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Chapter 8

International Business Oded Shenkar and Yadong Luo. Chapter 8. International Economic Integration and Institutions. Do You Know?. Why have world markets become more integrated today? How has this integration taken place? Why did the U.S. push hard to form NAFTA?

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Chapter 8

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  1. International Business Oded Shenkar and Yadong Luo Chapter 8 International Economic Integration and Institutions Chapter 8: International Economic Integration and Institutions

  2. Do You Know? • Why have world markets become more integrated today? How has this integration taken place? • Why did the U.S. push hard to form NAFTA? • What roles do the WTO, the World Bank, and IMF play in the world economy? Are they clubs of rich nations? Chapter 8: International Economic Integration and Institutions

  3. Do You Know? • Why do people debate whether regional blocs are compatible with globalization? • If you are an export manager in an Australian company, would you like to see the advent of more blocs in other regions? • How should MNEs strategically respond to regional integration? Chapter 8: International Economic Integration and Institutions

  4. International Economic Integration • Economic integration is a new reality in the international business market. • Business and governments have created a range of institutions, treaties, and agreements that help to • Overcome trade differences • Boost the free movement of trade, investment, and services across national boundaries Chapter 8: International Economic Integration and Institutions

  5. International Economic Integration • Economic integration is concerned with: • The removal of trade barriers or impediments between at least two participating nations • The establishment of cooperation and coordination between them • Integration creates high levels of globalization and regionalization. Chapter 8: International Economic Integration and Institutions

  6. International Economic Integration • Free Trade Area - removes trade impediments among member nations. (NAFTA ) • Customs Union - adds common external economic initiatives to all member nations. (Central American Common market) • Common Market - allows free trade of products and services and also allows free mobility of production factors like capital, labor and technology. • Economic Union - is a common market with unification of all monetary and fiscal policies. (European Union) • Political Union - is where participating nations literally become one nation in an economic and political sense, with common parliament and political institutions. Chapter 8: International Economic Integration and Institutions

  7. International Economic Integration Exhibit 8-1: Forces stimulating international economic integration Chapter 8: International Economic Integration and Institutions

  8. Global-Level Cooperation Among Nations • The World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF) are three fundamental institutions affecting global cooperation of nations. • The IMF and World Bank serve as a financial base for cooperation. • The WTO serves as the institutional foundation of the world trading system. Chapter 8: International Economic Integration and Institutions

  9. The World Trade Organization (WTO) • A multilateral trade organization aimed at international trade liberalization. • Came into being in 1995, after a 48 year development that started with trade negotiations at the Geneva Conference in 1947 • Is a relative of the original International Trade Organization that was proposed there. • Successor organization to GATT. Chapter 8: International Economic Integration and Institutions

  10. The World Trade Organization (WTO) Exhibit 8-2: Multilateral negotiations under GATT Chapter 8: International Economic Integration and Institutions

  11. The World Trade Organization (WTO) • The WTO seeks to establish trade policy rules that help expand trade and improve world living standards. It does this through: • Administering Trade Agreements. • Serving As The Forum For Trade Negotiations. • Settling Trade Disputes. • Reviewing National Trade Policies. • Assisting Developing Nations On Trade Policy Issues. • Cooperating With Other International Organizations Chapter 8: International Economic Integration and Institutions

  12. The World Trade Organization (WTO) • In January of 2003, the WTO had 146 members accounting for over 95% of world trade. • More than 30 applicants are negotiating to become members. • Russia is not yet a member, neither is Vietnam nor the Bahamas. • China is a member, so is Cuba. Chapter 8: International Economic Integration and Institutions

  13. The World Trade Organization (WTO) • WTO Functions: • Reduce import duties. • Eliminate trade discrimination through most favored nation (treating everyone equally) and national treatments (where all products are considered “domestic” once they cross national borders). • Combat protection and trade barriers • Dumping – the sale of imported goods either at prices below what a company charges in home market or below cost • Provide forums for dealing with trade issues. • Provide dispute resolution services for members. Chapter 8: International Economic Integration and Institutions

  14. The World Trade Organization (WTO) • Bilateral and regional customs unions and common markets. • Lowered tariffs to developing nations without violating antidiscrimination rules. • Establishment of a Generalized System of Preferences for developing nations. • Escape clauses, so that new members can protect infant industries. Chapter 8: International Economic Integration and Institutions

