CH8 Foreign Direct Investment

Introduction
 Foreign direct investment (FDI): a firm invests directly in facilities to produce or market a good or
service in a foreign country.
 The U.S. Department of Commerce defines FDI as a U.S. citizen, organization, or affiliated group
holding an interest of 10 percent or more in a foreign business entity.
 Once a firm undertakes FDI, it becomes a multinational enterprise.
 FDI form: greenfield ventures, acquisitions, or joint ventures with foreign entities.

Foreign Direct Investment in the World Economy

 The flow of FDI refers to the amount of FDI undertaken over a given time period (normally a year).
 The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time.
 TRENDS IN FDI
 there has been a significant increase in both the flow and stock of FDI in the world economy.
 Reasons drive the rapid growth of FDI:
1. Firms use FDI as a means to circumvent potential future trade barriers, given concerns about
protectionist pressures.
2. The global political and economic changes in many developing nations
Ex: a shift towards democratic institutions and free market economies, have also encouraged
FDI.
 The globalization of the world economy has a positive impact on the volume of FDI.
 it's important to have production facilities close to their major customers
->driving the demand for FDI.
 THE DIRECTION OF FDI
 most Foreign Direct Investment (FDI) has been directed at developed nations
 the reason that U.S. has been a target for FDI inflows:
①. Large and wealthy domestic markets.
②. Dynamic and stable economy.
③. Favorable political environment
④. openness to FDI.
 FDI inflows directed at developing nations and the transition economies of eastern Europe and
the old Soviet Union have increased markedly
 Most recent inflows into developing nations have been targeted at the emerging economies of
Southeast Asia.
 Growing importance of China as recipient of FDI.
 THE SOURCE OF FDI
 Since World War II, the United States has consistently been the largest source country for FDI.
 the United States, the United Kingdom, France, Germany, the Netherlands, and Japan accounted
for 60 percent of all FDI outflows during 1998–2018.
  These nations dominated FDI outflows due to their status as the most developed nations with the
largest economies, home to many of the largest and best-capitalized enterprises.
 China became a major foreign investor around 2005, especially in less developed nations.
 THE FORM OF FDI: ACQUISITIONS VERSUS GREENFIELD INVESTMENTS
 FDI takes two main forms.
1. greenfield investment: establishment of a new operation in a foreign country.
2. acquiring or merging with an existing firm in the foreign country.
 Firms may prefer mergers and acquisitions over greenfield investments for 3 reasons:
1. Quicker to execute.
2. Can acquire valuable strategic assets.
3. Can increase the efficiency of the acquired unit by transferring capital, technology, or
management skills.

Theories of Foreign Direct Investment

 The various theories of foreign direct investment approach the phenomenon from three
complementary perspectives.

 WHY FOREIGN DIRECT INVESTMENT?

 There are 2 alternatives to FDI:
1. Exporting: producing goods at home and shipping to receiving country for sale.
2. Licensing: granting a foreign entity the right to produce and sell a firm’s product in return for
a royalty fee.
 FDI is expensive and risky compared with exporting and licensing.
 Limitations of Exporting
1. Transportation costs and trade barriers.
2. By limiting imports through quotas and tariffs, governments increase the attractiveness
of FDI and licensing.
 Limitations of Licensing
 Internalization theory used to explain why firms prefer FDI gives three major drawbacks
to licensing:
1. Licensing may result in a firm’s giving away valuable technological know-how to a
potential foreign competitor.
2. Licensing does not give a firm the tight control over production, marketing, and strategy
in a foreign country that may be required to maximize its profitability.
3. The firm’s competitive advantage is based on the management, marketing, and
manufacturing capabilities, which are not amenable to licensing.
 Advantages of Foreign Direct Investment
1. When transportation costs or trade barriers make exporting unattractive.
2. When a firm wishes to maintain control over its technological know-how, or over its
operations and business strategy, or when the firm’s capabilities are simply not
amenable to licensing.
 THE PATTERN OF FOREIGN DIRECT INVESTMENT
  F. T. Knickerbocker: looked at the relationship between FDI and rivalry in oligopolistic industries.
 An oligopoly is an industry composed of a limited number of large firms
 Interdependence between firms in an oligopoly leads to imitative behavior: What one firm does
can have an immediate impact on the major competitors, forcing a response in kind.
 Imitative behavior also occurs in FDI.
 Multipoint competition: when two or more enterprises encounter each other in different regional
or national markets.
 THE ECLECTIC PARADIGM
 British economist John Dunning.
 Location-specific advantages explain rationale for FDI.
 Difficult for a firm to license its own unique capabilities and know-how.
 Combining location-specific assets or resource endowments with the firm’s own unique
capabilities often requires foreign direct investment.
 Firms can benefit from externalities by locating close to their source.

