Transcript Chapter 8
CHAPTER 8 ECONOMIC INTEGRATION AND EMERGING MARKETS Visit http://wileymanagementupdates.com/ for the latest in business news stories. 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 2 Czinkota: International Business, 8e 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 Chapter 8 3 Czinkota: International Business, 8e 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 Chapter 8 4 Czinkota: 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 Chapter 8 5 Czinkota: International Business, 8e 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 Chapter 8 6 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) Chapter 8 7 Czinkota: International Business, 8e 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 Chapter 8 8 Czinkota: International Business, 8e 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 Chapter 8 9 Czinkota: International Business, 8e 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. Chapter 8 10 Czinkota: International Business, 8e 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 Chapter 8 11 Czinkota: International Business, 8e 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 Chapter 8 12 Czinkota: International Business, 8e 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 Chapter 8 13 Czinkota: International Business, 8e 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 Chapter 8 14 Czinkota: International Business, 8e 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 Chapter 8 15 Czinkota: International Business, 8e 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 Chapter 8 16 Czinkota: International Business, 8e 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 17 Czinkota: International Business, 8e 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 Chapter 8 18 Czinkota: International Business, 8e 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 Chapter 8 19 Czinkota: International Business, 8e 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 Chapter 8 20 Czinkota: International Business, 8e 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 Chapter 8 21 Czinkota: International Business, 8e 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 Chapter 8 22 Czinkota: International Business, 8e 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 Chapter 8 23 Czinkota: International Business, 8e