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International Business
Oded Shenkar and Yadong Luo
Chapter 8
International Economic Integration
and Institutions
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?
• 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
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
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
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
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
International Economic Integration
Exhibit 8-1: Forces stimulating international economic integration
Chapter 8: International Economic Integration and Institutions
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
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
The World Trade Organization (WTO)
Exhibit 8-2: Multilateral negotiations under GATT
Chapter 8: International Economic Integration and Institutions
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:
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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
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
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
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
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
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
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
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
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
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
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
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
Other International Economic
Organizations
Exhibit 8-3: Summary of specialized international
economic organizations
Chapter 8: International Economic Integration and Institutions
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
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
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
Europe: The European Union (EU)
Exhibit 8-5:
The
European
Union
Chapter 8: International Economic Integration and Institutions
Europe: The European Union (EU)
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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
Europe: The European Union (EU)
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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
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
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
Asia Pacific
Exhibit 8-6: The Asia-Pacific Economic Cooperation
(APEC)
Chapter 8: International Economic Integration and Institutions
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
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
Latin America
Exhibit 8-7:
Free trade
blocs in the
Americas
Chapter 8: International Economic Integration and Institutions
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
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
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
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
Organization of Petroleum Exporting
Countries (OPEC)
Chapter 8: International Economic Integration and Institutions
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
Strategic Responses of MNEs
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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
Chapter 8: International Economic Integration and Institutions