AMITY

We nurture talent
REGIONAL ECONOMIC
INTERGRATION
 Regional Economic Integration
America
NAFTA
• 1989 US & Canada – 1994 & Mexico

• Remove tariffs on 99% of goods in 10 years

• Removal of barriers to cross-border flow of services
• Protection of intellectual property rights
• Removal of most restrictions on FDI
• Application of national environmental standards (scientific
basis)
• Establishment of 2 commissions
– Monitor environmental standards & health/safety, minimum wage or
child labor laws
– Impose fines & remove trade privileges for violations
 IMPACT OF NAFTA
For NAFTA
 TRADING RELATIONSHIP BETWEEN U.S AND CANADA IS
LARGEST BILATERAL TRADE IN WORLD
 CANADA IS THE LARGEST EXPORT MARKET TO U.S.
 OPPORTUNITY TO CREATE AN ENLARGED & EFFICIENT
PRODUCTION BASE FOR REGION
MEXICO

• Mexico would benefit from inwards FDI.

• Consumers benefit – lower prices
• Employment creation

US & Canada benefit

• Cheap labor from Mexico- IBM,GAP INC., LIZ CLAIBORN(TEXTILE
CO.)
• Competitiveness of firms that move production to Mexico
• Low cost agricultural products from Mexico
• Large Mexican market
 Against NAFTA

• Mass exodus of jobs from US & Canada to Mexico creates loss of

manufacturing jobs in U.S. E.G IBM and CANON,SANYO,SAFT

• Mexico’s lower wage labor exploitation- In U.S wage rate is $21.97 and
for Mexican it is $2.48.
Delphi corp. ,U.S auto part company pays $1.90 per hour in Mexico.

• Investment is shifting from Mexico to china.

• Less strict environmental laws

 IMPLICATIONS FOR COPORATE
STRATEGY
• Big rational market
• Automotive products and electronics
companies have witnessed more growth.
• E.g. Canadian firm established metal stamping plant
in Mexico to supply Volkswagen the German auto
manufacturer.
• DAIMLER CHRYSLER is producing cars and trucks
in Mexico.
 Issues of NAFTA(ENVIRONMENTAL)
1. SANITARY AND PHYTOSANITARY ARTICLE XX (b)

• In WTO agreement, protection of human safety or health, protection of animal

and plant life or health and also protection of the environment is of prime
importance, all these are broadly covered in Sanitary and Phytosanitary (SPS)
requirements. The agreement on the application of Sanitary and Phytosanitary
Measures is an integral part of final Act GATT 1994 (b) and of Agreement on
Agriculture measures are defined as any measure applied in the following ways-

• The border between Mexico and the United States is an impoverished area ranging
some 1,933 miles with a width of 60 miles on each side.

• This area is also known for its poor drinking water, inadequate sewage treatment,
mass squatter settlements with deplorable living conditions, exploding population
rates, and rapid industrial expansion by industries whose air and water emissions are
insufficiently monitored.

• Every day for example, untracked, unmonitored hazardous waste from maquiladora
companies are dumped onto vast stretches of desert near the border cities.
 ISSUES OF NAFTA
2.Marine pollution
• Concern regarding vast marine pollution and endangered marine
resources caused by petroleum spills and wastes from oil operations
off the coast of Mexico. Such carelessness is beginning to hit home
in the United States, as hundreds of miles of Texas beaches are
becoming polluted beyond use.
3. TRUCKS DISPUTE
• Due to the expansion of multinational corporations into Mexico from the
U.S., there is a substantial increase in the transportation of goods across the
border. Mass waves of trucks idling in traffic at international bridges and border
crossings have led to substantial photochemical smog problems in Tijuana - San
Diego and Ciudad Juarez - El Paso.
4.WATER SEWAGE
• As a result of the immense poverty, such border cities as Ciudad Juarez and
Nuevo Laredo lack sewage treatment plants. Thus millions of gallons of raw
sewage are poured daily into the Rio Grande, the main source of drinking water.
• In addition to having profound effects on the health of the nearby residents,
industries are having increasing difficulties finding fresh water for their
processing needs
 Issue of NAFTA
5. DOLPHIN –TUNA FISHING DISPUTE -1972 Marine
Mammal Protection Act.
(Priti: in 1991, when the Mexican government challenged a United States law banning
imports of tuna from Mexico. The U.S. Marine Mammal Protection Act prohibited
tuna fishing methods that killed large numbers of dolphins, and banned tuna
imports from countries that used such fishing methods. The Mexican government
argued that this U.S. law was in violation of the rules of the General Agreement on
Tariffs and Trade (GATT).
A GATT dispute panel ruled that the U.S. could not use domestic legislation to protect
dolphins outside its own territorial limits.)

