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Types of Regional Integration
• Regional cooperation agreements
• Free trade areas
• Customs unions
• Common markets Increasingdifficulty
Examples
• European Union (EU)
• North American Free Trade Agreement (NAFTA)
• Central American Free Trade Agreement (CAFTA)
• Southern African Development Community (SADC)
Table 7-3. Important Regional Trade Agreements Region Name Acronym
Europe
European Union EU
European Free Trade Association EFTA
North America North American Free Trade Agreement NAFTA
Latin Americaand theCaribbean
Latin American Integration Association LAIA
Andean Common Market ANCOM
Central American Common Market CACM
Southern Cone Common Market Mercosur
Caribbean Community CARICOM
Africa
Arab Maghreb Union UMA
Economic Community of Central African States ECCAS
Central African Customs and Economic Union CACEU
Economic Community of West African States ECOWAS
West African Economic Community CEAO
Southern African Development Community SADC
Asia
Association of South-East Asian Nations ASEAN
Asia Pacific Economic Cooperation APEC
Economic Cooperation Organization ECO
South Asian Association for Regional Cooperation SAARC
Middle East Gulf Cooperation Council GCC
The European Union
• 1957 Treaty of Rome created the European Economic Community (6 members)
• Current number of members = 27
• Creation of the Unified Market under the Maastricht Treaty of 1992
• Creation of the Euro in 1999
• Passports abolished under the Schengen agreement
Members of the EU1952 Belgium, France, Germany, Italy, Luxembourg, Netherlands
1973 Denmark, Ireland, United Kingdom
1981 Greece
1986 Portugal, Spain
1995 Austria, Finland, Sweden
2004 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia
2007 Bulgaria, Romania
Trade Creation vs. Trade Diversion
• How compatible are regional and multilateral trade regimes?
• Economists study whether the regional arrangement creates or diverts trade
• If the agreement simply diverts trade from extraregional countries to intraregional trading partners, then it is trade diverting.
Fortress Europe vs. Fortress North America
• Consider the case of European antitrust enforcement (Does it favor EU firms against US firms?)
• Consider the NAFTA regional content rules for the auto industry (Do they discriminate against Japan and Europe?)
Video (humorous) on the origins of NAFTA
Why Hasn’t Regional Integration Been Successful Outside Europe?• Europe integrated mostly industrialized,
wealthy countries.
• The EU insists that members must have democratic governments.
• Most other regions have considerably wider variations among potential members in size, wealth, degree of industrialization, and political systems (e.g. NAFTA).
Multinational Corporations (MNCs)
A multinational corporation is “an enterprise that engages in foreign direct investment (FDI) and that owns or controls value-added activities in more than one country.
Synonyms: transnational corporation (TNC), multinationalenterprise (MNE), transnational enterprise (TNE)
The Transnationality of MNCs
• Increases with:– number of countries in which it has subsidiaries
or affiliate firms– number of countries in which the firm has
operations of various sorts– foreign assets, revenues, employees over total– proportion of foreign employees, managers,
stockholders
UNCTAD’s Transnationality Index (TNI) by Industry, 2005
• Index based on three indicators:– Foreign
assets/total assets
– Foreign sales/total sales
– Foreign employment/total employment
Example: IBM
“IBM operates in 170 countries, with about 65 percent of our
employees outside the U.S., including 30 percent in Asia
Pacific. Non-U.S. operations generate about 60 percent
of IBM’s revenue.
IBM’s research and software development have long
been globally integrated. The company’s R&D system assigns
work among our 20,000-plus software developers in 61 labs
in 15 countries, and 3,000 scientists and technologists in
IBM Research centers in the U.S., China, Israel, Switzerland,
Japan and India, based on areas of unique expertise.”
Source: IBM Annual Report 2006
Example: Samsung (Korea)
• Total revenue = $158 billion in 2006
• The company employs approximately 138,000 people in 124 offices in 56 countries.
• Samsung Electronics is a leading producer of digital TVs, memory chips, mobile phones and LCDs.
Samsung is notas globally organizedAs IBM.
Hierarchy of MNC Activities
• Sales or marketing office
• Simply assembly plants (screwdriver plants)
• Full-scale manufacturing (final products and components manufactured abroad)
• R&D operations abroad
The OLI Model of Foreign Direct Investment
• Ownership
• Location
• Internalization
Market power that derivesfrom ownership of special knowledge
Advantages of a particularforeign location
Firm must prefer FDI to otherways of conducting foreignbusiness (e.g., exports, licensing)
Source: Various works by John Dunning.
Definition of Foreign Direct Investment
An investment made to acquire control over enterprises operating outside of the economy of the investor. Control means owning 10% or more of the ordinary shares or voting power of a firm or its equivalent; lower ownership shares are known as portfolio investment.
Two Main Reasons to Invest Abroad via FDI
• To gain access to local markets (horizontal FDI)
• To gain access to low-cost inputs (vertical FDI)
Most North-North FDI is horizontal;most North-South FDI is vertical.
Greenfield vs. Mergers and Acquisitions
• Two main methods of acquiring control of foreign assets:– Greenfield investments– Mergers and Acquisitions
Daimler-Benz purchase of Chrysler
Outflows of FDI from Developed and Developing Nations, in Billions of Current Dollars, 1970-2010
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1970 1975 1980 1985 1990 1995 2000 2005
DevelopingDeveloped
Source: United Nations Conference on Trade and Development, World Investment Report.
Inflows of FDI into Developed and Developing Nations, in Billions of Current Dollars, 1970-2010
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
1970 1975 1980 1985 1990 1995 2000 2005
DevelopingDeveloped
Source: United Nations Conference on Trade and Development, World Investment Report.
Figure 4-1. Outward Stock of Direct Foreign Investment in Billions of Dollars, 1960-2006
Sources: UNCTC, Transnational Corporations in World Development (New York: UN, 1988); UNCTAD, World Investment Report (Geneva: UNCTAD, 1999 and 2007).
Figure 4-5. Inflows of FDI into the Big Five Industrialized Countries, in Billions of Current
Dollars, 1965-2006
Source: World Bank, World Data 1994 CD-ROM (Washington, D.C.: World Bank, 1994); UNCTAD, World Investment Report (Geneva: UNCTAD, 2007).
Figure 4-7. FDI Inflows into Developing and Transition Economies by Region, in Billions of Dollars, 1970-
2006
Source: UNCTAD, World Investment Report 2007 (Geneva: UNCTAD, 2007).
Key Facts• FDI flows are increasing more rapidly than
trade flows
• Most FDI flows, like trade flows, are from rich countries to other rich countries
• An increasing amount of FDI is going to a small number of developing countries
• There are increasing numbers of MNCs headquartered in developing countries
How the US-Japan Trade Dispute in Autos Led to Greater FDI Flows from
Japan to US• After the oil price increases of 1973, US
consumers bought larger number of fuel-efficient vehicles (VWs, Toyotas, etc.)
• Auto industry accused Japan of dumping autos on US markets
• Carter Administration negotiated a Voluntary Restraint Agreement (VRA) with Japan on autos
Exports vs. Local Production of Automobiles in the United States by Japanese Firms, 1980-
1990, in Thousands of Vehicles
Source: Japan Automobile Manufacturers Association.