7.7 Understand and explain the advantages and implications of regional integration.
Regional integration is the most popular form of reciprocal trade liberalization. In pursuing regional integration, nations seek at least four advantages:44
Expand Market Size
Regional integration greatly increases the scale of the marketplace for firms inside the economic bloc. For example, although Belgium has a population of just 10 million, membership in the EU gives Belgian firms free access to a total market of nearly 500 million EU buyers.
Achieve Scale Economies and Enhanced Productivity
Expansion of market size within an economic bloc gives member-country firms the opportunity to increase the scale of operations in both production and marketing, gaining greater concentration and increased efficiency. Although a German firm may be only moderately efficient when producing 10,000 units of product for Germany, it greatly increases its efficiency by producing 50,000 units for the much larger EU market. Internationalization inside the bloc helps firms learn to compete outside the bloc as well. More efficient resource usage can lead to greater productivity and lower prices for consumers.
A photo of Brussels, Belgium, taken by the riverfront with buildings all round.
Attract Direct Investment from Outside the Bloc
Foreign firms prefer to invest in countries that are part of an economic bloc because factories they build there receive preferential treatment for exports to all member countries within the bloc. Many non-European firms—for example, General Mills, Samsung, and Tata—invested heavily in the EU to take advantage of Europe’s economic integration. By establishing operations in a single EU country, these firms gain free trade access to the entire EU market.
Acquire Stronger Defensive and Political Posture
Regional integration helps strengthen member-countries relative to other nations and world regions. This was one of the motives for creating the European Community (the precursor to the EU), whose members sought to fortify their mutual defense against the former Soviet Union. Today, the EU is one way Europe counterbalances the power and international influence of the United States. Broadly speaking, countries are more powerful when they cooperate than when they operate alone.
In 1990, there were approximately 50 regional economic integration agreements worldwide. Today, some 400 are in various stages of development. Many nations belong to more than one. Regional economic integration is not slowing the progress of global free trade. Rather, global free trade will tend to emerge as economic blocs link with each other over time. The evidence suggests regional economic integration is gradually giving way to a system of free trade worldwide.
Managerial implications of regional integration include:
Internationalization inside the bloc. The elimination of trade and investment barriers presents new opportunities. Regional integration pressures or encourages member-companies to internationalize into neighboring countries within the bloc. Restructuring operations. In the early stages of regional integration, firms begin to view the bloc as a unified whole. Managers develop strategies suited to the region as a whole rather than to individual countries. For example, a firm might combine multiple plants into a single factory. Regional products and marketing. As firms increasingly view the bloc as one large market, they tend to standardize their products and marketing. They start selling much the same products, using similar marketing approaches, to all countries inside the bloc. Internationalization from outside the bloc. Emergence of an economic bloc makes a region more attractive to companies based outside the bloc. Many will use FDI to establish a physical presence inside the bloc to access better all the benefits the bloc can offer.
Advantages of Economic Integration
The advantages of economic integration fall into three categories: trade creation, employment opportunities, and consensus and cooperation.1
More specifically, economic integration typically leads to a reduction in the cost of trade, improved availability of goods and services and a wider selection of them, and gains in efficiency that lead to greater purchasing power.
Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.1
Employment opportunities tend to improve because trade liberalization leads to market expansion, technology sharing, and cross-border investment.
Political cooperation among countries also can improve because of stronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greater stability.