6.The agricultural sectors also face severe environmental

problems. Large corporations often feel the need to use harsh
pesticides on their products to ensure the success of their
crops. These pesticides also contain life-threatening poisons
that have a profoundly debilitating effect on both the land and
the workers.
 MERCOSUR(SOUTH AMERICA)
1991 – Treaty of Asucion, updated by 1994 Treaty of Ouro Preto
Origins – 1985 – Argentina-Brazil – PICE
Mercosur Parliament – Agreed in Dec 2004. Must have 18reps from each country by
2010
• Full Members
• Argentina
• Brazil
• Paraguay
• Uruguay
• Becoming Full Members
• Venezuela before becoming a full member its entry has to be ratified by the
Paraguayan and the Brazilian parliaments
• Bolivia
• Associate Members (Priti: CCEP – ANDEAN COMMUNITY)
• Chile
• Colombia
• Ecuador
• Peru (CHECK FOOTNOTES OF NEXT SLIDE ALSO)
 Regional Economic Integration
America
Andean Community
• 1969 & 1997 – Customs Union of Bolivia, Chile(No), Ecuador,
Colombia, Peru (Priti:BolCCEP)
• Internal tariff reduction, common external tariff,
transportation policy, common industrial policy
Priti: The trade bloc was called the Andean Pact until 1996 and came into existence with
the signing of the Cartagena Agreement in 1969. Its headquarters are located in Lima,
Peru
The original Andean Pact was founded in 1969 by Bolivia, Chile, Colombia, Ecuador and Peru. In 1973, the pact gained its sixth member,
Venezuela. In 1976, however, its membership was again reduced to five when Chile withdrew. Venezuela announced its withdrawal in
2006, reducing the Andean Community to four member states.
CHECK FOOTNOTES
 Regional Economic Integration
America
Central American Common Market(5 NATIONS of
Central America)
• 1960’s – Costa Rica, El Salvador, Guatemala,
Honduras & Nicaragua
• Collapse 1969 – war after soccer game (between Honduras and
El Salvador)
• RESTARTED AFTER 1991
• (Priti: The CACM has succeeded in removing duties on most products moving among
the member countries, has largely unified external tariffs and increased trade within the
member nations. However, it has not achieved the further goals of greater economic and
political unification that were hoped for at the organization's founding)
CARICOM
• 1973 Caribbean Community (Barbados, Jamaica,
Guyana and Trinidad&Tobago ) (established by the Treaty
of Chaguaramas which came into effect on August 1, 1973)
• (CARICOM replaced the 1965–1972 Caribbean Free Trade
Association (CARIFTA))
• Currently 15members, 5 associate members and 7 observers
 Regional Economic Integration( Asia)
ASEAN(10 MEMBERS)
• 1967 – Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Singapore, Thailand & Vietnam
• 500 million people & GDP $740 B
• Foster free trade & cooperate in industrial policies,
social progress
• Companies which benefit are BMW, Matsushita,
Electrical industrial, Honda motor, Proctor and Gamble.
• Dell computers has established assembly operations at
Malaysia.

