Lecture 5 Regional Economic Integration and Emerging Markets

Lecture 5 Regional Economic Integration and Emerging Markets
BUSN600 International Business Environment Lecture 5 Regional Economic Integration and Emerging Markets

Lecture 5 Main Concepts Approaches to Economic Integration
BUN600: International Business Environment Lecture 5 Main Concepts Approaches to Economic Integration Characteristics and Challenges of the WTO Bilateral Agreements Regional Economic Integration Regional Trading Groups Emerging Markets

Lecture 5 1 Approaches to Economic Integration Economic integration
BUN600: International Business Environment Lecture 5 1 Approaches to Economic Integration Economic integration the political and monetary agreements among nations and world regions in which preference is given to member countries Bilateral integration At the bilateral level two countries decide to cooperate more closely. Regional integration At the regional level, a group of countries located in the same geographic area cooperate. Global integration At the global level, countries from all over the world cooperate through the World Trade Organization.

Lecture 5 2 The WTO World Trade Organization (WTO) The major body for
BUN600: International Business Environment Lecture 5 2 The WTO World Trade Organization (WTO) The major body for reciprocal trade negotiations enforcement of trade agreements General Agreement on Tariffs and Trade (GATT) The World Trade Organization, or WTO, encompasses and extends the General Agreement on Tariffs and Trade, also known as GATT.

Lecture 5 2 The WTO Most favored nation (MFN) clause GATT
BUN600: International Business Environment Lecture 5 2 The WTO GATT The GATT was formed by 23 countries in 1947 as mechanism for negotiating the reduction and elimination of trade barriers and for agreeing on the conduct of international trade. Most favored nation (MFN) clause The central tenet of GATT was the MFN clause that required members to open their markets equally to all other members. Succeeded by WTO in 1995

Lecture 5 2 The WTO Continues the MFN clause of GATT
BUN600: International Business Environment Lecture 5 2 The WTO Continues the MFN clause of GATT Provides a mechanism for dispute settlement The WTO does make some exceptions to the MFN principle. For example, developing countries’ manufactured products have been given preferential treatment over those from industrial countries, concessions granted to members within a regional trading alliance, such as the EU, have not been extended to countries outside the alliance, and countries are permitted to raise barriers against member countries which they feel are trading unfairly. Doha Round The most recent set of negotiations for the WTO began in 2001 in Doha, Qatar. The Doha Round, which focuses on giving a boost to developing nations, has been challenging and has stalled numerous times. One of the major sources of tension involves agricultural subsidies. Criticised for failing to pay enough attention to labor and environmental concerns undermining global diversity benefitting rich at the expense of the poor

Lecture 5 3 Bilateral Agreements
BUN600: International Business Environment Lecture 5 3 Bilateral Agreements Countries are increasingly willing to sidestep the multilateral system and engage in bilateral agreements in order to achieve their objectives. Bilateral agreements can be between two individual countries or can involve one country dealing with a group of other countries Also known as Preferential trade agreements (PTAs) Free trade agreements (FTAs)

Lecture 5 3 Bilateral Agreements Regional trade agreements
BUN600: International Business Environment Lecture 5 3 Bilateral Agreements Regional trade agreements Regional trade agreements or RTAs, also known preferential trade agreements, give member countries special treatment. They began to emerge after World War II when nations saw the benefits of cooperation and larger market sizes. Examples include European Union (EU) European Free Trade Area (EFTA) North American Free Trade Area (NAFTA) Association of Southeast Asian Nations (ASEAN) Common Market of Eastern and Southern Africa (COMESA)

Lecture 5 4 Regional Economic Integration
BUN600: International Business Environment Lecture 5 4 Regional Economic Integration Major types of economic integration Free trade area no internal tariffs Customs union no internal tariffs plus common external tariffs Common market customs union plus factor mobility

BUN600: International Business Environment Lecture 5 4 Regional Economic Integration Effects of regional integration Static effects The static effects of integration are the shifting of resources from inefficient to efficient companies as trade barriers fall. Static effects can develop when there is trade creation or trade diversion. Trade creation occurs when production shifts to more efficient producers for reasons of comparative advantage, while trade diversion occurs when trade shifts to countries in the group at the expense of trade with countries not in the group. Static effects improve the efficiency of resource allocation and affect both production and consumption.

