Topic

International Economic Integration and Institutions

Nature of International Business Environmental

International business houses need accurate information to make appropriate decisions. Europe was the most opportunistic market for leather goods, particularly shoes. Based on the accurate date. The Bata shoe company make an appropriate decision to enter various European countries. International business houses need to have not only accurate but also timely information. For e.g. Coca-Cola could enter the European market based on timely information, whereas Pepsi entered later. The size of international business should be large in order to have an impact the foreign economies. Most international business houses segment their markets based on the geographical market segmentation. Daewoo, for instance, segmented its markets as North America, Europe, Africa, Indian sub-continent, and Pacific. International markets present more potential that the domestic markets.

Trends in the World Trade and Economics Growth

The Developing countries, which number about 170 and have about 85 percent of the world population, account for only about 20 percent of the world GDP and 22 percent of the export. However, the projection are that in the next decade, the developing countries will increase their share in the world income and trade.

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?

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?

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

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.

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.

International Economic Integration

Exhibit 8-1: Forces stimulating international economic integration

International Organisations
The following are International economic organisations 1. International Monetary Fund (IMF) 2. World Bank (WB) 3. World Trade Organization (WTO) 4. International Finance Corporation (IFC) 5. Asian Development Bank (ADB) 6. United Nations Conference on Trade and Development (UNCTAD) 7. United Nations Industrial Development Organisation (UNIDO) 8. International Trade Centre (ITC) 9. General System of Preferences (GSP) 10. General System of Trade Preferences among Developing Countries (GSTP)

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.

World Trade Organization (WTO)

WTO came into force on January 1, 1995. OBJECTIVES : 1. To help trade flow as freely as possible. 2. To achieve further liberalisation gradually through negotiations. 3. To set up an impartial means of settling disputes. In short, WTO is expected to: 1. Administer WTO trade agreements. 2. Provide a forum for trade negotiations. 3. Handle trade disputes. 4. Monitor national trade policies. 5. Provide technical assistance and training for developing countries. 6. Cooperate with other international organisations. Areas of Negotiations Broadly speaking, WTO has been set up to continue negotiations and bring agreements in the following areas: 1. Basic telecommunications. 2. Maritime transport. 3. Movement of natural persons. 4. Financial services. 5. General Agreement on Trade and Services (GATS) 6. A reaffirmation of the rule of the law in trade and economic relations. 7. A reversal of long- standing protectionist practices in agriculture, textiles and clothing. 8. An extension of multilateral rules to services and intellectual property rights.

WTO and India : India became a founder member of WTO by ratifying the WTO agreement on December 30, 1994. The critics believe that the new policies have developed a dependency syndrome on the international market and the Indian economys fortunes have been geared to it.

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.

The World Trade Organization (WTO)

Exhibit 8-2: Multilateral negotiations under GATT

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:
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

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.

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.

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.

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.

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

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).

International Monetary Fund (IMF)

The International Monetary Fund (IMF) was established on December 27, 1945, with 29 member countries. It began financial operations on March 1, 1947. OBJECTIVES : The main objectives of IMF are as follows: 1.Promote international monetary cooperation. 2.Facilitate the expansion and balanced growth of international trade. 3.Promote exchange stability and maintain orderly exchange arrangements among members. 4.Assist in establishing a multilateral system of payments in respect of current transactions among member countries, and also assist in eliminating foreign exchange restrictions that hamper the growth of world trade. 5.Make available to members the general resources on a temporary basis to enable them to correct BoP problems without resorting to measures that would harm national- or international prosperity. 6.Shorten the duration and lessen the degree of disequilibrium in the international BoP of members. ORGANIATIONS : The IMFs organisations consiss of : 1.Board of Governors, 2. Executive Board 3. Managing Director 4. Staff of Internationals Civils Servants 5. Development Committee

Borrowings, Financing Facilities, and Policies :

BORROWINGS : A member can generally borrow up to 380 percent of its quota. Contingent Credit Lines (CCL) access is in the range of 300-580 percent of quota. Financing Facilities and Policies Landing facilities consist of EFF, SRF and CFF. Emerging assistant through EFM. Technical Assistant. IMF Resources Subscriptions by members. FINANCING FACILITIES AND POLICIES : 1] Regular Lending Facilities : Regular lending facilities consists of selling to the members the currencies of other members of Special Drawings Rights (SDRs) in exchange for the own currencies. Such drawings are normally associated with stand by and extended arrangements. Stand by arrangement : Stand-by arrangements are to resolve BoP problems of a largely cyclical nature. Extended Fund Facilities (EFF) : Extended Arrangements facilities are designed are designed to correct BoP difficulties that stem largely from structural problems and take long period to correct.

2] Special Lending Facilities : Supplement Reserve Facility (SRF) : Supplement reserve facilities are intended to help member countries experiencing exceptional BoP problems created by a large short from a sudden and disruptive loss of market confidence Contingent Credit Lines (CCL) : The CCL is intended to be a preventive measure, solely for members concerned about their potential vulnerability to contagion but not facing a crises at the time of the commitment.
3] Concessional Lending Facilities : Poverty Reduction and Growth Facility (PRGF) : PRGF programmes are expected to be based on a strategy designed by the borrowing country to reduce poverty. 4] Other IMF Policies : Emergency Assistance : The IMF provides emergency assistance to member facing BoP difficulties caused by a natural disaster. Emergency Financing Mechanism (EFM) EFM to be used in rare circumstances representing or threatening a crises in a members external accounts.

