Proposal Example of Establishing a Greenfield Production Facility

Introduction

The proposal, to establish a Greenfield production facility for Acme, a U.S. multi-national enterprise (MNE), in either Italy, a member of the European Union (EU), or in Turkey, a non-member of the EU, provides a recommendation as to which alternative, as well as the rationale for the decision.  This proposal looks at each country’s currencies, trade policies, culture, political and legal components, in weighing the decision for the nonpareil choice.  

 Italy and Turkey in Review

1.0 Currency of Italy and Turkey:  Advantages and Disadvantages

          Italy is part of the European Union (EU), which uses the Euro as its currency.  The Euro has its advantages as well as disadvantages.  The advantages outweigh the disadvantages.  The main advantage of the Euro is a single currency between member nations, which eradicated the need of exchanging currencies between Economic and Monetary (EMU) members.  EMU members saved an average of $30 billion a year by switching to the Euro. 

          The bulk of the savings was from the reduction in transaction costs from currency exchanges by firms that import or export to or from other countries.  Another advantage was the elimination of exchange rate volatility between member nations, in addition to, preventing speculation and competitive devaluations, which were the main culprits of inflation and high interest rates.  On the other hand, one of the major problems in member nations switching to a single currency was giving up their rights to change economic and monetary policies to eradicate any economic downturns at home; likewise, exchange rates could not be adjusted by the individual countries to aid in regional economic upturns.  Even though these appear to be disadvantages, the member nations already made it easy to purchase and sell goods cross-borders, and to lend and borrow, meaning, the EMU nations are linked together to a semi-unitary monetary policy.  In addition to the benefits of a fixed exchange rate of 2.25%; these benefits include, promoting international trade and investment, which supports growth, especially in developing countries.

          There is also the possibility of one nation in the EU being in a recession, which would prove to be quite difficult for that country because to change EMU monetary policy would impair other countries.  Nonetheless, by adopting a single currency economy throughout Europe, the economies’ and business cycles are linked together, which in turn, alleviating economic downturn versus stability of the member nations.  One of the major concerns of Italy, who in recent times is the financial crisis, which has hit home in Italy, and Prime Minister Silvio Berlucsconi has stepped down, due to parliament’s approval of new austerity measures to try to ward off an economic collapse for the euro zone’s third largest economy.  Mr. Berlucsconi will join his Greek counterpart George Papandreou, as fear rises in the euro zone that Italy may default on its debt.  There were no austerity measures to reduce its €1.9 trillion dollar debt, six times more than Greece’s debt, and the costs to pay for that debt is becoming more bleak.  Analysts are saying that Italy is too big to bail out, even though no one knows for sure if they will default, however, if they do default the consequences for the world economy would be devastating.  Another detriment is the exchange rate of the euro is depreciating, due to the financial insolvency of Greece, who are part of PIGS (Portugal, Italy, Greece, and Spain), and now Italy may be joining Greece in defaulting on their debt.                  

              Turkey uses the Turkish Lira (convertible) as their primary form of currency; formerly known as the Turkish pound in Ottoman Turkey.  Although Turkey’s currency is convertible, they have many bilateral investment and tax treaties with the United States that ensure elimination of double taxation, as well as a guarantee repatriation of capital in convertible currencies. 

          Every unit of Turkish currency (TL) equals 100 Kurush; However, Kurush is seldom used because inflation is so high in Turkey.  The Central Bank of the Republic of Turkey (CBRT), as of 2012, has tightened the monetary policy, after the inflation rate rose to 10.5% in 2011.  This is due to the Turkish Lira depreciating.  This rate is well above the expected rate of 8.4%, because of this large increase, the CBRT has planned for tightening measures in order for inflation to fall by 5% by the end of 2012.  The  CBRT provides flexible policies, such as using an interest rate corridor, foreign exchange auctions, and adjustments to the reserve requirement ratio and repo auctions.  These policies are aimed toward stabilizing the Turkish Lira, which has depreciated by 25%.

1.1 Trade Policies in the EU and Turkey

            “Europe is the world’s largest trading bloc, accounting for one-fifth of global trade."  A single trade policy is set up for the 27 member States of the European Union, who share a single border and market.  This empowers the European Commission (EC) when it talks trade with partners’ of the EU.  The Commission acts as the negotiator for one negotiation, which means one agreement, and not 27 different trade rules with each partner of trade.  In the World Trade Organization (WTO), the Commission represents the EU member States, providing unity to mould an open global trading system, which promotes fair rules and to make sure those rules are followed.  At the heart of trade policy is the WTO system.  This system allows all the members a fair and equal voice in negotiations and the making of trade rules, and new WTO trade agreements. 

