify and describe two of them.
One regional incentive is low-interest loans. A second is reduced land prices. Others include
grants and training support for the personnel. All of these are designed to attract MNEs to set up
operations in the local area.
6. In addition to regional incentives, what other evaluation criteria should MNEs employ
when deciding where in the EU to establish operations? Identify and describe three of
them.
Other criteria that are used in making location decisions include (a) access to customers; (b)
quality of labor and (c) expansion prospects. Still others include the level of wage costs, the
attractiveness of the environment, access to suppliers, nonfinancial regional assistance, and the
absence of restrictions for expansion, local infrastructure, the level of rents and public
transportation.
7: In formulating a strategy for doing business in the EU, there are two primary areas of
initial consideration: national responsiveness and economic integration. What does this
statement mean?

This statement means that the firm must be responsive to local conditions and cultures, on the
one hand, while trying to develop economies of scale and the benefits of increased coordination
and control of geographically dispersed activities, on the other. For example, firms selling
microcomputers often use a strategy that emphasizes high economic integration and low
sovereignty. Conversely, firms in the food products and designer clothes industries often employ
high sovereignty and low economic integration. The MNEs selling inexpensive toys typically use
a strategy of low globalization and low sovereignty, while auto firms tend to use high economic
integration and high sovereignty, characterized by strong price competitiveness and select target
positioning.
8. What do companies that want to export to the EU need to know about doing business
there? Discuss five facts or strategies that would be of value to them.
Five facts or strategies that are of value to firms wanting to export to the EU include (a) examine
the legal and business considerations involved in appointing foreign intermediaries and establish
criteria that reflect the particular geographic market; (b) assemble a list of potential candidates by
using the various directories and consulting other sources of information; (c) qualify such
candidates by applying certain criteria and conducting a preliminary interview; (d) visit the
proposed intermediary to obtain additional information about its resources and facilities, to get a
proper feel for the intermediarys compatibility with the organization and to check the objectives
of the agent or distributor and (e) after selecting an agent or distributor: (i) negotiate an
agreement that is fair and mutually beneficial; (ii) comply in good faith with the terms of the
agreement; (iii) continue communication between the parties and (iv) make occasional
adjustments in the relationship in response to changing circumstances.
9: In gaining a foothold in the EU, when is it most effective to opt for an acquisition over an
alliance? When is a strategic alliance a better choice? In each case, provide an example.
Research shows the following: (a) acquisitions work well for core businesses and existing
geographic areas, while alliances are more effective for edging into related businesses or new
geographic markets; (b) alliances between strong and weak companies rarely work; (c) the
hallmark of successful, enduring alliances is their ability to evolve beyond initial expectations
and objectives; (d) alliances with an even split of financial ownership are more likely to succeed
than those in which one partner holds a majority interest and (e) more than 75 percent of the
alliances that terminated ended with an acquisition by one of the parents.
10. Why will marketing strategies in the EU have to reflect a concern for pricing? A
concern for positioning? Give an example of when each would be the most important
consideration.
Pricing is important because as internal barriers and restrictions between countries are lowered,
costs will decline and firms will have to become price competitive. Other reasons that will
account for price competition include the opening of public procurement contracts to broader
competition, increases in foreign investment that will increase production capacity and more
rigorous enforcement of competition policy. A concern for positioning will be important because
of the large number of submarkets in the EU, each of which requires national responsiveness to
local conditions. Pricing is most important when products are similar and regarded as equal in
quality and performance. Positioning is important when products must be adapted to local tastes.
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11. What is the likely future of direct marketing in the EU? Defend your answer.
The most likely future of direct marketing is strong growth. This is a new approach for many
European businesses because there are so many small markets in the EU, in contrast to the
United States where markets are larger and telemarketing and other nontraditional channels have
been in use for well over a decade. As the EU market becomes more homogeneous and there is
an end to legal restrictions on the use of direct marketing, this approach is likely to gain strongly
as a marketing strategy.
12. What are three major manufacturing considerations for companies doing business in
the EU? Identify and describe each.
One manufacturing consideration is reducing costs through the use of standardized components
and large production runs. This allows for lower cost per unit. A second is the use of outsourcing
and just-in-time (JIT) inventory systems to reduce the cost of carrying parts and supplies. This
significantly cuts back the cost of investment. A third is the use of factory networks to create
sophisticated production, distribution and after-sales service systems. This approach allows
MNEs to build products in a series of different locations and to assemble them in still another
location, thus achieving the best combination of low costs and local customer responsiveness.
13. How important is it for EU managers to have a global perspective?
It is important for EU managers to have a global perspective because the way they do business in
Europe is often different from the way it is done elsewhere. For example, there are significant
cultural differences between Europe and the United States and Japan in terms of worker
participation in decision making and motivation. Each geographic region has its own unique
characteristics. The same is true for doing business throughout the EU.
14. How can trade laws be used by EU firms to keep out global competitors?
Trade laws can be used by EU firms in the form of AD and CVD laws. Both protect domestic
producers by providing them shelter from foreign competition, resulting in a protected niche for
local manufacturers, though this strategy often results in the latter remaining noncompetitive
against world-class companies.
15. What evidence is there that EU firms use antidumping laws?
There is a fair amount of evidence that EU firms use antidumping laws. Between 2002 and 2009
there were almost 172 cases brought in the EU.
16. The EU accepted 10 new members into the union in 2004 and another 2 in 2007. Are
these members fully integrated?
No. For example, the citizens of these new members do not have full access to the labor markets in the
EU15. In addition, farmers from these countries do not receive the same amount of farm subsidies as their
EU15 counterparts.
17. How are the 12 new entrants into the union likely to affect employment in the EU15?
The 12 new entrants come from relatively less developed economies where labor is cheap. The eventual
entry of these workers might increase the supply of labor in the EU15, which might lead to lower wages.
However, the issue is more complicated, as manufacturing firms move their facilities to these countries to
take advantage of the common market. While workers in EU15 nations perceive this as an export of jobs
that creates EU15 unemployment, these facilities would have been likely to go to Asia in any case. The
net effect on employment, from these relocations, is difficult to estimate.
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