World Bank (WB)

The International Bank for Reconstructions and Development (IBRD) or the World Bank (WB) was established in 1945. OBJECTIVES : The objectives of the WB as noted down in its Articles of Agreement are as follows: 1. To assist in the reconstruction- and development of territories of the members by facilitating the investment of capital for productive purposes. 2. To restore the economies of member counties destroyed or disrupted by war, and the reconversion of production facilities to peacetime needs. 3. To encourage the development of productive facilities and resources in the less-developed countries (LDCs). 4. To promote private foreign investment by means of guarantees of participation in loans and other investments made by private investors. 5. To supplement private investment on suitable conditions when private capital is not available on reasonable terms. 6. Finance for productive purposes out of its own capital funds raised by il and other resources. 7. To promote the long-range balanced growth of international trade and the maintenance of equilibrium in the BoP. 8. To encourage international investment of the productive resources of members, thereby assisting in raising productivity, standards of living, and conditions of labour in their territories.

Financing Policies : The WB finances all kinds of infrastructure development such as roads, railways telecommunication, ports and power. 1. Structure Adjustment Lending (SAL) : Structure adjustment lending is designed to achieve a more efficient use of resources and contribute to a more sustainable BoP in the maintenance of growth in the face of server constraints. 2.Special Action Programme (SAP) The object of the SAP is to help countries implement adjustment measures and high priority projects.

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.

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.

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.

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.

United Nations Conference on Trade and Development (UNCTAD)

UNCTAD was established in 1964 as a permanent organ of the UN General Assembly. FUNCTIONS : The principal functions of UNCTAD are as follows : 1.To promote international trade with a view to accelerate economic development. 2.To formulate principles of and policies on international trade and related problems of economic development. 3.To negotiate multinational trade agreements. 4.To make proposals for putting its principles and policies into effects.

BASIC PRINCIPLES : UNCTAD's action programme and priorities have been laid down in various recommendations adopted by the first conference in 1964. These recommendations are based on the following basic principles: 1.Every country has the sovereign right to freely dispose of its natural resources in the interest of the economic development and well-being of its own people and to freely trade with other countries; 2.Economic relations among countries, including trade relations, shall be based on respect for the principles of sovereign equality of states, self-determination of people, and noninterference in the internal affairs of other countries; and 3.There shall be no discrimination on the basis of differences in socio-economic systems, and the adoption of various trading methods and trading policies shall be consistent with this principle.

United Nations Industrial Development Organization (UNIDO)

UNIDO was established in January 1967 with an objective to promote industrialization in developing countries. The major activities of UNIDO are direct technical assistance to industries research and co-ordination.

International Trade Centre (ITC)

ITC is directly responsible for implementing UNDP- financed projects related to trade promotion in developing countries. The ITC assists developing countries by working with them in : 1.Developing a national promotion strategy. 2.Establishing appropriate government institutions and services. 3.Finding marked opportunities for current export products. 4.Training government trade officials, businessmen and instructors in export. 5.Improving import operations and techniques.

Other International Economic Organizations

Exhibit 8-3: Summary of specialized international economic organizations

Chapter 8: International Economic Integration and Institutions

International Finance Corporation (IFC)

IFC was established in 1956. MISSION : Its mission was contributed for reducing poverty and improving living standards to the WB groups and over all purpose. OBJECTIVES : The objectives of IFC are to assist the economic development of LDCs by promoting growth in the private sector of their economies and help to mobilise domestic and foreign capital for this purpose. MAIN FEATURES OF ASSISTANCE : The main features of IFCs assistance are as follows : 1.The IFC makes its investments in partnership with private investors from the capitalexporting country or from the country in which the enterprise is located, or both. 2.It is envisaged that the Corporation's investments will never be more than half of the capital requirements of the enterprise. 3.The minimum investment the IFC will make in an enterprise is fixed at $10,000 or its equivalent, but no upper limit is fixed. 4.The enterprises eligible for loans from the Corporation should be predominantly industrial and contribute to the economic development of the country. 5.The rate of interest in each case would be a matter of negotiation depending on the risks and other investments. 6.The IFC will not seek or accept a government guarantee for the repayment of any of its investment, nor will it seek formal government approval of any proposed financing, except when such approval is required by law in any country.

IFC and India : The IFC has identified five priority areas in India for its activities, which are capital market development, FDI, access to foreign markets, equity investments and infrastructure.

Asian Development Bank (ADB)

A.D.B was set up in December 1966 under the auspices of the United Nations Economic Commission for Asia and Far East (ECAFE) to foster the economic development of Asian countries. Its headquarters are in Manila. The funds of the ADB are contributed by developed countries such as Japan, the United States, Canada, West Germany, Australia, and others. The main objectives of the ADB are: 1.To promote investment in the ESCAP (Economic and social Commission for Asia and the Pacific) region of public- and private capital for development; and 2.To utilise the available resources for financing development, giving priority to those regional, sub-regional, as well as national projects and programmes which contribute more effectively to the harmonious economic growth of the region as a whole. At the 23rd Annual Meeting of the Board of Governors of the ADB, the President pointed out that the Bank's most appropriate response to Asian- and Pacific development in the future lies in following three board directions: 1.Greater priority must be placed on alleviating poverty and protecting the environment; 2.The Bank must strengthen its assistance to the private sector to improve productivity and efficiency; and 3.The Bank must work with its developing members to create a policy framework that makes the most efficient use of human- and capital resources.

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.

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.

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

Europe: The European Union (EU)

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 transEuropean transportation and environmental protection.

Europe: The European Union (EU)

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.

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.

Latin America
Exhibit 8-7: Free trade blocs in the Americas

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

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.

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.

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 worlds oil production

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

Strategic Responses of MNEs

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.