                 Europe’s trade policy benefits European companies’ growth by creating jobs and investment opportunities, even for the smallest companies, who want to trade outside of Europe; due to Europe’s affluent communications and transport systems.  New markets for European exports are open through Europe’s trade policy; providing a reduction in tariffs and other blocks to the markets incipient partners.  The EC works daily to ensure that any rifts or barriers encountered by exporters are removed, to not only abate piracy and counterfeiting of goods, but also expedite new opportunities in European investment.

            In contrast, Turkey has become somewhat of an example that other countries could look to for advice when it comes to foreign trade policy, for they have taken measures to strengthen their democratic system and social and political platforms.  Unlike other countries of the world during the global financial crisis, Turkey did not intercede in its banking sector; and its credit score has increased for two consecutive years.  Turkey is among the fastest growing countries, with strong political and economic stability, following economic reforms. 

            Turkey is a member of the WTO, and has free trade agreements with the European Free Trade Association (EFTA), Israel, and other countries.  They have a nominal GDP of $797.6 billion.  The exchange rate regime in Turkey is flexible or liberal exchange rate system; its biggest exports are to the United States, along with its trading partners in the EU:  Italy, France, and Germany.  There are economic advantages of a flexible exchange rate such as giving leeway to fiscal and monetary authorities to pursue internal goals, like stable growth, full employment, price stability, and exchange rate adjustment often aids as a stabilizer automatically to fulfill these goals.  However, the flexible exchange rate has its disadvantages, like uncertainty and instability in trade, inflation, speculation, lack of investment from countries abroad and internally. 

                There are no limitation and or/approval for non-residents who wish to buy/sell securities at the Istanbul Stock Exchange, as well as open foreign exchange deposit accounts at banks.  Under Turkish currency legislation, free transfer of profits, royalties and fees, dividends, license, repayment of loans and interests, and proceeds of sale and liquidation is unrestricted.  Turkey joined the EU Customs Union in 1996, which has proven beneficial in trade relations with the European block.  These benefits includes, free movement of goods, customs duties and charges were eliminated, as well as quantitative restrictions, Common Customs Tariffs against third countries, a free and fair competitive market without government obtainment, and protection of intellectual, commercial, and industrial property. 

1.2 Cultures of Italy and Turkey

          When one thinks of Italy, they may see romance on the canals of Venice, a whole pizza just for them in a little café on a hillside, excellent vino, Leonardo da Vinci’s Mona Lisa, or enjoying gelato on a hot, sunny day.  However, in the mix of all these wonderful attributes that composes the country of Italy stands a language barrier, 93% of the 59 million people speak only Italian.  However, people who work for large companies or international firms speak English well.  There is another culture in Italy, the business culture.  When conducting business there are several factors to consider that are customary in Italy. 

            One factor is to select the best people for negotiations because Italians prefer to do business with only the top people in a firm.  On the other hand, they also prefer to do business with people they trust, so it is important to build strong relations with Italian businesses.  Bureaucracy in Italy can prove to be quite frustrating; therefore, it is important to have personal contacts that could help cut any “red tape."  Age is also a contributing factor in the workplace because people in their twenties do not have the experience or knowledge base that older individuals possess. 

            One interesting factor is that for the whole month of August Italy goes on vacation, this factor is pertinent to keep in mind when arranging any meetings or negotiations.  In addition, when arranging presentations in Italy, the look of the presentation is usually more important than the content itself, also called, “Bella figura,” or “beautiful figure".  Although attractive presentations are important, the relationships that are established in the business arena are considered the most important element in establishing business contacts, as well as successful ventures. 

              Turkey is known for its beautiful textiles and rugs, as well as coffee; books have been written about their thick coffee.  The Turkish people are extremely friendly and love to socialize, even with strangers.  The language of these friendly people is quite diverse; of course, the official language is Turkish, spoken by 90% of the 71.1 million population, out of the 73.7 million total population.  The minority languages are Kurdish, which make up 6% of the population, Arabic at 1.2%, and Circassian spoken by 0.09% of the population throughout Turkey; other languages include, Armenian, Greek, Judezmo, a Romance language spoken by the Jews.

