REGIONAL ECONOMIC INTEGRATION

5 DIFFERENT STAGES OF ECONOMIC INTEGRATION

FREE TRADE AREA

A group of countries that remove trade bariers among themsevles

NAFTA

Each country maintains diffferent external policies regardiing non members

No free movement of people among member countries

What is Regional Economic Integration?

Efforts to reduce trade & investment barriers within one region - EU

Whereas global economic integration is to reduce barriers around the world

Political benefits: promotes peace - buying/selling from allies - unlikely to fight each other

Economic benefits:

Handle disputes constructively

Makes life easier for all particpants - multilateral trade agreements; non-discrimiantroy

Raises income, generates jobs & stimulates economic growth

CUSTOMS UNION

IMPOSES COMMON EXTERNAL POLICIES ON NON-PARTICPATING COUNTRIES

In addition to a FTA to combat trade diversion

MERCOSUR in South America

COMMON MARKET

Combines custom union + free movement of goods & people

EU was previosuly a common market

ECONOMIC UNION

All features of a common market

Members coordiante and harmonize economic policies to belnd their economcies

1 single economic entity

The EU

POLITICAL UNION

Integration of political and economic affairs of the region

the USA, former Soviet Union

Pros of Economic Integration for MNEs

Benefits centre on both political and economic dimensions

Political

Promotes peace - fostering close economic ties - builds confidence

Enhances collective political weight of region

Economic

Disputes handled constructively

Consistent rules make life easier, discrimination impossible in the region

Free trade & investment rasies income & stimulates economic growth

Can bring a larger labour market

Trade creation - cooperation = cheaper consumer prices; reduced distribution costs & economies of scale for region based firms

Employment opportunties - free movement of labour

Regional deals emerge as global deals can be difficult to accomplish

CONS of economic integration for MNEs

Political

Preferential treatments for firms with the region

discrimiantion against those outside firms

undermines global intregration

Economic

Some loss of sovereignty - 17 Euro member states - lost monetary policy

Greece threateened rights of other EU members as a burden

Trade Diversion

trading with member countries only

increased trade with less efficient/more expensive producers

weaker companies protected inadvertently

trade barriers outside the bloc

Employment shifts and reductions - moving production to cheaper labour markets in the region

Countries cuathoius about joining regional EI - Swizterland & Norway not in the EU and do very well without

Implications for MNEs

Markets that have been protected fro foreign competition are increasignly open - EU & NAFTAS - likely to INCREASE competition

OPPORTUNITIES:

Formally protected markets are now open to exports and foreign investment

Free movement of goods across borders, harmonization of product standards, simplification of tax regimes means firms can realise enormous cost economies by centralizing production in those places where factor costs and skill are optimal

Integration & FDI

MNE may have HQ or production facilities outside of the region

2 countries both importers of a partiucalr goods, with producer outside of the region

REI results in a single, large market for the good in place of the wto relatively small national markets

Changes the profitability of operating a plant in one of the countries in the region

Demand may justify establishment of branch plant to jump over the tariff costs - cheaper production

Induces FDI into region and profitability of MNE rises

THREATS

Lower trade and investment barriers - possible price competition - increased competition forcing EU firms to become more efficient and innovative - be stronger players

Firms outside the bloc - shut out from single market - trade fortress created - firms limited if EU intervenes on strategies for M&As - business must monitor regional trade alliances to monitor activity

What Factors Help Regional Integration Succeed?

Economic similarity

on wage rates,economic conditions and other factors helps ensure success

more similar the economies of the member countries, the more likely the economic bloc will succeed

Significant wage rate differences mean workers in lower-wage countries will migrate to higher-wage countries

Significant economic instability in one member country can quickly spread and harm the economies of the other members.

Political similarity

Similar political systems, shared aspirations and willingness to surrender national autonomy

Enhances prospects for a successful bloc. This is a key success factor of the EU

Countries that seek to integrate regionally should share similar aspirations and a willingness to surrender national autonomy for the larger goals

Similarity of culture and language

Geographic Proximity

facilitates intra-bloc movement of products, labour, and other factors.

Often, neighboring countries have a common history, culture, and language

bloc provides the basis for mutual understanding and cooperation

MERCOSUR bloc enjoys advantages because its members share many cultural and linguistic similarities

Under NAFTA, it was easier for Canadian firms to establish trade and investment relationships in the United States than in Mexico because of the similarities between the two northern countries

facilitates transportation of products, labor, and other factors of production

Neighboring countries also tend to share culture and language

Why Do Nations Pursue Economic Integration?

EXPAND MARKET SIZE

Increases size of the marketplace for firms inside the economic bloc

Buyers can access larger selection of goods.

Belgium has a population of just 10 million, the absence of trade barriers with other countries in the EU gives Belgian firms easier access to a total market of roughly 500 million EU buyers

When NAFTA was formed, Canadian firms gained access to the much larger markets of Mexico and the United States, and consumers in all three countries access a wider selection of products and services.

Enhance productivity and economies of scale

Bigger market facilitates economies of scale

Internationalization inside the bloc helps firms learn to compete outside the bloc.

Competition and efficient resource usage inside the bloc leads to lower prices for bloc consumers.

While a German firm may be only moderately efficient when producing 10,000 units of product for Germany, it greatly increases its efficiency by producing 50,000 units for the much larger EU market

firms enjoy additional benefits through increased access to factors of production that now flow freely across national borders within the bloc

Labor and other inputs are allocated more efficiently among the member countries. More efficient resource usage leads to lower prices for consumers.

ATTRACT INVESTMENT FROM OUTSIDE THE BLOC

foreign firms prefer to invest in countries belonging to an economic bloc

Factories they build there receive preferential treatment for exports to all member countries within the bloc

Samsung - invested heavily in the EU - take advantage of Europe’s economic integration - establishing operations in a single EU country, these firms gain free trade access to the entire EU market.

ACQUIRE STRONGER DEFENSIVE & POLITICAL POSTURE

provides member countries with a stronger defensive posture relative to other nations and world regions

key motive for formation of the EU

EU is one way Europe counterbalances the power and international influence of the United States

helps countries gain bargaining and political power in world affairs

countries are more powerful when they cooperate than when they operate alone