Y376 International Political
Economy
January 30, 2012
Types of Regional Integration
•
•
•
•
Regional cooperation agreements
Free trade areas
Customs unions
Common markets
Increasing
difficulty
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
Europe
North America
Latin America
and the
Caribbean
Africa
Asia
Middle East
Name
Acronym
European Union
EU
European Free Trade Association
EFTA
North American Free Trade Agreement
NAFTA
Latin American Integration Association
LAIA
Andean Common Market
ANCOM
Central American Common Market
CACM
Southern Cone Common Market
Mercosur
Caribbean Community
CARICOM
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
Association of South-East Asian Nations
ASEAN
Asia Pacific Economic Cooperation
APEC
Economic Cooperation Organization
ECO
South Asian Association for Regional Cooperation
SAARC
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 EU
1952 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
Funny
video
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), multinational
enterprise (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/tota
l 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 not
as globally organized
As 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 derives
from ownership of special
knowledge
Advantages of a particular
foreign location
Firm must prefer FDI to other
ways of conducting foreign
business (e.g., exports, licensing)
Source: Various works by John Dunning.
Product-Cycle Theory
Growth
Sales
Time
Source: Raymond Vernon.
Decline
Maturity
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
$1,600
$1,400
Developing
Developed
$1,200
$1,000
$800
$600
$400
$200
$0
1970
1975
1980
1985
1990
1995
2000
2005
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
$1,600
$1,400
Developing
Developed
$1,200
$1,000
$800
$600
$400
$200
$0
1970
1975
1980
1985
1990
1995
2000
2005
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 fuelefficient 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, 19801990, in Thousands of Vehicles
Source: Japan Automobile Manufacturers Association.