(Free trade area, Open Sky(2009), Cultural Activities,

Higher Learning, ASEAN Football Championship,
Paragames(Phys.Disab)
 APEC
• Asia-Pacific Economic Cooperation
• 1990 -21 Members (US, Japan, China,
Australia)
• 56% GDP & 41% of world trade
• Increase multilateral cooperation in light of
interdependence of Pacific nations.
 Regional Trade Blocs in Africa

• The Common Market for Eastern and Southern Africa

(COMESA), is a preferential trading area with twenty
member states stretching from Libya to Zimbabwe. COMESA
formed in December 1994, replacing a Preferential Trade
Area which had existed since 1981. Nine of the member
states formed a free trade area in 2000, with Rwanda and
Burundi joining the FTA in 2004 and the Comoros and Libya
in 2006 .
• The Southern African Development Community
(SADC) is an inter-governmental organization. It furthers
socio-economic cooperation and integration as well as
political and security cooperation among 15 southern African
countries .
 Africa
• The Economic and Monetary Community of
Central Africa (CEMAC). Its member states are
Cameroon, the Central African Republic, Chad, the
Republic of the Congo, Equatorial Guinea and
Gabon .

• The West African Economic and Monetary

Union UEMOA was created by a Treaty signed at
Dakar, Senegal, on January 10, 1994 by the Heads
of State and Government of Benin , Burkina Faso,
Côte d’Ivoire, Mali, Niger, Senegal, and Togo. On
May 2 1997, Guinea-Bissau became its eighth
member state.
Balance of Payments

Sonia Singh
 Part I
Balance of Payments Accounting
 Balance of Payments Accounting
General use of BP
accounting is more
recent, but in 1381
Richard Aylesbury, an
Englishman, had not
only collected such
statistics, but was
developing analysis as to
why the accounts
behaved as the did.
Balance of Payments Accounting

It is not clear that

they are really
necessary!
 Balance of Payments Accounting

For example, who keeps

track of India’s balance of
payments transactions
with other Indian states?
 Balance of Payments Accounting

What kind of records should

be kept?
What do you want to find
out?
The nature of the record
changes by what we are
trying to find out.
 Balance of Payments Accounting
What kind of things do
governments wish to know?
What is the international
demand for our currency
doing to its value?
Do we have enough currency
reserves, or capacity to pay
for our trade?
Does our trade promote full
employment? And so on.
 Balance of Payments Accounting

• What kinds of transactions represent the basic

focus of balance of payments accounting?

• All transactions between the citizens of a

nation and those of other nations are recorded
in the balance of payments for a given period
of time.
 Recording International Payments

• How is information recorded in balance of

payments accounting?

• The basic technique is standard, double-entry

accounting,

• a flow of funds statement that shows changes in

assets, liabilities and net worth over time.
 Recording International Payments

• The balance of payments statement is to

inform government authorities of the
international position of the country to assist
them with monetary-fiscal questions as well as
trade and payments policies.
Debits, Credits, and International Payments

• What is the meaning of a debit in a balance of

payments account? What is a credit?
• A debit records a transaction increasing assets
or reducing liabilities.
Debits, Credits, and International Payments

• A debit results from some kind of transaction

requiring an immediate out-payment.
• A debit arises from the purchase of goods,
claims, or reserve assets and represents an
inflow of value.
Debits, Credits, and International Payments

• A credit records a transaction reducing assets

or increasing liabilities.
• It results from some kind of transaction
requiring an immediate in-payment.
• A credit arises from the sale of goods, claims,
or reserve assets and represents an outflow of
value.
 Sources and Uses of Funds
• How does a country derive foreign currencies
it needs to conduct its international business?

• The sources of funds, the supply of foreign

exchange, are
• exports,
• investment income,
 Sources and Uses of Funds
• The sources of funds, the supply of foreign
exchange, are

• transfer payments received,

• and long-term and short-term borrowing.
 Sources and Uses of Funds

• Credit entries reflect the sources, debit entries

indicate the uses of foreign exchange.
 Part II
The Balance of Payments Accounts
 BALANCE OF PAYMENTS
ACCOUNTS
These accounts are to summarize payments a
country receives from other nations and payments
it must make to other nations.

