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