The International Financial Market, Research Paper Example

Abstract

In the offered paper, the issue Greenfield production facility establishment by US ACME Company was explored from the perspective of two countries suitability. The chosen countries were Bulgaria, as a new EU member state, and Turkey, as a member of European custom union. The topic was studied from the perspectives of national currencies, trade policies and cultural specifics which would affect the effectiveness of the project.

Key words: Greenfield facility, economic growth, labor force, Bulgaria, Turkey.

International Financial Market

Each company in the process of development inevitably reaches the point of expansion. It can be local, national or international expansion, irrespective of the scale principles of expansion remain the same. It is crucial to know where to go and how to act, in other words, analysis of the target markets and locations is essential. Economic environment of Bulgaria and Turkey are analyzed from the perspective of their suitability for the Greenfield production facilities of the Acme Corporation. Main advantages and disadvantages of countries’ suitability are discussed in the framework of national currencies and their exchange rate to US dollar, trade policies and cultural specifics which might affect efficiency and profitability of the project conduct.

First of all, it should be emphasized why those two countries were chosen among others. Both states are considered to have medium-developed economies with favorable environment for foreign investment. Bulgaria is a new EU member state. Subsequently, it already favors economic privileges as a member of Union’s economy and is continues to involve foreign investments, needed to modernize and in some places to develop economic infrastructure. In 2010, US was the main foreign investor into economy. Although the country is a member of the EU, it is not yet a member of the Euro zone, which opens new possibilities for capital investments, particularly in the US Dollars (Garabed, 2011). On the other hand, Turkey is not a member of the EU but favors trade privileges with it in the framework of custom union. Country’s full entrance is a matter of the long-term perspective. Thus, financial system and economic system would remain the same for another decade or so (Sumru Altug and Filiztekin Alpay, 2006). Thus, both countries represent an opportunity to enter European market on favorable basis, but in a different way.

From a currency perspective, both countries are suitable for the target project, because the value of the dollar is higher than the value of national currency. Bulgarian lev has a bit stronger position of $1.36 for 1 lev, while 1 Turkish lira is worth of $1.7 (“The Turkish Economy”). Although this may seem quite insignificant difference, when the numbers are increased to millions, economizing on the value of Turkish lira would be significant. In other words, $1 spent on Greenfield project would be more effective and cost-efficient in Turkey than in Bulgaria. In a long-term perspective, Bulgaria would become even more expensive country for the project conduct due to the entrance to the Euro zone in 2013 (Zlatkova, 2011). Turkey’s membership, on the other hand, is a long-term perspective of the next decade, and entrance to the Euro zone is even further. Subsequently, relevantly higher inflation in Turkey and its tie to US dollar makes transactions of the project more effective and stable in a long-term planning.

Concerning countries’ trade policies, both target European markets and have preferences in the foreign trade with the EU. Both countries are open to the foreign investments, including Greenfield projects. The main issue in terms of trade policy is custom policy. Obviously, Greenfield project in Bulgaria would give an opportunity for the direct access to the European markets on the conditions of a member-state.  On the other hand, this advantage would be diminished by the European legal framework for the foreign investments to the member states economies, which would result in higher taxes and stricter conditions of project performance in terms of current stage of national and common European norms’ discrepancy. This, in its turn, might result in the delay of project development.  In those terms, Turkish trade policy and custom union with EU would be an optimal solution for the project. First of all, Turkish legal framework in the field of foreign investments is already reformed and quite favorable which was proved by FDI stock for 2009 of $205 billion (“The Turkish Economy”). Secondly, since Turkey is not member of the EU, its projects estimation is missing bureaucratic processing on local, national and common European levels. Finally, Turkish import is more diversified than Bulgarian. It is not strictly limited to the European direction, but also to Asian and African. In other words, locating Greenfield production facility in Turkey would give an opportunity to work on various markets without further changes of location and creation of branch networks. Efficiency of Turkish investment environment is proved by numerous American companies represented in Turkish economy (Sumru Altug and Filiztekin Alpay, 2006).

Some of the cultural specifics of countries’ economies might have a negative influence on the target project. The main failure of Bulgarian economy is its political dimension, meaning high level of bureaucracy and corruption, which diminish efficiency of many European and foreign projects and investments to Bulgarian economy. It is considered to be one of the reasons of Bulgaria slow economic growth in 2010 at the rate of 0.2%, while Turkey succeeded at the rate of 8.9% (Garabed, 2011; “The Turkish Economy”). Another essential issue, which is common to most of the new EU member states, is a low quality of labor force skills; this might become a problem when possible jobs created by the project would require higher skills than were available on the local labor market. Concerning Turkey, possible obstacles might be its political situation. Because of Turkey’s geographical position, instability in the Middle East and Africa might affect its political stability. Muslim and military origin of the current political system of Turkey might diminish its economic value and profitability of the long-term cooperation perspective. In other words, government foreign investment policy and support might greatly depend upon Turkish foreign policy. The quality of labor force skills is also a challenge in Turkey.

Overall, it becomes clear that both countries have their pluses and minuses. After evaluation of all pro and cons, the most suitable solution for the Greenfield production facility establishment would be Turkey. It has favorable geographical position for entering various markets, benefits from custom union with EU, without strict legal obligations imposed on Bulgaria. Turkey has a stable economic growth which recovered extremely fast after the world crises. Higher inflation rate in Turkey makes it more cost-effective country for project placement. The most essential is that Turkish labor force is much cheaper than Bulgarian with relatively the same unemployment rate of 10% (Zlatkova, 2011).

References

Garabed, Minassian (2011). Breaking the Bulgarian Economic Model: Reasons and Projections. Saarbruken, Germany: VDM Publishing.

Sumru Altug, & Filiztekin Alpay (Eds.) (2006). The Turkish economy: the real economy, corporate governance and reform. Oxon, OX: Routledge.

“The Turkish Economy. Overheating”. The Economist. 5 May, 2011. Retrieved from http://www.economist.com/node/18651739

Zlatkova, Ina (2011). The Bulgarian Economy – One of the Most Favorable Economies in the World for Starting a Business According to the World Bank. 17 Jun. Retrieved from http://sb-bg.com/2011/06/17/the-bulgarian-economy