They consist of the following five categories:

1. MERCHANDISE OR TRADE BALANCE:

(Exports minus imports )
 BALANCE OF PAYMENTS
ACCOUNTS
2. GOODS AND SERVICES BALANCE:
(Just add services)

3. NET UNILATERAL TRANSFERS

(Gifts)
 Indian government transfers to foreigners
 (E.g., Foreign aid or wheat from INDIA
stockpiles)
 Private remittances of wages earned abroad, and
 Lots of other transfers.
 BALANCE OF PAYMENTS
ACCOUNTS

To here, we are looking at the

CURRENT ACCOUNT BALANCE
(Net flows of goods, services and gifts).

Again:
1. MERCHANDISE OR TRADE BALANCE:
2. GOODS AND SERVICES* BALANCE:
3. NET UNILATERAL TRANSFERS
 Balance of Payments
There is also a set of asset flows referred to as the
CAPITAL ACCOUNT BALANCE

4. NET CHANGES IN FOREIGN HOLDINGS OF U.S.

ASSETS
Flows of financial assets and similar claims, or
Foreign direct and other investments in the U.S., or
“Private capital flows.”

(Note that we are talking direct and portfolio investments

here).
 Balance of Payments
5. NET OFFICIAL INTERNATIONAL
RESERVE TRANSACTION
Foreign official holdings of INDIA ASSESTS.
India holdings of official reserve (gold and
foreign exchange) assets
or, “Official asset flows.”
 All Together Now
1. MERCHANDISE OR TRADE BALANCE:
2. GOODS AND SERVICES* BALANCE:
3. NET UNILATERAL TRANSFERS
4. NET CHANGES IN FOREIGN HOLDINGS OF India
ASSETS
5. NET OF FICIAL INTERNATIONAL RESERVE
TRANSACTION
 Balance of Payments
• THE BALANCE OF
PAYMENTS IS,
THEREFORE, THE
SUM OF THE
CURRENT AND
CAPITAL ACCOUNT
BALANCES.
 Services in the Balance of Payments
Note:
*Services include travel and
tourism, trade transportation,
insurance, education, financial,
technical, telecommunications
and other business and
professional services.

In addition there are royalties,

payments for capital services
besides interest, such as
dividends, payments for foreign
labor, etc.
 Overall Surpluses and Deficits
• What is an overall balance of payments
surplus? What is an overall deficit?

• A surplus is when the sum of the current

account plus the private capital account is
counterbalanced by an accumulation of official
net assets, so official reserve assets increase.
 Overall Surpluses and Deficits
• What is an overall balance of payments
surplus? What is an overall deficit?

• If it is in deficit , the sum is counterbalanced

by an accumulation of official net liabilities, so
the country sees its official reserve assets
decline.
 What Drives Large India Current Account Deficits?

Find the current account deficiat balance situation.

• The India currently has a huge current account
deficit.
Why do we have it?

Is it sustainable?
• The current account balance is the difference
between domestic saving and domestic
investment. If domestic saving falls, the India
must borrow from abroad to finance domestic
investment…
• India foreign indebtedness is not necessarily
bad if foreign funds are used towards
investment.
• Repayment of the debt is potentially a problem
if foreign funds are used to purchase
consumption goods since future generations
will bear the burden of debt.
 Assessing the Global
Business Environment:
Political, Economic, Legal,
Technological

1-48
 India Becomes Crucial to IBM

• India is the site of IBM’s second-largest operation

• IBM’s employees in India grew from 9,000 to

43,000 between 2004 and 2006

• IBM’s business in India grew 61% in the first

quarter of 2006

1-49
 India Becomes Crucial to IBM

• Examples of IBM projects in India:

– Container tracking system
– Warranty management system
– System for tracking the failure of vehicle
components
– Global Business Solutions Center