Political Ideology and Foreign Direct Investment

 THE RADICAL VIEW
 Roots in Marxist political and economic theory.
 Multinational enterprises (MNEs) serve as instruments of imperialist domination, exploiting host
countries for the exclusive benefit of their home countries.
 MNEs extract profits from host countries, control key technology, and favor home-country
nationals for important jobs in foreign subsidiaries.
 No country should permit foreign corporations to undertake foreign direct investment (FDI) as
they are seen as instruments of economic domination.
 From 1945 until the 1980s, the radical view was very influential in the world economy.
 By the early 1990s, the radical position was in retreat.
 THE FREE MARKET VIEW
 The free market view, rooted in classical economics and international trade theories, advocates
for the distribution of international production based on the theory of comparative advantage.
 According to the free market view, multinational enterprises (MNEs) serve as instruments for
dispersing the production of goods and services to the most efficient locations globally, increasing
overall efficiency in the world economy.
 Contrary to the radical view, the free market perspective emphasizes that resource transfers
through FDI benefit the host country by bringing technology, skills, and capital, stimulating
economic growth.
 PRAGMATIC NATIONALISM
 Many countries adopt a pragmatic nationalist policy towards FDI, recognizing both its benefits
and costs, and seek to maximize national benefits while minimizing costs.
 FDI can bring capital, skills, technology, and jobs to a host country, but it also raises concerns
about profits flowing abroad and negative impacts on the host country's balance-of-payments
position.
 Pragmatic nationalism includes actively pursuing FDI deemed in the national interest, often
 through offering subsidies like tax breaks or grants to foreign multinational enterprises (MNEs).
 SHIFTING IDEOLOGY
 there has been a decline in countries adhering to a radical ideology, with an increasing number
gravitating toward the free market end of the spectrum and liberalizing their foreign investment
regimes.
 Formerly radical countries, including former communist nations in eastern Europe, socialist
countries in Africa, and India, have shifted towards more liberalized FDI policies, contributing to a
global surge in FDI volume.
 there is evidence of a more hostile approach to foreign direct investment in some nations
EX: Venezuela and Bolivia