        Doing business in Turkey is a lot like doing business in Italy.  They want to conduct business with those they trust; a commitment to building personal relationships is key, as well as presenting a proposal in a very professional and “Bella figura” way because Turkish people are oral and visual people, so presenting presentations with maps, graphs, and charts is sure to capture their attention.  Financial gains is not the only thing they will be concerned about, they also want to know about power, respect, influence, and other non-monetary benefits.  Meetings are usually spearheaded by the head of the firm, first in negotiations, and it is wise that you learn patience as well in your dealings, because a quick decision is unlikely. 

1.3 Politics and Economies

         The government agency, the Italian Institute for Foreign Trade (I.C.E., Istituto nazionale per il Commercio Estero), is responsible for business opportunities, promotion of trade, and industrial cooperation between Italy and foreign countries.  The ICE for internationalization and consolidation of foreign markets supports Italian firms.  The activities of the ICE is funded by private and public funds from companies that use ICE services for assistance, advice, and information, as well as the Ministry of International Trade, who has a supervisory role and constitutes directives. 

           Italy is the sixth richest country in the world, they have a Gross Domestic Product (GDP) of U.S. $1.273 trillion, and places 18^th in income per capita.  However, taxes in Italy are high, making up 43.3% of the GDP, while 34.9% of total tax revenues come from income tax, and 35.4% from value-added tax (VAT), and indirect taxes are levied by the government.  One of the common problems that the government is trying to fix is tax evasion, which largely stems from the informal economy because employees from private and public sectors have their taxes deducted from their paychecks; therefore, do not have to submit tax declaration forms.  Taxation of the people is progressive in Italy. 

        It is interesting to note that Turkey is a candidate to join the EU, but no timetable has been established.  There are many reasons for this, a couple of factors include, large-scale immigration, as well as, Turkey is not a European country.  On the other hand, outside of the EU, Turkey is booming in economic growth.  The GDP grew to 11%, during the first three months of 2011.  As of 2002, foreign direct investments have totaled $15.7 billion.  Non-tariff barriers confine freedom of trade, even though the weighted average tariff rate is at 2.3%.  There are some restrictions in a number of sectors for foreign investment, as well as frequent changes in regulatory and legal domains, although, the financial system has greater competitiveness and transparency due to a steady transformation in the financial system. 

1.4 Tax Laws in Italy and Turkey

            The tax rate in Italy for 2011 is as follows, for an individual, between 23-43%, as well as direct taxation (IRPEF), and a regional tax of 0.9%-1.4%, in addition to municipal tax of 0.1%-0.8%.  However, some income earners had reduced rates of tax or tax exemptions.  Corporate taxes (IRES) in 2011 was 27.5%, as well as a local tax (IRAP) at 3.9%, thus, the effective tax rate was 31.4%.

           Turkey’s multi-tax system is progressive.  The standard corporate tax is 20%, and individual tax rate varies between 15% and 35%.  Capital gains tax is added to the income of the regular income of the corporation.  For non-residents, tax in Turkey is deducted at source, dividends 15%, interest 10%, and royalties 20%.  Whether a company is liable for full or liability taxes depends on its residency status.  A resident company will have a full tax liability (worldwide income is taxable).  A company that is a non-resident, and conducts business through a joint venture or a branch, then it will have limited tax liability, fully subject to corporate tax on an annual basis in Turkey.  However, if there were no presence in Turkey, then withholding tax is administered on earned income.  If there is a presence, the avoidance of double taxation treaty, reduced rates of withholding tax. 

 Conclusion

       By analyzing Italy and Turkey’s currency, exchange and inflation rate, trade policies, culture, politics, tax laws, and economy, a viable choice has been made as to which country a Greenfield production facility in Italy would provide the most beneficial and successful outcomes for Acme.  Even though Turkey is seeing economic growth, the financial risks outweigh this advantage.  Although Italy is going through a financial crisis, and the threat of default is facing the world’s financial economy, the choice for Italy is defined, as simple as, they are a member of the EU.  With Italy being a part of the EU, it has several economic advantages, such as a large market and trading block, as well as the euro is stronger than the depreciating Turkish Lira.  Even though Turkey is part of the WTO, like Italy, which has its many benefits, such as free trade, which lowers trade barriers that reduces production costs and prices; there is more power in numbers.  Therefore, to build the Greenfield in Italy, who are part of the 27 member States of the EU, would be the successful choice because of the free trade zone, meaning, easy market access in each country of the EU, a benefit that Turkey lacks.