1-50
 Regional Trading Blocs

• Much of today’s world trade takes place

within three regional free-trade blocs:
– Western Europe
– Asia
– The Americas

1-51
 The European Union

• A unified market of over 400 million people

in 27 nations

• Two challenges for global managers:

– “Fortress” Europe
– Dealing with multiple cultures within this unified
market
1-52
 Asia
• Japan

• The Four Tigers

• China

• India

• South Asia

1-53
 The Americas

• North American Free Trade Agreement

(NAFTA)

• Central American Free Trade Agreement

(DR-CAFTA)

• Free Trade Area of the Americas (FTAA)

© 2008 Pearson Prentice Hall 1-54
Other Regions of the World

• The Russian Federation

• Less Developed Countries (LDCs)

– Low gross national product (GDP)
– Low per capita income
– Large, relatively unskilled populations
– High international debt
1-55
Comparative Management in Focus:
Opening Economy Revitalizes India

• In the past ten years,

foreign investment
restrictions were
lifted and
protectionism was
reduced

1-56
 Results of India’s Opening Economy

• Increased Indian and foreign investment

• A growing middle-class

• Increased productivity and profits

• A growing reputation for service outsourcing

and exporting
1-57
Information Technology: Affecting
the Management Agenda

• Making geographic barriers less relevant

• Lowering cultural barriers

• Encouraging convergence of consumers’

tastes and preferences
1-58
The Globalization of Human Capital

• The off shoring of manufacturing jobs

and outsourcing of white-collar jobs is
increasing

• It has been estimated that 3.3 million US

jobs will be lost in service-sector
outsourcing by 2015
1-59
The Global Manager’s Role and the
International Environment

1-60
 Political Risk
• Any governmental action or politically
motivated event that could adversely affect
the long-run profitability or value of a firm

• Example:
Venezuela recently forced oil companies to
accept a minority stake in fields they owned
and to pay more in taxes and royalties
1-61
 Common Political Risk Events

• Nationalization

• Terrorism

• Macropolitical risk vs. micropolitical risk

1-62
 Political Risk Assessment

• Helps companies manage exposure to risk

and minimize financial loss

• Two forms:
– Consultation with experts
– Development of internal staff capabilities

1-63
 Other Techniques for Managing
Political Risk
• Computer Modeling
Example: American Can’s PRISM

• Ranking systems

• Early warning systems

1-64
 Options for Managing
Political Risk
• Avoidance

• Adaptation

• Dependency

• Hedging
1-65
 Examples of Managing
Terrorism Risk

• IBM and Exxon try to develop benevolent

images and maintain low profiles

• Using teams to monitor terrorist activities

• Hiring counterterrorism consultants

1-66
 Economic Risk

• Is closely related to political risk

• Is determined by a country’s ability or

intention to meet its financial obligations

1-67
 Types of Economic Risk
• Loss of profitability due to abrupt
changes in monetary and fiscal policies

• Loss of profitability due to changes in

foreign investment policies

• Example: Devaluation of Peso in 1990s

1-68
 The Legal Environment

• Consists of the local laws and legal systems of

those countries in which an international
company operates and of international law,
which governs relationships between
sovereign countries

1-69
 Three Types of Legal Systems

• Common law

• Civil law

• Islamic law

1-70
Three Approaches to Contract Law

• Common law: Details must be written in the

contract to be enforced

• Civil law: Assumes promises will be enforced

without specifying the details

• In Asia the contract may be in the relationship,

not on the paper
1-71
 Other Regulatory Issues

• Protectionist policies, such as tariffs or quotas

• The attractiveness of the tax system

• The level of government involvement in the

economic and regulatory environment

1-72
 Risks and Issues in the
Technological Environment

• The appropriability of technology

• The International Convention for the

Protection of Industrial Property (the
Paris Union)

1-73
 More Issues and Risks in the
Technological Environment

• Inappropriate use of technology by others

• Appropriateness of technology for the

local environment

1-74
 Issues in Global E-Business

• E-business

• E-commerce

• B2B (business-to-business)

• B2C (business-to-customer)
1-75