Benefits and Costs of FDI

 HOST-COUNTRY BENEFITS
 Resource-Transfer Effects
 Foreign direct investment can positively impact a host economy by providing capital,
technology, and management resources that may not be otherwise available, thereby
boosting economic growth.
 Employment Effects
 Foreign direct investment (FDI) is claimed to bring jobs to a host country through both direct
and indirect effects
 The net gain in employment due to FDI can be a significant negotiating point between an
MNE and the host government.
 Balance-of-Payments Effects
 The effect of foreign direct investment (FDI) on a country's balance-of-payments accounts is
a significant concern for host governments, particularly regarding the current account and
trade deficits.
 Governments prefer a current account surplus to avoid selling off assets to foreigners, which
is necessary to sustain a long-term current account deficit.
 export-led economic growth when multinational enterprises use foreign subsidiaries to
export goods and services to other countries.
 Effect on Competition and Economic Growth
 market efficiency relies on competition among producers.
 Greenfield foreign direct investment (FDI), by establishing new enterprises, increases market
players, enhancing consumer choice and fostering competition, leading to lower prices and
increased economic welfare.
 Services where exporting is not an option. => led to enhanced competition, stimulates
investment, lower prices.
 HOST-COUNTRY COSTS
 Adverse Effects on Competition
 Subsidiaries of foreign MNEs may have greater economic power than indigenous
competitors.
 Greenfield investments increase competition, but this not as clear with an acquisition.
  Adverse Effects on the Balance of Payments
 set against the initial capital inflow that comes with FDI must be the subsequent outflow of
earnings from the foreign subsidiary to its parent company. =>capital outflow
 when a foreign subsidiary imports a substantial number of its inputs from abroad.
=> results in a debit on the current account of the host country’s balance of payments.
 Possible Effects on National Sovereignty and Autonomy
 FDI may result in a loss of economic independence, with key decisions affecting the host
country's economy made by a foreign parent beyond the host government's control.
 But they fail to consider growing interdependence of the world economy
 HOME-COUNTRY BENEFITS
 The benefits of FDI to the home (source) country arise from 3 sources:
1. the home country’s balance of payments benefits from the inward flow of foreign earnings.
2. employment effects.
3. Reverse resource-transfer effect: benefits arise when the home-country MNE learns
valuable skills from its exposure to foreign markets that can subsequently be transferred
back to the home country.
 HOME-COUNTRY COSTS
 Balance of payments:
1. the balance of payments suffers from the initial capital outflow required to finance the FDI.
This effect
 more than offset by the subsequent inflow of foreign earnings.
2. the current account of the balance of payments suffers if the purpose of foreign investment
is to serve the home market from a low-cost production location.
3. the current account of the balance of payments suffers if the FDI is a substitute for direct
exports.
 Employment effects: when FDI is a substitute for domestic production.
 INTERNATIONAL TRADE THEORY AND FDI
 Offshore production is FDI undertaken to serve the home market.
1. May stimulate economic growth in home country.
2. May result in lower prices.
3. Makes a company more competitive.

Government Policy Instruments and FDI

 HOME-COUNTRY POLICIES
 Encouraging Outward FDI
 Government-backed insurance programs.
 Government loans.
 Elimination of double taxation of foreign income.
 Relaxation of restrictions on FDI by host countries.
 Restricting Outward FDI
 Limit capital outflows: to improve balance of payments, and to make it more difficult
undertake FDI.
  Manipulate tax rules: to try to encourage their firms to invest at home.
 Prohibit investment for political reasons
 HOST-COUNTRY POLICIES
 Encouraging Inward FDI
 Governments commonly provide incentives to attract foreign firms for investment.
 Incentives come in various forms, including tax concessions, low-interest loans, and grants or
subsidies.
 The motivation behind these incentives is to benefit from the resource-transfer and
employment effects of Foreign Direct Investment (FDI).
 Restricting Inward FDI
 Ownership restraint: it can manifest in exclusion from specific industries or restrictions on
the percentage of foreign ownership, often motivated by national security, competition
concerns, or the desire to nurture local industries.
 Performance requirements: more common in less developed countries, reflecting a strategy
to maximize benefits and minimize costs of FDI for the host country.
 INTERNATIONAL INSTITUTIONS AND THE LIBERALIZATION OF FDI
 The WTO, focused on promoting international trade in services, became involved in
regulating FDI, especially in services where exporting is not feasible.
 The WTO's emphasis has been on pushing for the liberalization of regulations governing FDI.
 liberalizing trade in telecommunications and financial services

FOCUS ON MANAGERIAL IMPLICATIONS

 FDI AND GOVERNMENT POLICY
 The Theory of FDI
 Dunning’s locations specific advantages argument explains the direction of FDI, but not why
firms prefer FDI to exporting or licensing.
 Internalization theories identify the relative profitability of FDI, exporting, and licensing.
 Licensing may work, it is not an attractive option when the following conditions exist:
1. the firm has valuable know-how that cannot be adequately protected by a licensing
contract
2. the firm needs tight control over a foreign entity to maximize its market share and
earnings in that country
3. a firm’s skills and capabilities are not amenable to licensing.
 Licensing not a good option in three types of industries:
1. High-technology.
2. Global oligopolies.
3. Industries facing intense cost pressures.
 Government Policy
 Investing in countries that have permissive policies generally preferable than those that
restrict FDI.
 Many countries still display a pragmatic stance.
 Bargaining power dependent on three factors:
1. Value each side places on what the other has to offer.
2. Number of comparable alternatives available to each side.
3. Each party’s time horizon.
COMMENTS:
Answering the third question in the Discussion Questions for this chapter, "What are the strengths of the
eclectic theory of FDI? Can you see any shortcomings?" Here are my perspectives:

The eclectic theory emphasizes the reasons for a company to engage in Foreign Direct Investment (FDI).
Dunning introduced the OLI framework. O stands for Ownership Advantage, multinational enterprises can
utilize their unique corporate assets (such as technological, marketing, or management capabilities) to gain
a competitive advantage in foreign markets. L is Location Advantage, the resources in the host country
favor investments by multinational enterprises (e.g., natural resources like minerals and oil, low-cost or
highly skilled human resources). I is Internalization Advantage, after integrating internalization theory,
Dunning suggests that when corporate difficult for a firm to license its unique capabilities and know-how, it
can combine location-specific assets or resource endowments with the firm’s own unique capabilities
through foreign direct investment.

Based on these considerations, companies become more flexible in addressing different industries and
countries, efficiently allocating resources, and choosing the most suitable locations for investment to
enhance efficiency. However, it seems to overlook local competition, political risk uncertainties, and the
difficulty in adapting to market changes in the short term.
CH9 Regional Economic Integration

Introduction
 a proliferation of regional trade blocs promoting regional economic integration.
 WTO members are required to notify the WTO of their participation in regional trade agreements
 free trade agreements produce gains from trade for all member countries.
 GATT and WTO seek to reduce trade barriers but reaching agreements is difficult.
 regional integration:
1. EU: the most ambitious
2. NAFTA: remove all barriers to the free flow of goods and services among Canada, Mexico, and
the United States.
 As significant job losses in the United States, it has developed a new agreement, known as
the United States–Mexico–Canada Agreement (USMCA).
3. Mercosur: start reducing barriers to trade between each other, and although progress within
Mercosur has been halting, the institution is still in place.

Levels of Economic Integration

 From least integrated to most integrated: free trade area -> customs union -> common market ->
economic union -> political union.

1. free trade area:

 Eliminates all barriers to the trade of goods and services among member countries.
 Each country allowed to determine its own trade policies regarding nonmembers.
 Free trade agreements, constituting almost 90 percent of regional agreements
 The European Free Trade Association (EFTA) is the most enduring free trade area, including Norway,
Iceland, Liechtenstein, and Switzerland.
 Other free trade areas include NAFTA and its successor, the United States–Canada–Mexico
Agreement (USCMA).
2. Customs Union
 Eliminates trade barriers between member countries and adopts a common external trade policy.
  The EU began as a customs union.
 The Andean Community, currently a free trade area, includes Bolivia, Colombia, Ecuador, and Peru,
aspires to be a customs union but has been imperfectly implemented.
3. Common market
 No restrictions on immigration, emigration, or cross-border flows of capital among member
countries.
 Requires harmony and cooperation on fiscal, monetary, and employment policies.
 Mercosur aims to establish itself as a common market, with Argentina, Brazil, Paraguay, and
Uruguay as members.
4. Economic Union
 Economic union involves closer integration, a common currency, tax rate harmonization, and a
common monetary and fiscal policy.
 The EU is an economic union, but with imperfections.
 EX: not all members of the EU have adopted the euro, the currency of the EU; differences in tax
rates and regulations across countries
 Achieving economic union involves sacrificing national sovereignty to a coordinating bureaucracy.
5. Political Union
 Central political apparatus coordinates economic, social, and foreign policy of member states.
 EU headed toward at least partial political union
 U.S. is an even closer example of political union.

The Case for Regional Integration

 THE ECONOMIC CASE FOR INTEGRATION
 unrestricted free trade allows countries to specialize, leading to greater world production and
dynamic gains from trade.
 Opening a country to free trade stimulates economic growth, creating positive-sum gains for all
participating countries.
 Foreign direct investment (FDI) transfers technological, marketing, and managerial know-how,
further boosting economic growth.
 The theoretical ideal is an absence of barriers to the free flow of goods, services, and factors of
production among nations.
 Government intervention in international trade and FDI is justified in some cases, making
unrestricted free trade and FDI an ideal rather than a reality.
 Regional economic integration aims to achieve additional gains from the free flow of trade and
investment beyond what global agreements like the WTO provide.
 It is easier to establish a free trade and investment regime among adjacent countries than among
the entire world community, motivating regional integration efforts.
 THE POLITICAL CASE FOR INTEGRATION
 Regional economic integration creates incentives for political cooperation between neighboring
states, reducing the potential for violent conflict.
 Grouping economies together enhances the political weight of the countries involved in the world.
 IMPEDIMENTS TO INTEGRATION
  integration has never been easy to achieve or sustain for two main reasons:
1. While a nation as a whole may benefit from a regional free trade agreement, certain groups
will lose. EX: job losses
2. It implies a loss of national sovereignty.

