International Economic Integration Forms of Economic Integration 1

International Economic Integration

Forms of Economic Integration 1. Free Trade Areas: Remove all trade impediments among themselves. Keep their own policies against outsiders. (EFTA, LAFTA) 2. Custom Unions: Member nations must conduct and pursue common external commercial relations such as common external tariffs. (CACM: Central American Common Market, CARICOM: Caribbean Community & Common Market)

Forms of Economic Integration 3. Common Market: Free factor mobility such as capital, labor, tech, and enterprise (MERCOSUR) 4. Complete Economic Union: Complete unification of monetary and fiscal policies (EU) 5. Complete Political Union: Germany

Major Effects of an Economic Integration 1. External Tariff: The effects can affect a particular industry directly and affect an industry by way of changes in the costs and prices of intermediate products or service inputs.

Major Effects of an Economic Integration 2. OLI Configuration: Dynamic effects of a regional trading bloc improve competitive advantages of a firm within the bloc by expanding market size, creating opportunities for scale economies, and increasing high levels of innovation activities. These effects can add more O advantages to a firm that already has more L advantages compared to other firms outside of the trading bloc. The improved advantages would be main attractiveness to foreign investors.

Major Effects of an Economic Integration 3. Strategic Responses: FDI becomes the strategic response, strategic asset seeking, of firms coping with changes in relative competitiveness, locational advantages and organizational forms brought about through the realignment of tariffs from the formation of a trading bloc.

Macro-economic effects by integration New economies of scale 2. Increase level of competition 3. Increase level of technology 4. Increase competitiveness of the regional firms 1.

Side Effects of an Economic Integration 1. Political Risk: A country that especially used to have political instability could appeal to foreign investors to reduce its political risk by becoming a member of a trading bloc. It means that a country’s exclusive or dogmatic treatments to economic activities could be more reasonable or acceptable by adopting a trading bloc’s general policies.

Side Effects of an Economic Integration 2. Protection of Intellectual Property Rights: Intellectual property rights include patents, knowhow, and trademarks. To get legal protection patents are granted and trademarks are registered by national governments, but the limitation of the protection, valid only within the territorial jurisdiction of the granting government, and the significantly different levels of the protection among countries make foreign investors hesitate to invest.

Side Effects of an Economic Integration 3. Others: Uncertainty of external commercial policy may encourage unnecessary higher levels of FDI because of the expectation of future restrictions in access to the enlarged market of the trading bloc.

Newly Created Types of FDI 1. Defensive import-substituting investments: These investments are derived from the increased L advantages of member countries by the tariff realignment in a trading bloc. FDI inflows are created by the foreign firms to shift their strategies from trade-based to investment-based for not loosing their market shares within the bloc.

Newly Created Types of FDI 2. Reorganization investments: According to the increased L advantages within the members, intra-region FDIs are stimulated to encourage the reallocation of economic activity according to member states’ comparative advantage. Because the movement of FDI is within a bloc, there is no FDI inflow from outsides non-members, but increasing intra-FDI.

Newly Created Types of FDI 3. Rationalized investment: Major parts of the advantages by an economic integration are also derived from cost reduction and efficient gain by regrouping of production facilities in fewer locations where more favorable costs are found. So, outsiders’ FDIs are coming to the area to look for those advantages.

Newly Created Types of FDI 4. Offensive import-substituting investment: If a country becomes a member of a trading bloc, the whole market of the bloc will be considered as one. As a result, these kinds of investments are derived from market expansion, demand growth, technical progress and FDI inflows would come to take these advantages of growing demand opening up of new markets.