CHAPTER 8
ECONOMIC
INTEGRATION AND
EMERGING MARKETS
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Copyright © 2011 John Wiley & Sons
Chapter 8
Learning
Objectives
Chapter 8
1.
Review types of economic integration among countries
2.
Compare and contrast the costs and benefits to
advancing economic integration
3.
Suggest corporate response to advancing economic
integration
4.
Examine how an organization tries to control the price
and quantity supplied of a particular commodity
5.
Survey the vast opportunities for trade offered by
emerging market economies
6.
Understand the scope of barriers to business and
infrastructure challenges
7.
Define economies that are changing from a centrally
planned economy to a free market
8.
Illustrate growth in developing countries by encouraging
potential markets
9.
Suggest corporate response to advancing economic
integration
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Introduction
Group of Five
• U.S. Britain, France, Germany, and Japan
• Name given to the five nations that meet
periodically to achieve agreement on international
economic and monetary issues
 Forum for member nations to discuss key issues related to the global economy:
Group of
Seven
Group of
Ten
Group of
Twenty
 Newly industrialized countries (NICs) are growing in importance in
international business
 In less-developed economies, debt problems and falling commodity prices
make market development difficult
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Levels of Economic Integration
Stage of
Integration
Abolition of
Tariffs or
Quotas
among
Members
Common
Tariff and
Quota
System
Abolition of
Restrictions
on Factor
Movements
Harmony
and
Unification
of Economic
Institutions
Free Trade
Area
Yes
No
No
No
Customs
Union
Yes
Yes
No
No
Common
Market
Yes
Yes
Yes
No
Economic
Union
Yes
Yes
Yes
Yes
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Arguments Surrounding Economic
Integration
 Trade Creation and Trade Diversion


Trade creation – Increased exports by new members to other
members resulting from membership
Trade diversion – Decreased exports to members of the
economic union by nonmember nations often resulting in the
advantage shifting away from the lower-cost producer to the
higher cost producer
 Reduced Import Prices – Results from importers’
efforts to remain competitive despite tariffs
imposed
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Arguments Surrounding Economic
Integration
 Increased Competition and Economies of Scale


The larger market created also means more competing firms which can
result in greater efficiency and lower consumer prices
Internal and external economies of scale – Lower production costs from
greater production or free mobility of factors of production
 Higher Factor Productivity



Movement of labor and capital from areas of low productivity to areas of
high productivity
Poorer countries may lose badly needed investment capital or labor to a
more profitable richer country
More developed countries may lose companies who move to areas where
operating costs are lower
 Regionalism versus Nationalism – The greatest
impediment to economic integration
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Regional Groupings - Europe
 European Integration





Economic Integration in Europe following World War II
Organization for European Economic Cooperation (OEEC) 1948
European Economic Community (EEC) in 1957
European Free Trade Association in 1960 (EFTA)
European Economic Area and European Union (EU) in 1994
 Organization of the EU





Executive Body - European Commission
Legislative Body - The Council of Ministers
Judicial Body - The Court of Justice
Advisory Body - The European Parliament
EU difficulties:
Inability to agree on a common immigration policy
 Inability to integrate a common agricultural policy (CAP)

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Regional Groupings – North America
 North American Free Trade agreement (NAFTA)
 Went into effect in 1989 between Canada and the U.S.
 Included Mexico in 1994
 Proponents - Access to low-cost Mexican labor and job
creation in Mexico
 Opponents
Job loss to Mexico and lower environmental standards
 Segments of the U.S. economy will be harmed as wages decline



Trade among Canada, Mexico, and the U.S. has increased
dramatically since NAFTA took effect
The output of goods in maquiladoras, Mexican border
factories, have shifted from low-end to higher-end goods
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NAFTA: Ten Years Later
According to the U.S. Department of Commerce’s International Trade
Administration, the following trade and investment highlights have
taken place since NAFTA was established:
• Stimulated trade and investment in U.S., Mexico, and Canada
• Relaxed investment restrictions in Mexico
• Strengthened patent provisions to boost U.S. competitiveness
• Reduced or eliminated barriers limiting market access and price
advantage over other competitors
• Provisions in the auto sector
• Provisions in textile and apparel
Source: U.S. Department of Commerce International Trade Administration
http://ita.doc.gov/td/industry/otea/nafta/nafta-index.html
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Focus on Entrepreneurship:
NAFTA – Reshaping the Retail
Market
Even before NAFTA took effect in 1994, the first Wal Mart store in Mexico was breaking all sales records.
After NAFTA took effect, tariffs tumbled, unleashing
pent-up demand in Mexico for U.S.-made goods. The
treaty also helped eliminate some of the transportation
headaches and government red tape. Despite
capitalizing on these opportunities, the competitive
market in Mexico is growing, with the Mexican retailer
Gigante now bringing stores to the U.S.
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Regional Groupings – Latin America
 Integration in Latin America

Three objectives of Mercado Comun Del Sur (MERCOSUR), 1981:
Establish a free trade zone
 Create a common external tariff system
 Free movement of capital, labor, and services






Andean Common Market (ANCOM) founded in 1969
The Bolivarian Alternative for the People of Our America (ALBA)
Central American Common Market (CACM) was formed in 1960
Central America – Dominican Republic – U.S. Free Trade Agreement
(CAFTA-DR), 2005
Caribbean Common Market (CARICOM) formed in 1968
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Regional Groupings – Asia
 Integration in Asia