The Case against Regional Integration

 Trade creation: Trade created due to regional economic integration; occurs when high-cost domestic
producers are replaced by low-cost foreign producers within a free trade area.
 Trade diversion: Trade created due to regional economic integration; occurs when low-cost foreign
suppliers outside a free trade area are replaced by higher-cost suppliers within a free trade area.

Regional Economic Integration in Europe

 EVOLUTION OF THE EUROPEAN UNION
 The European Union (EU) is the product of two political factors:
1. The devastation of western Europe during two world wars and the desire for a lasting peace.
2. The European nations’ desire to hold their own on the world’s political and economic stage.
 The Treaty of Rome in 1957 established the European Community.
 Focusing on creating a common market by eliminating internal trade barriers, implementing a
common external tariff, and ensuring free movement of factors of production.
 1993 European Community became the European Union
 expanded to 28 member states, establishing it as a global economic power.
 2020 Britain's planned exit.
 POLITICAL STRUCTURE OF THE EUROPEAN UNION
 The four main institutions: European Commission, the Council of the European Union, the European
Parliament, and the Court of Justice.
1. The European Commission is responsible for proposing EU legislation, implementing it, and
monitoring compliance with EU laws by member states.
2. The European Council is ultimate controlling authority within the EU because draft legislation
from the commission can become EU law only if the council agrees.
3. European Parliament is directly elected by the populations of the member states. They are
responsible for debating legislation proposed by the commission and forwarded to it by the
council. Treaty of Lisbon increased power of the parliament.
4. The Court of Justice, which is composed of one judge from each country, is the supreme
appeals court for EU law.

 THE SINGLE EUROPEAN ACT

 The Objectives of the Act
 Remove all frontier controls among EC countries.
 Apply the principle of “mutual recognition” to product standards.
 Institute open public procurement to nonnational suppliers.
 Lift barriers to competition in the retail banking and insurance businesses.
 Remove all restrictions on foreign exchange transactions between member countries by the
 end of 1992.
 Abolish restrictions on cabotage by the end of 1992.
 Impact
 Impetus for restructuring of substantial sections of industry.
 Fostered faster economic growth.
 Established legal, cultural, and language differences creates uneven implementation.
 THE ESTABLISHMENT OF THE EURO
 Benefits of the Euro
 1992 Maastricht Treaty:
1. Committed the EU to adopt a single currency (euro) by January 1, 1999
2. Used by 19 of 28 member states (the euro zone).
3. Second most widely-traded currency after U.S. dollar.
4. Great Britain, Denmark, Sweden don’t use euro.
 Benefits of the Euro
 Savings from handling a single currency.
 Makes it easier to compare prices across Europe.
 Producers forced to look for ways to reduce production costs.
 Boosts development of highly liquid pan-European capital market.
 Increases investment options.
 Costs of the Euro
 Loss of control over national monetary policy.
 EU is not an optimal currency area.
 The Euro Experience
 Volatile trading history since establishment in 1999.
 Euro has weakened since 2008.
 Slow economic growth and large budget deficits among Greece, Portugal, Ireland, Italy, and
Spain.
 provided bailout packages to Greece, Ireland, and Portugal, requiring these countries to
implement austerity measures.
 Some newer nations have put plans to adopt euro on hold.
 ENLARGEMENT OF THE EUROPEAN UNION
 began after the collapse of communism in the late 1980s.
 13 additional countries applied by end of the 1990s.
 applicants had to undergo economic reforms, privatize state assets, establish stable democratic
governments, and respect human rights.
 The new members were initially unable to adopt the euro and faced restrictions on the free
movement of labor.
 Eastern European countries only account for 5 % of the GDP of current EU members.
 Turkey denied entry because of human rights concerns. (Muslim identity)
 BRITISH EXIT FROM THE EUROPEAN UNION (BREXIT)
 British electorate voted to leave in 2016.
 Concern with the loss of national sovereignty, regulations and immigration.
  Treaty of Lisbon: Britain had two years to negotiate terms of exit.
 seen as a counterweight to economic power of Germany.
 For Britain to benefit, it must be able to negotiate trade deals with the EU.

