Economic & Monetary Integration: Comparing Asia and European Experiences

1. Economic & Monetary Integration: Comparing Asia and European Experiences Louis Brennan Institute for International Integration Studies Trinity College Dublin

2. International Business as a Driver of Regional Integration in Asia • Introduction and Terminology • The “chicken and egg” question • Multinational Enterprises (MNEs) • East Asia and Regional Integration • The role of MNEs • Conclusion

3. International Business (IB) • Traditionally involved in transcending borders • Here addressing the role of IB in reducing borders and forging regional integration • Main focus is on the actors within IB viz. Multinational Enterprises (MNEs) • MNEs - “the most significant actors in today globalized world’

4. Terminology • Regionalism refers to state-led projects, which are characterized by the emergence of intergovernmental dialogue and treaties (Breslin et al, 2003). • Regionalization refers to the processes of integration which come from the market, from private trade and investment flows, and from the policies and decisions of companies, rather than from the predetermined plans of national or local government (Breslin et al, 2003).

5. The “Chicken and Egg” Question • RI has manifested itself through history in many forms and is ‘a product of many and varied forces’ (Mattli, 1999). • Has RI been created and driven by a desire for political sanction or has it developed out of economic considerations and IB? • IB and RI have also been described as mutually reinforcing in nature (Vaitos, 1982).

6. The Increasing Role of MNEs • KinichiOhmae (1990) argues that corporations, not nations, are driving economic activity and that their influence, presence and powers transcend traditional geographic boundaries. • Gabel and Bruner (2003) showed that 53 of the world’s top 100 economies are MNE’s who command more resources and exert stronger influence than 75% of all national states. • While state control is de jure, MNEs are sometimes seen as assuming de facto power.

7. The increasing role of the corporation • Globalist business strategies can often result in more regionalised patterns of economic activity (Ruigork and van Tulder, 1995, Rugman and Verbeke, 2004). • IB and MNEs have intensified international regional integration (Johnson and Turner, 2010). • The new wave of regionalism is increasingly economic-focused with transnational corporations and their international operations playing an intensified role as non-state actors (Best & Christiansen, 2008).

8. MNEs and Regionalization • Rugman and Chang (2008) show that the economic activity of the top 500 MNEs is essentially regional and not global, with activity taking place predominantly within and not between regions. • Since the 1980s, firms have generally shifted from an international perspective towards more local, regional-orientated strategies. • Mirzaand Giroud (2004) demonstrate how these strategies created vast regional linkages and promoted regionalization.

9. MNEs and Regionalization – cont’d • Morrison and Roth (1992, p.37) claim, ‘...a regional approach to business represents a more effective solution to the dual challenges of efficiency and organizational responsiveness.’ • A regional approach to business on the part of MNEs has been increasingly manifested with the establishment of regional HQs. • The development of regional supply chains, with manufacturing done closer to the source of demand is accelerating in a bid to respond more quickly to consumer trends and avoid disruption caused by natural disasters (Andrew Bounds, FT, May 10, 2013)

10. East Asia and Regional Integration • From the 1980s onwards, the prominence of international business and the convergence of attitudes towards economic growth within ASEAN began to emerge. • The ASEAN Free Trade Area (AFTA) agreement of January 1992 reflected the new priority of promoting international business in the ASEAN mandate, coupled with MNEs prioritising their operations within the ASEAN borders. • This engagement by MNEs is reflected in increases in foreign direct investment (FDI) and trade.

11. Evolution of FDI inflows to ASEAN as a percentage of GDP, 1980–2011 (Percentage) Source: UNCTAD (2012) Regional integration and foreign direct investment in developing and transition economies

12. FDI inflows by host country, from 2003-2010, in US million $ Source: ASEAN Community in Figures 2011

13. Intra-Regional Trade Share, 1980 - 2011

14. The Global Trade Context for Regionalization Evolution of Intraregional Trade Source: Asian Development Bank

15. ASEAN TRADE • Regionalization in ASEAN has resulted in overall trade increasing by 255% from 1998 to 2010. • Intra-ASEAN’s share of ASEAN total trade increased from 21% in 1998 to 25.4% in 2010.