BUN600: International Business Environment Lecture 5 4 Regional Economic Integration Effects of regional integration Dynamic effects Dynamic effects of integration are the overall growth in the market and the impact on a company caused by expanding production and by the company’s ability to achieve greater economies of scale. Economies of scale Economies of scale occur when the average cost per unit falls as the number of units produced rises. Keep in mind that regional economic integration allows for specialization and trade based on comparative advantage.

Impact of Trade Agreements
BUN600: International Business Environment Lecture 5 4 Regional Economic Integration Impact of Trade Agreements

Lecture 5 5 Regional Trading Groups European Union (EU)
BUN600: International Business Environment Lecture 5 5 Regional Trading Groups European Union (EU) One of the most comprehensive and successful regional groups is the European Union which began as a free trade agreement and has since expanded to become a common market that has abolished restrictions on factor mobility and harmonized national, political, economic, and social policies. The EU has 27 members some of which have joined forces on the bloc’s common currency, the euro. changed from the European Economic Community to the European Community to the European Union the largest and most successful regional trade group in the world provides free trade of goods, capital, and people uses common external tariffs has a common currency

BUN600: International Business Environment

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups European Union (EU) European Commission provides political leadership, drafts laws, and runs the various daily programs of the EU Council of the EU composed of the heads of state of each member country European Parliament has legislative power, control over the budget, and is supervisor of executive decisions European Court of Justice interprets and applies EU treaties

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups European Union (EU) Single European Act designed to eliminate the remaining nontariff barriers to trade in Europe Lisbon Treaty strengthens the EU’s governance process and improves the ability of the EU to make and implement decisions Treaty of Maastricht The decision to move to a common currency, the euro, in Europe has eliminated currency as a barrier to trade for member countries. The euro Is a common currency in Europe. Is administered by the European Central Bank. Was established on January 1,1999. Resulted in new bank notes in 2002. Does not include the United Kingdom, Denmark, Sweden, or nine of the new entrants to the EU.

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups European Union (EU) European Commission provides political leadership, drafts laws, and runs the various daily programs of the EU Council of the EU composed of the heads of state of each member country European Parliament has legislative power, control over the budget, and is supervisor of executive decisions European Court of Justice interprets and applies EU treaties

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups European Union (EU) Multinationals need to understand how the EU can influence their corporate strategy. For example, should they produce in a central location and incur the cost and time to move products from country to country? Should they acquire a local company as a way to get into the market? What do the different growth rates across member countries mean? Companies doing business in the EU therefore need to determine where to produce products determine what their entry strategy will be balance the commonness of the EU with national differences

Lecture 5 5 Regional Trading Groups
BUN600: International Business Environment Lecture 5 5 Regional Trading Groups The North American Free Trade Agreement (NAFTA) includes Canada, the U.S., and Mexico involves free trade in goods, services, and investments includes countries of different sizes and wealth Some U.S. trade and investment has been diverted to Mexico Free trade area rules of origin

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups The North American Free Trade Agreement (NAFTA) NAFTA lays out various regional content rules that must be met in order to qualify for preferential treatment. In particular, for a product to be considered North American in terms of country of origin, at least 50 percent of the value of most products must be from North America. NAFTA also addresses several other areas, notably workers rights and the environment. The agreement, for example, includes certain labor standards such as the right to unionize as well as upgraded environmental standards in Mexico. Since NAFTA was signed, trade and investment have increased significantly. In fact, many companies look at it as one big regional market, and have been able to take advantage of trade agreements each country has with other nations as well. Moreover, demand in Mexico continues to rise, thanks in part to the creation of new jobs in the country, and more competitive companies. Keep in mind though, that challenges remain. One key issue today is illegal immigration.

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups There are six major regional economic groups in the Americas Caribbean Community (CARICOM) Central American Common Market (CACM) Central American Free Trade Agreement (CAFTA –DR) Andean Community (CAN) Southern Common Market (MERCOSUR) Latin American Integration Association (LAIA)

BUN600: International Business Environment Lecture 5 5 Regional Trading Groups Regional integration in Asia includes The Association of Southeast Asian Nations (ASEAN) ASEAN is the fourth largest free trade area in the world. While the ASEAN free trade area has been very successful, other efforts in the region have not. Asia Pacific Economic Cooperation (APEC) APEC has had less success in achieving its goals. The group is not only large and geographically distant, it also lacks a treaty. However, because it generates such a large percentage of the world’s output and merchandise trade, it’s potential is large. A key goal for the bloc is to establish open regionalism whereby member countries decide whether to apply trade liberalization to non-APEC countries on an unconditional MFN basis or on a reciprocal FTA basis.

