Y376 International Political Economy

January 30, 2012

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

Euro Zone Currency Union

Funnyvideo

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.

Product-Cycle Theory

Maturity

Growth Decline

Time

Sales

Source: Raymond Vernon.

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

The Role of Mergers and Acquisitions

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).

Number of MNCS from Developed and Developing Economies

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.