16. Evolving East Asia • East Asia’s market expansion and regional integration has been both vertical and horizontal (Das, 2005). • These advances occurred in conjunction with large flows of regional investment into Southeast Asia and China (Das, 2005). • After the Plaza Accord of the mid 1980s, with the devaluation of the US dollar, the production locus shifted from firms to networks of regional production. • East Asia transformed into a production platform producing merchandise efficiently for global markets with rising levels of GDP (Das, 2005).

17. Evolving East Asia • By the late 1990s, approximately 50% of the exports of the East Asian economies were destined for other East Asian economies. This increasing proportion is a manifestation of the increasing economic interdependence, argues Lau (2003).

18. The Fragmentation of Production • MNEs have been responsible for the development of international production networks that have been achieved through a process known as vertical specialisation. • Asia has been the major beneficiary in terms of the ensuing growth in International business and international production fragmentation. • The process of global production sharing has created a new form of division of labour between Asian economies.

19. International production network of a hard disk drive made in Thailand

20. AFTA responding to and enabling the fragmentation of production • The fragmentation of production drives the need for Regional Integration encompassing intra-regional trade agreements to facilitate the smooth transfer of goods between the countries involved. • The ASEAN Free Trade Area (AFTA) established in 1992 facilitated this type of regional trade and production fragmentation. • The ASEAN countries and East Asia in general became known as Factory Asia because of the growth of international production networks by MNEs. • The introduction of AFTA made it far more cost effective and smoother for the transfer of goods between these countries with benefits to all parties.

21. Moreover… • As a result of globalization, firms can pick and choose their markets in relation to cost of labour, capital and resources (Friedman, 2007). • ASEAN members must tackle this reality through both national reforms (e.g. addressing tariffs) and regional integration. (Schwarz and Villinger, 2004). • The ASEAN Economic Community (AEC) has been set as the goal of ASEAN’s regional economic integration by 2015 in order to become a single market. • The implementation of such regional integration among the ASEAN states should act as a magnet for IB as was the case for Europe with the implementation for the Single European Market.

22. And so… • There are signs that integration and coherence among ASEAN member states is strengthening. This can be seen in terms of the deepening region wide economic exchange (e.g. trade, investment, financial flows) and transnational business operations among members (Dent, 2008).

23. The Role of MNEs • MNEs as the primary driving force behind regional integration in East Asia (Lim 1995; Ravenhill 1998; Borrus et al. 2000; Felker 2003; Coe et al. 2004). • The East Asian (EA) boom period of the late 1980s and early 1990s acted as a stimulant to MNEs to establish strategically organised production networks and supply chains across East Asia in the pursuit of competitive advantage. • Despite the absence of formal regional institutions, these networks were credited with fostering a coherent regional development process (Felker, 2003) that has intensified largely through the market-driven forces of intraregional trade and FDI (Soesastro, 2006).

24. The Role of MNEs – cont’d • By the early 1990s ASEAN economic orientation had shifted towards being market-driven and export-led (Severino, 2011) This shift was driven by market forces and not by government decisions. He argues that business in East Asia has seen rising levels of trade due to firms pushing ASEAN for further integration. • According to Severino, these firms are not ASEAN companies, but rather Japanese, American and to a lesser extent European.

25. Asia versus Europe • Regionalism in Asia has developed rather differently than in the European context, as integration has been driven more so by markets than by governments, integration becomes a greater outcome of free market forces aligning economic interaction and interdependence (Cappannelli & Filippini, 2010).

26. Conclusion • Explored the role of IB via its agents - MNES - and their activities in the form of FDI, intraregional trade and production fragmentation, as push factors/drivers of regional integration. • Conclude that IB shapes market conditions and influences trade and other policies in such a way that it can be considered a fundamental actor in the RI process. • In considering the relationship between RI and IB and the ways that they drive each other, a ‘reinforcing dynamic’ is observed whereby these two phenomena continue to drive each other. • Critically, although MNE’s seem to be the major driver of intraregional trade and RI in East Asia, they are becoming increasingly reliant on the role of institutions.

27. “Reinforcing Dynamic”

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