BUN600: International Business Environment

Lecture 5 6 Emerging Markets
BUN600: International Business Environment Lecture 5 6 Emerging Markets Emerging markets are countries such as Brazil, China, India, Russia and Turkey experiencing Industrialisation, modernisation and rapid economic growth and have begun to produce new global challengers In their home countries, challengers leverage low-cost labour and engineering and managerial talent. Family-owned or family-run businesses (‘family conglomerates’) can make important business decisions quickly. Access loans at low interest rates from home-country, government-owned banks. Taking their established brands to global markets. Leverage superior engineering capability. Benefit from local bases of ample natural resources

BUN600: International Business Environment Lecture 5 6 Emerging Markets Emerging markets are countries such as Brazil, China, India, Russia and Turkey experiencing industrialisation, modernisation and rapid economic growth and have begun to produce new global challengers In their home countries, challengers leverage low-cost labour and engineering and managerial talent. Family-owned or family-run businesses (‘family conglomerates’) can make important business decisions quickly. Access loans at low interest rates from home-country, government-owned banks. Taking their established brands to global markets. Leverage superior engineering capability. Benefit from local bases of ample natural resources

BUN600: International Business Environment Lecture 5 6 Emerging Markets

BUN600: International Business Environment Lecture 5 6 Emerging Markets Developing economies have low discretionary incomes. Approximately 21 per cent live on less than US$1.25 per day; which equates to roughly 1.22 billion people. Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy and poor education systems; also, poor education, and lack of health care and child care. Governments in developing economies are often severely indebted. Bureaucracy and red tape in developing economies deter firms from these countries from participating in the global economy. International trade and investment help to stimulate economic growth, create jobs, raise incomes and lower prices for the products and services demanded by consumers and companies.

Lecture 5 6 Emerging Markets Markets Manufacturing Bases Sourcing
BUN600: International Business Environment Lecture 5 6 Emerging Markets Markets Since 2003, Australia’s trade in goods with Asia has exceeded trade with the rest of the world (largely reflecting an increase in sales of resources to China). Manufacturing Bases Home to low-wage, high-quality labour for manufacturing and assembly operations. Large reserves of raw materials and natural resources (South Africa, Brazil). Sourcing Outsourcing (procurement of selected value-adding activities) helps foreign firms become more efficient. Global sourcing, or importing, is sourcing that relies on foreign suppliers or production bases. Investments from abroad benefit emerging markets as they lead to new jobs, production capacity, transfer of technology and linkages to the global marketplace

BUN600: International Business Environment Lecture 5 6 Emerging Markets Per Capita Income as an Indicator of Market Potential In relying on per capita GDP for comparison of different countries, one should use PPP (purchasing power parity) exchange rates, rather than the market exchange rates. PPP adjustment provides a more realistic indicator of purchasing power of consumers in emerging and developing economies. PPP adjusted per capita GDP represents the amount of products that consumers can buy in a given country, using their own currency and consistent with their own standard of living.

BUN600: International Business Environment Lecture 5 6 Emerging Markets Middle-class households make up the largest proportion of households in advanced economies. In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy. As incomes increase, spending patterns will evolve, fueling growth across various product and service categories.

Lecture 5 6 Emerging Markets Political instability.
BUN600: International Business Environment Lecture 5 6 Emerging Markets Political instability. Adds to business costs, increases risks and reduces managers’ ability to forecast business conditions. Weak intellectual property protection. Laws may not be enforced, or the judicial process may be painfully slow. Bureaucracy, red tape and lack of transparency. Burdensome administrative rules, as well as excessive requirements for licences, approvals and paperwork, all delay business activities. Example: Russia, Venezuela and the Philippines are among those with substantial corruption. Partner availability and qualifications. Foreign firms should seek alliances with well-qualified local companies in countries characterised by inadequate legal and political frameworks. Dominance of family conglomerates. A family conglomerate is a large, highly diversified company that is privately owned. Family conglomerates operate in industries ranging from banking to construction to manufacturing. Family conglomerates provide huge tax revenues and facilitate national economic development, which helps to explain why governments eagerly support them.

Lecture 5 Regional Economic Integration and Emerging Markets

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