Market forces are compelling Asia to move toward formal
integration
Association of Southeast Asian Nations (ASEAN) was very
informal
ASEAN Free Trade Area (AFTA) formed in 1991 reduced tariffs
and set goal for customs union by 2010
East Asia Economic Group (EAEG) has been proposed
Asia Pacific Economic Cooperation (APEC) has set goals of
liberalizing trade
South Asian Association for Regional Cooperation (SAARC) on
Indian subcontinent in 1985
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Economic Cooperation Framework
Agreement
Taiwan and China will sign the proposed
Economic Cooperation Framework Agreement
(ECFA) on June 29, 2010. The proposal calls for
cuts on hundreds of Taiwanese exports to China
over the next two years. The 539 categories of
Taiwanese exports are worth $13.8 billion, while
Taiwan in turn will reduce tariffs for 267
categories of Chinese exports, worth $2.9 billion.
Source: The Economist -- http://www.economist.com/blogs/newsbook/2010/06/taiwan-china_trade
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Regional Groupings –
Africa and Mid-East
 Integration in Africa and the Middle East

Economic Community of West African States (ECOWAS), 1975


Objective is to form a customs union and common market
Other less successful entities in Africa
Common Market for Eastern and Southern Africa (COMESA)
 Economic Community of Central African States (ECCAS)
 Southern African Customs Union
 Southern African Development Community (SADC)



Arab Maghreb Union (Algeria, Libya, Mauritania, Morocco,
Tunisia)
Gulf Cooperation Council (GCC) (1980) – Goal is to achieve a
common currency by 2013
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Cartels and Commodity Price
Agreements
 Cartels

An association of producers of a particular good formed to suppress
market forces
Example: Organization of Petroleum Exporting Countries (OPEC)

Tactics include:

Price
Fixing
Dividing
Up Sales
Territories
Agreeing to
Restrict
Production
 International commodity price agreements


Buyers and sellers agree to manage the price of a certain commodity
If the price moves outside a certain range a manager will enter the
market and buy or sell to bring the price back down
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Emerging Markets
An emerging market is a country
making an effort to change and
improve its economy with the goal of
raising its performance to that of the
world’s more advanced nations
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Evolution of the Global Monetary
System
China
India
 Production Platform to Marketplace
 Key to Growth – Rapid transformation from an
agrarian society to an export-driven platform for
global manufacturing
 Growth in Services
 In 1991 India initiated a series of economic
measures that promoted sustained economic
growth and participation in the global economy
 Implementation of economic liberalization
Brazil
Chapter 8
policies and the avoidance of inflation problems
have spurred economic growth
 In 2008, showed great resiliency in the midst of
the global recession
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Agriculture Boom for Brazil, China, India?
According to the 2010 Agricultural Outlook Report, it is expected that
the rising economies of Brazil, China, and India will see strong growth
in their agricultural sectors in the next decade as output remains
stagnant among big importers in Western Europe.
Brazil is predicted to experience the fastest growth in agriculture, an
expansion of more than 40 percent through 2019 compared to the
2007-2009 base period. China and India were expected to see growth
of 26 percent and 21 percent.
Over the decade ending in 2019, global production of crops will
increase by more than 13 percent.
Source: The China Post -- http://www.chinapost.com.tw/business/global-markets/2010/06/17/261118/p2/BrazilChina.htm
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Barriers to Business
 Infrastructure Problems


Poor roads, outdated facilities, lack of refrigeration, and
inefficient distribution make it difficult to bring products to
the marketplace
The state of infrastructure development varies among the
major emerging markets:
China continues in unparalleled construction and modernization
of cities, highways, ports, and airports
 India requires significant future infrastructure investment in order
to continue to compete globally
 Brazil started the second phase of the country’s Growth
Acceleration Project in 2007, with improvements expected by 2011

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Transition Economies
 Former-Soviet nations emerge from central
planning to market orientation
 In many countries, privatization is ongoing


Some segments of the population have a desire for a return of
“the good old days”
Russia has yet to diversify its economy and remains highly
dependent on the fuel and mineral sectors
 Demand conditions in transition economies:




Buyers’ preferences are often vague and undefined
Market research is still new in many areas
Evolving distribution and pricing structures
Limited information on demand and channel supply
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The Developing Markets
 Research – Learn about the needs, aspirations, and
habits of targeted populations
 Creative Buying Power


Credit is essential for consumers in developing countries
Microfinance – Financial services to low-income clients
 Tailored Local Solutions – Companies combine advanced
technology with local insights
 Improving access can lead to a thriving business due to
economic and physical location of poor communities
 Shaping Aspirations


Developing markets can be ideal settings for commercial and
technological innovations
Presents a great growth opportunity for companies
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Focus on Technology:
Connects the World
Cisco employs strategies that have resulted in
phenomenal growth in developing areas such as
Saudi Arabia, Turkey, and Poland:
• Win the government, business will follow
• Sell more than technology
• Charity pays
• Hire well-connected locals
• Create jobs
• Create and adopt products to local needs
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Economic Integration and the
International Manager
Effects of
Change
 Create a vision of the outcome of change
 Consider degree of change readiness
 Be prepared for growing competition
Strategic
Planning
 Fill in gaps in goods and market portfolios
 Those in weak positions may need to form alliances
with stronger players
Reorganization
 Centralized authority to execute regional programs
 Staffing with personnel who understand the market
 Increased coordination and consultation with locals
Lobbying
 Seek ways to influence the regulatory environment
 Provide lawmakers with industry information
 Lobbying on multiple levels
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