ECONOMIC INTEGRATION AND EMERGING MARKETS CHAPTER 8 Copyright © 2011 John Wiley & Sons Visit for the latest in business.

ECONOMIC INTEGRATION AND

EMERGING MARKETS

CHAPTER 8

Copyright © 2011 John Wiley & Sons

Visit http://wileymanagementupdates.com/ for the latest in business news stories.

Chapter 8

Learning Objectives

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

2Chapter 8 Czinkota: International Business, 8e

Introduction

Forum for member nations to discuss key issues related to the global economy:

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

3Chapter 8

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

Group of Seven

Group of Ten

Group of Twenty

Czinkota: International Business, 8e

Levels of Economic Integration

Chapter 8 4

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 Institution

s

Free Trade Area

Yes No No No

Customs Union

Yes Yes No No

Common Market

Yes Yes Yes No

Economic Union

Yes Yes Yes YesCzinkota: International Business, 8e

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


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 lowerRegionalism versus Nationalism – The greatest

impediment to economic integration6Chapter 8 Czinkota: International Business, 8e

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)


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


NAFTA: Ten Years Later

Chapter 8

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 Administrationhttp://ita.doc.gov/td/industry/otea/nafta/nafta-index.html

9 Czinkota: International Business, 8e

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.

Focus on Entrepreneurship:NAFTA – Reshaping the Retail Market


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


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


Economic Cooperation Framework Agreement

Chapter 8

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.

13Source: The Economist -- http://www.economist.com/blogs/newsbook/2010/06/taiwan-china_trade


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


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:

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 down15Chapter 8

Price Fixing

Dividing Up Sales

Territories

Agreeing to Restrict Productio

n


Emerging Markets

Chapter 8

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


Evolution of the Global Monetary System

17Chapter 8

China

India

Brazil

Production Platform to MarketplaceKey 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 policies and the avoidance of inflation problems have spurred economic growth

In 2008, showed great resiliency in the midst of the global recession


Agriculture Boom for Brazil, China, India?

Chapter 8

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/Brazil-China.htm


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


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


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


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

Focus on Technology:Connects the World


Economic Integration and the International Manager

23Chapter 8

Effects of Change

Strategic Planning

Reorganization

Create a vision of the outcome of change Consider degree of change readiness Be prepared for growing competition

Fill in gaps in goods and market portfolios Those in weak positions may need to form alliances

with stronger players

Centralized authority to execute regional programs Staffing with personnel who understand the

market Increased coordination and consultation with locals

Seek ways to influence the regulatory environment Provide lawmakers with industry information Lobbying on multiple levelsLobbying


ECONOMIC INTEGRATION AND EMERGING MARKETS CHAPTER 8 Copyright © 2011 John Wiley & Sons Visit for the latest in business.

Documents

economic union

international business

e slide

trade diversion trade

free market

emerging market economies

emerging markets chapter

common market