  15. The International Monetary Fund (IMF) • The IMF seeks to: • Promote international monetary cooperation and expansion of international trade • Reduce inequity in member nations’ balances of payments. • Key institution in the international monetary system • Helps members defend their currencies against cyclical, seasonal, or random currency fluctuations. Chapter 8: International Economic Integration and Institutions

  16. The International Monetary Fund (IMF) • The IMF seeks to establish sound monetary practices among member nations it does this through: • Promoting exchange stability • Maintaining orderly exchange arrangements • Helping members avoid serious exchange depreciations • Placing reserves at the disposal of member nations who are in financial crisis, subject to safeguards and repayment Chapter 8: International Economic Integration and Institutions

  17. The International Monetary Fund (IMF) • In January of 2003, the IMF had 160 members accounting for over 95% of currency exchange. • The IMF is headed by a Board of Governors, which is composed of representatives of all member nations. • The IMF requires all members to cooperate with the Fund in order to promote a stable exchange rate system. • Largest members: United States, United Kingdom, Japan, Germany, France (and 155 others). Chapter 8: International Economic Integration and Institutions

  18. The International Monetary Fund (IMF) • The IMF allows: • Special Drawing Rights (SDRs), which are a unit of account and allow countries to peg their currencies against the five largest IMF members. • IMF members settle transactions with SDR for exchanges among themselves. Chapter 8: International Economic Integration and Institutions

  19. The World Bank Group • The World Bank is formally known as the International Bank for Reconstruction and Development. • It is tied with three affiliates • The International Development Association (IDA) • The International Finance Corporation (IFC) • The Multilateral Investment Guarantee Agency (MIGA). • Their common objective is to help raise standards of living in developing nations by channeling financial resources to them from developed countries. Chapter 8: International Economic Integration and Institutions

  20. The World Bank Group • The World Bank is owned by the governments of 160 nations. • Its capital is provided by subscription, and it finances its operations primarily through world capital markets. • It is also financed by interest payments from borrower nations. • Loans are geared toward advanced developing nations and must be used for productive purposes like financing infrastructure, telecommunications, ports and power. Chapter 8: International Economic Integration and Institutions

  21. The World Bank Group • The IDA concentrates on productive project in the least developed nations. • The IFC assists in economic development of maturing countries by investing in private sector investments. • The MIGA specializes in encouraging equity investment and foreign direct investment to developing countries by mitigating trade barriers. Chapter 8: International Economic Integration and Institutions

  22. Other International Economic Organizations • The Organization for Economic Cooperation and Development (OECD) • Aids in the achievement of the highest and soundest possible growth in economies of member countries • Promotes economic development, employment expansion, living standards improvement, financial stability, and extension of world trade on a multilateral and nondiscriminatory basis. • The United Nations Conference on Trade and Development (UNCTAD) • A forum for examination of economic problems plaguing developing countries • Solves them through negotiations with developed nations that benefit from trade with them. Chapter 8: International Economic Integration and Institutions

  23. Other International Economic Organizations Exhibit 8-3: Summary of specialized international economic organizations Chapter 8: International Economic Integration and Institutions

  24. Postwar Regional Integration • A total of 109 agreements were reports to GATT from 1947 through 1994. • Features of regional integration: • Postwar regional integration has centered in western Europe. • Many developing countries renewed their interest in regional integration since the Uruguay Round began. • The level of economic integration varies widely among agreements. Chapter 8: International Economic Integration and Institutions

  25. North America: The North American Free Trade Agreement (NAFTA) • Established in 1992, implemented in 1994, NAFTA created a tri-national (Canada, Mexico, and the United States) market area • more than 360 million people • combined annual purchasing power of about $6.5 trillion. • Dismantles trade barriers for industrial goods, and has agreements on services, investments, intellectual property rights, and agriculture. • Side agreements on labor adjustments, environmental protection, import surges, child labor, minimum wages, productivity, and health and safety standards. Chapter 8: International Economic Integration and Institutions

  26. Europe: The European Union (EU) • Established in 1957 as the European Economic Community (EEC), it became the European Community (EC) in 1995. • It originally had 15 member states. • In 1992, the Maastricht Treaty created the European Common Market • monetary union, establishment of common foreign and security policy, common citizenship, and cooperation on justice and social affairs. • The new name for the EC, after Maastricht, is the European Union. Chapter 8: International Economic Integration and Institutions

  27. Europe: The European Union (EU) Exhibit 8-5: The European Union Chapter 8: International Economic Integration and Institutions