Regional Economic Integration in the Americas

 THE NORTH AMERICAN FREE TRADE AGREEMENT (From 1994)
 NAFTA’S Contents
 Free trade area among Canada, Mexico and the U.S.
 Abolished tariffs on 99 percent of goods traded between members.
 Removed barriers on the cross-border flow of services.
 Protects intellectual property rights.
 Removes most restrictions on FDI between members.
 Allows each country to apply environmental standards.
 Established two commissions to impose fines and remove trade privileges when
environmental standards or legislation involving health and safety, minimum wages, or child
labor are ignored.
 The Case for NAFTA
 Mexico would benefit from:
Increased jobs as low cost production moves south and more rapid economic growth as a
result.
 U.S. and Canada would benefit from:
1. Access to a large and increasingly prosperous market.
2. Lower prices for consumers from goods produced in Mexico.
3. Low cost labor and ability to be competitive in world markets.
4. Increased imports by Mexico
 The Case against NAFTA
 Jobs would be lost and wage levels would decline in the U.S. and Canada.
 Pollution would increase due to Mexico's more lax standards.
 Mexico would lose its sovereignty.
 NAFTA: The Results
 NAFTA's impact has been small but positive.
 Productivity in all three countries increased.
 Real wages increased for all NAFTA members.
 Estimates on job losses vary, but overall impact is considered small.
 THE UNITED STATES–CANADA–MEXICO AGREEMENT (USCMA)
 Politicians on both sides have taken aim at NAFTA saying it has created job losses in the U.S.
 NAFTA renegotiated to the USCMA:
1. Automakers must produce 75 percent of content in North America.
2. By 2023, 40 percent of parts for tariff-free vehicles must come from “high wage” factory.
3. To become law, must be ratified by legislators in all three countries.
 THE ANDEAN COMMUNITY
 In 1969, Bolivia, Chile, Ecuador, Colombia, and Peru formed the Andean Pact, modeled after the
 EU. ->less successful
 collapsed due to economic challenges, political unrest, and ideological differences.
 Economic problems included low growth, hyperinflation, high unemployment, and debt burdens.
 Re-launched in 1990.
 In 1990, the Galápagos Declaration set goals for a free trade area, customs union, and common
market.
 In 1997, Renamed the Andean Community.
 In 2005, the Andean Community signed an agreement with Mercosur to create a free trade area
 In 2006, Venezuela withdrew.
 MERCOSUR
 started in 1988 between Brazil and Argentina
 expanding to include Paraguay and Uruguay in 1990, and Venezuela in 2012.
 In 2016, Venezuela was suspended due to violations of democratic principles and human rights.
 May be diverting trade rather than creating trade, and local firms are investing in industries that
are not competitive on a worldwide basis.
 Efforts stalled on reducing trade barriers between member states
 CENTRAL AMERICAN COMMON MARKET, CAFTA, AND CARICOM
 CAFTA
 In the early 1960s, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua attempted to
establish a Central American Common Market.
 collapsed in 1969 due to war between Honduras and El Salvador.
 In 2004 agreement to establish a free trade agreement between the six (Costa Rica, El
Salvador, Guatemala, Honduras, Nicaragua and Dominican Republic) countries and the United
States.-> CAFTA
 Central America Free Trade Agreement (CAFTA): aim to lower trade barriers between the
United States and the six countries for most goods and services.
 CARICOM
 In 1991, a customs union was to have been created by the English-speaking Caribbean
countries under the auspices of the Caribbean Community. (CARICOM)
 In 2005.CARICOM expanded to 15 members.
 In early 2006, six CARICOM members established the Caribbean Single Market and Economy
(CSME), modeled on the EU's single market, with the goal of lowering trade barriers and
harmonizing macroeconomic and monetary policy between member states.

Regional Economic Integration Elsewhere.

