Chap 002International Management - Phatak - Ch.2 slides

8/10/2019 Chap 002International Management - Phatak - Ch.2 slides

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McGraw-Hill/Irwin International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

International Management

Phatak, Bhagat, and Kashlak


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McGraw-Hill/Irwin International Management 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.

Chapter 2

The Global Macro-EconomicEnvironment


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Chapter Learning Objectives

Discuss potential effects of the growth of regional trade blocs onglobal free trade.Explain the differences and similarities between a free trade

area, a customs union, a common market, an economic unionand a political union.Describe the static and dynamic benefits of regional economicintegration as well as the supply-side led benefits that willaccrue to member countries.Describe the key features of the Uruguay Round of the GATTand the WTO and their implications for the conduct of business

between member countries.


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Chapter Learning Objectives(contd.)

Discuss the significance of the WTO to international trade.Describe the important characteristics of NAFTA and theEuropean Union.

Discuss the ways in which the major regional economicagreements can be expected to improve business opportunities,and problems associated with their implementation.Examine the phenomenon of Globalization and its meaning.

Evaluate the significance of country-specific economic featuresand competitiveness rankings to international companies.


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Chapter Topics

A New Global EconomyThe General Agreement on Tariffs and Trade and the WorldTrade Organization

Country-Level Economic IntegrationThe Effects of Economic IntegrationMajor Regional Economic Agreement InitiativesWill Regional Trade Blocs Promote Global Free Trade?

GlobalizationCountry-Specific Economic Environments and CountryCompetitiveness


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Major Developments Favoring Free Trade

The emergence of the World TradeOrganization (WTO)

The emergence of regional trade blocs, suchas the North American Free Trade Agreement(NAFTA), the expanded EU, and other

regional trade agreements like MERCUSURin South America


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Reasons Why Trade Blocs Get Formed

Geographical proximity and often the sharing of common borders as in the European Union and NAFTACommon economic and political interests as in the European

Union and the ASEANSimilar ethnic and cultural backgrounds as in the Free Trade ofthe AmericasSimilar levels of economic development as in the European

UnionSimilar views on the mutual benefits of free trade as in NAFTARegional political needs and considerations as in the ASEAN


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Fig. 2-1: A Hierarchy of Regional Economic Integration Initiatives

Free TradeArea

CustomsUnion

CommonMarket

Economic

Union

PoliticalUnion

Elimination ofTrade Barriers

+ Common ExternalTrade Positions

+ Labor/CapitalMobility

+ Coordinated Economicand Fiscal Policy

+ Coordinated Politicaland Social Policy


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Table 2-1: Types of Trade Blocs

Level ofIntegration

No Tariffs andQuotas

CommonTariffs and

Quotas

NoRestrictions

on FactorMovements

Harmonized/unified Eco.

Policies &Institutions

Unified Eco. &Political

Policies &Institutions

Free Trade

AreaYes No No No No

CustomsUnion

Yes Yes No No No

CommonMarket

Yes Yes Yes No No

EconomicUnion

Yes Yes Yes Yes No

PoliticalUnion

Yes Yes Yes Yes Yes


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Fig. 2-2: Regional Economic IntegrationBenefits

Removal of TradeAnd I nvestment

Barriers

Initial Costs Drop

Prices Drop

Demand Increases

ProductionLevels Rise

Economies ofScale Benefits

Competition Increases/More Investors

IndustryInnovationIncreases

New ProductDevelopment

New ProcessDevelopment

Reallocation/Consolidationof Resources

(Comparative Advantage)

L ower CostsAnd

Supply-Side LedGrowth


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Major Regional Economic Agreement Initiatives

The North American Free Trade Agreement (NAFTA)U.S.A, Canada, and MexicoWent into effect on January 1, 1994

Free Trade Area of the AmericasProposal to expand NAFTA to include all countries in theWestern Hemisphere, except CubaThis region accounts for 37% of all U.S. trade, $155 billionin American investment, 800 million people, and a $13trillion economy


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Major Regional Economic Agreement Initiatives(contd.)

The Association of Southeast Asian Nations (ASEAN)Indonesia, Malaysia, Philippines, Singapore, Thailand,Brunei Darussalam, Vietnam, Laos, Myanmar, andCambodiaTotal population of 500 million, area of 4.5 million squarekilometers, GDP of U.S. $737 billion, a total trade of U.S. $720 billion

Mercado Comun del Sur (MERCOSUR)Argentina, Brazil, Paraguay, and Uruguay


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Market of nearly 200 million people, area of about12.5 million square miles, combined gross regional

product in excess of $800 billion, and Latin

Americas largest industrial base The European Union (EU)15 countries currently membersMarket area of 320 million peopleHistorically known as the Common MarketCreated after World War IISimilarities between EU and the United States


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Cyprus, the Czech Republic, Estonia, Hungary,Latvia, Lithuania, Malta, Poland, the SlovakRepublic, and Slovenia set to join EU on May 1,

2004Bulgaria and Romania hope to do so by 2007To join the EU, countries need to fulfill economic

and political conditions known as the CopenhagenCriteria.


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Table 2-2: Exports within Trade Blocs

1990 1995 1996 1997 1998 1999 NAFTA 226273 394472 437804 496423 521649 581162

EU 981260 1259699 437804 496424 1226988 1376314

ASEAN 28648 81911 86923 88770 71669 81929MERCOSUR 4127 14199 17075 20772 20352 15313


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Globalization

The growing economicinterdependence of countriesworldwide, the increasing integrationof economic life across political

boundaries, through the increasingvolume and variety of cross-border

transactions in goods, services, capitalflows, and rapid and widespreaddiffusion of technology

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Specific Drivers of Globalization

1. Tremendous growth in international trade andcommerce

2. Innovations in information technology andtransportation

3. Porous borders between countries4. The globalization of financial markets

5. The creation of a global labor force6. Rapidly falling freight costs

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Factors Multinationals Must Consider Prior toDeciding Entry Mode

1) Determine the key success factors for the business,i.e. the conditions that must be present in the foreignmarket in order to succeed in achieving the objectives

of the market entry2) Study whether these conditions exist in the target

market

3) Determine changes in implementation strategies thatwould be required in order to succeed in the targetmarket

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Table 2-6: 2003 Competitive Ranking ofCountries (top twenty)

Country CompetitivenessRanking

United States 1

Finland 2

Taiwan 3Singapore 4

Sweden 5

Switzerland 6

Australia 7Canada 8

Norway 9

Denmark 10


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Key Terms and Concepts

GATTWTOWTO Settlement of DisputesFree Trade AreaCustoms UnionCommon MarketEconomic Union

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Key Terms and Concepts (contd.)

Political UnionEconomic Integration

NAFTAEUASEANGlobalization

Chap 002International Management - Phatak - Ch.2 slides

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