  28. Europe: The European Union (EU) • Creates the common European Currency, the ECU, or Euro. • Gives every citizen in member states a European Passport and free movement from one country to another within the EU. • Contains provisions of cooperation in justice and domestic affairs. • Employs the EU to play a more active role in trans-European transportation and environmental protection. Chapter 8: International Economic Integration and Institutions

  29. Europe: The European Union (EU) • Increases the power of a European Parliament to enact legislation. • Removes all restrictions on capital movements among member states. • Establishes a European Central Bank responsible for monetary policy • Transforms the EU into the European Economic and Monetary Union under which member currencies are tied to one another at a standard exchange rate. Chapter 8: International Economic Integration and Institutions

  30. Europe: The European Union (EU) • Five EU Institutions • The European Parliament, elected by the people of member states. • The Council of the Union, elected by the governments of member states. • The European Commission (an executive body). • The Court of Justice, interpretation of the Law. • The Court of Auditors, which manages the EU budget. Chapter 8: International Economic Integration and Institutions

  31. Asia Pacific • APEC (Asia Pacific Economic Cooperation Forum) was founded in 1994 and consists of 18 member nations. • Enhances the progress made in the Uruguay round of GATT. • Association of Southeast Asian Nations (ASEAN) was founded in 1967 by Malaysia, Indonesia, Philippines, Singapore, and Thailand. • The purpose is to promote peace, stability, and economic growth in the region. Chapter 8: International Economic Integration and Institutions

  32. Asia Pacific Exhibit 8-6: The Asia-Pacific Economic Cooperation (APEC) Chapter 8: International Economic Integration and Institutions

  33. Asia Pacific • Asia accounts for 20% of world trade. • It has substantial trade liberalization. • There are less formal agreements bilaterally and multilaterally in abundance. Examples are SAARC, and the China Circle. • It has also created numerous sub-regional economic trade zones, which are named transnational export processing zones, natural economic territories, or growth triangles. Chapter 8: International Economic Integration and Institutions

  34. Latin America • Early attempts were the Latin American Free Trade Association (LAFTA) and the Central American Common Market (CACM). Both failed economically and politically. • LAFTA was superceded by the Latin American Integration Association (LAIA), whose goal was to increase bilateral trade among member nations. • MERCOSUR was established in 1995 as an organization to promote trade in South America. Chapter 8: International Economic Integration and Institutions

  35. Latin America Exhibit 8-7: Free trade blocs in the Americas Chapter 8: International Economic Integration and Institutions

  36. Africa and the Middle East • The Economic Community of West African States (ECOWAS) - Established in 1975 by west African states • Central African Economic and Customs Union (UDEAC) – established in 1966 in former French Africa • Preferential Trade Area (PTA) – established 1981 from former members of the East African Economic Community (formed in British East Africa, dissolved in 1979) • Gulf Cooperation Council (GCC) – Middle East free trade area established in 1981 Chapter 8: International Economic Integration and Institutions

  37. Regionalization vs. Globalization • Regionalization is a prominent feature in the world economy today. All WTO members will also be members of a regional bloc or agreement. • Regionalization is compatible with economic growth and globalization, but insiders gain many more benefits than outsiders. Chapter 8: International Economic Integration and Institutions

  38. Commodity-Level Cooperation Among Nations • Commodity cartel – a group of producing countries that wish to protect themselves from the fluctuations in prices of certain commodities traded internationally • Crude oil, coffee, rubber, cocoa • Can control prices through production quotas and limiting overall output. Chapter 8: International Economic Integration and Institutions

  39. Organization of Petroleum Exporting Countries (OPEC) • Inter-governmental organization consisting of 13 members. • Strongest collective force impacting prices in the oil market. • OPEC members control more than 40% of the world’s oil production Chapter 8: International Economic Integration and Institutions

  40. Organization of Petroleum Exporting Countries (OPEC) Chapter 8: International Economic Integration and Institutions

  41. The Multifiber Arrangement (MFA) • Agreement countries to control exports of textiles and apparel from developing countries to developed countries • Established in 1972 • Covers about two-thirds of textile and apparel traded internationally Chapter 8: International Economic Integration and Institutions

  42. Strategic Responses of MNEs • Defensive Export Substituting, where firms defend market share previously achieved through exports, by establishing operations within regions. • Offensive Export Substituting, ensures market penetration through foreign direct investment before markets are officially integrated. • Rationalized Foreign Direct Investment, where Multinational Enterprises heighten resource commitment to operations to achieve new economies of scale in the wake of regionalization. Chapter 8: International Economic Integration and Institutions

  43. Chapter 8: International Economic Integration and Institutions

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