 ASSOCIATION OF SOUTHEAST ASIAN NATIONS
 Formed in 1967, the Association of Southeast Asian Nations (ASEAN) includes Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam.
 basic objective is to foster freer trade among member countries and achieve cooperation in their
industrial policies.
 In 2003, an ASEAN Free Trade Area (AFTA) among the six original members (Brunei, Indonesia,
Malaysia, Philippines, Singapore and Thailand ) came into full effect, cutting tariffs on
 manufacturing and agricultural products to less than 5 percent.
 ASEAN and AFTA moving towards establishing a free trade zone.
 REGIONAL TRADE BLOCS IN AFRICA
 19 trade blocs on the continent.
 Progress toward meaningful trade blocs has been slow due to
1. political turmoil in several African nations
2. deep suspicion of free trade
 arguments favoring protection through tariff barriers.
 East African Community (EAC)
 In early 2001, Kenya, Uganda, and Tanzania, members of the East African Community (EAC),
committed to relaunching their bloc,
 intending to establish a customs union, regional court, legislative assembly, and eventually a
political federation.
 program includes cooperation on immigration, road and telecommunication networks,
investment, and capital markets.
 In 2005, started to implement a customs union,
 In 2007, Burundi and Rwanda joined the EAC.
 In 2010, established a common market and is striving toward an eventual goal of monetary
union.
 In 2015, representatives from 26 African nations signed the Tripartite Free Trade Area (TFTA),
aiming to establish a common market covering.
 In 2018, the Continental Free Trade Area (CAFTA), was signed by 44 countries, reflecting an
active embrace of free trade by African leaders.
 OTHER TRADE AGREEMENTS
 Renewed emphasis on bilateral and multilateral trade agreements since collapse of Doha Round
talks.
 United States was pursuing two major multilateral trade agreements:
1. The Trans Pacific Partnership (TPP) with 11 other Pacific Rim countries, including Australia,
New Zealand, Japan, South Korea, Malaysia, and Chile.
2. The Transatlantic Trade and Investment Partnership (TTIP) with the European Union.
 President Trump withdrew the United States from the TPP.
 Negotiations on the TTIP have been put on hold.

FOCUS ON MANAGERIAL IMPLICATIONS

 REGIONAL ECONOMIC INTEGRATION THREATS
 Opportunities
 Regional economic integration opens new markets.
 Allows firms to realize cost economies by centralizing production in those locations where the
mix of factor costs and skills is optimal.
 Enduring cultural differences and competitive practices might limit ability of companies to
realize cost economies.
 Threats
 Business environment becomes competitive.
 Competitors might become more efficient.
 There is a risk of being shut out of the single market by the creation of a “trade fortress.”
 Growing opposition to free trade areas. (EX:NAFTA)
COMMENT:
Answering the third question in the Discussion Questions for this chapter, " What, in general, was the effect
of the creation of a single market and a single currency within the EU on
competition within the EU?" Here are my perspectives:

The creation of a single market eliminated numerous trade barriers among EU member states, fostering a
larger and more integrated market. This enlargement has intensified competition among businesses from
different member states. on the other hand, Businesses within the EU can operate more freely across
borders, achieving economies of scale and enhancing efficiency by serving a broader customer base
without the hindrance of national borders. The adoption of the euro as a single currency eliminated
currency conversion costs and reduced uncertainty associated with fluctuating exchange rates. This
reduction in transaction costs facilitated smoother cross-border trade and investment. In additon, the use
of a single currency increased price transparency, making it easier for consumers to compare prices across
different countries and contributing to a more competitive environment.

The combination of a single market and a single currency has led to deeper economic integration among EU
member states. This integration encourages competition by breaking down national barriers and creating a
more unified economic space. Increased competition has stimulated innovation, as businesses strive to
differentiate themselves in the market. This innovation benefits consumers and contributes to overall
economic growth.
Despite the positive effects, challenges arise due to differences in economic development among member
states. I think some regions may face more intense competition, while others may struggle to keep up.

In conclusion, the establishment of a single market and a single currency in the EU has significantly
promoted competition, improved efficiency, and lowered transaction costs, fostering economic integration.
But still have challenges arising from varying economic development levels among member states.