Global LinkagesGlobal Linkages

CountryA

CountryB

Management Linkages

Policy Linkages

Trade and Investment Linkages

Global LinkagesGlobal Linkages

CountryA

CountryB

Management Linkages

IntegrationIntegration

Trade and Investment Linkages

Regionalization of Economic ActivityRegionalization of Economic Activity Levels of Economic Integration

– Free Trade Area– Customs Union– Common Market– Economic Union

Effects on trade and FDI patterns Evolution toward worldwide integration Impact on management of MNCs

Trade and Investment in IsolationTrade and Investment in Isolation

20%

40%

10%

100%

33%

Prevailing Tariff Levels and Investment Patterns

FDI

Trade

Free Trade AreaFree Trade Area

20%

100%

33%

No tariffs among members

Tariffs with non-members unchanged

Consequences External Tariffs?External Tariffs? Trade Creation?Trade Creation? Trade Diversion?Trade Diversion? Regional content? Regional content? Export jobs?Export jobs?

Trade and Investment in Trade and Investment in IsolationIsolation

40%

33%

CheapestProducer

Imports

Trade Creation from FTA Trade Creation from FTA FormationFormation

33%

CheapestProducer

Impo

rts

Trade and Investment in Trade and Investment in IsolationIsolation

40%

33%

CheapestProducer

Imports

Trade Diversion from FTA Trade Diversion from FTA FormationFormation

33%

CheapestProducer

Impo

rts

Customs UnionCustoms Union

33%

FTA plus... Common tariff

policy for non-members

33%

33%

Common MarketCommon Market

Customs Union plus...

Reduction of non-tariff barriers among members

No Non-Tariff Barriers

Shift in International Strategy

EC Single European ActEC Single European Act Free Movement of Goods

– Abolish border controls– Reduce state subsidies to industries– Mutual recognition of technical standards

Free Movement of Services– Mutual recognition of regulatory standards– Increase competition for public procurement– Harmonize regulation in telecom and transportation

industries

Free Movement of Capital– Abolish exchange controls– Allow cross border securities trading– Cross border banking– Initiation of ECU denominated financial instruments

Free Movement of Labor– Abolish border checks– Mutual recognition of skills, education– Common immigration policy

EC Single European ActEC Single European Act

Common MarketCommon Market

£

DM

FF DkK

ÖS

National Currencies

ConsequencesConsequences• Strain on F/X ratesStrain on F/X rates• … …tax rates?tax rates?• … …growth?growth?• … …trade?trade?

Economic UnionEconomic Union

Common Market plus...

Single currency Harmonization of

Monetary and Fiscal Policies

Multilateralism in Trade and Multilateralism in Trade and Investment Regimes: WTOInvestment Regimes: WTO

Europe

PacificRim

NorthAmerica

Regionalization/Triad: Building Regionalization/Triad: Building Block or Stumbling Block?Block or Stumbling Block?

EuropeanEuropeanUnionUnion

PacificPacificRimRim

NAFTANAFTA

Impact of Integration on MNCsImpact of Integration on MNCs

CountryA

CountryB

Management Linkages ?Management Linkages ?

IntegrationIntegration

Trade and Investment Linkages

Impact of Integration on MNCsImpact of Integration on MNCsShift in Globalization DriversShift in Globalization Drivers

– Market drivers– Cost drivers– Competition drivers

Entry Mode DecisionsEntry Mode Decisions– Regional stand-alone attractiveness– Regional strategic importance

International StrategyInternational Strategy– Location and integration of value-creating

activities