Thriving in a Competitive Global Context - Evaluating Economic Integration Initiatives - Literature review Example

Thriving in a Competitive Global Context - Evaluating Economic Integration Initiatives

Table of Contents

Introduction3

Background3

Literature Review4

Benefits of an Economic Bloc4

Link between Trading/Economic blocs and Growth5

Advantages brought by bloc membership and their impact on firms’ competitive position6

Analysis9

Conclusion and Recommendations10

• Introduction

Economic integration agreements among the countries have risen over the years and it is continuing to grow. Number of countries both developed and developing around the world has been benefited through economic integration as it allows them to facilitate more effective trade with other nations. The concept of globalization has opened the gate for many countries to interact with other country relating to trading, production and financial transactions (Balassa, 2013). On the other hand, the economic bloc has provided free access to different companies of the nations to enhance their business prospect on a wider scale and develop their economy. In context to that, specific advantage of joining economic bloc will be critically evaluated in order to know its impact on the countries. Therefore, the main economic bloc of Mexico would be assessed for supporting the argument and knowing the influence of economic bloc on the growth of the nation. Furthermore, significance of bloc membership would be studied in relation to the selected country and how it impacts the competitive position of the firms within the country. Secondary research would be carried out to acquire the relevant information and analysis would be done to reach out to a feasible conclusion.

• Background

Economic integration is pursued either due to political or economic reasons or both. The economic integration has facilitated the rise of trade among the member states of economic unions around the world that has supported in increasing the productivity level and meeting the demand of the consumers. On the other hand, the continuous rise in the competition on global platform has made it difficult majorly for the medium scale firms to compete on a wider scale which may impact on the productivity of the organisation (Haufler and Wooton, 2010). The economic integration provides opportunities to these firms to enhance their scale of operation and increase the level of trade with other country’s firms. In relation to that, Mexico by joining an economic bloc would be able to receive much benefit in the form of free trading, eliminating tariffs, etc. It is evident that trade blocs like ASEAN, EU, EFTA and others have provided advantage to the companies of different sectors to import and export technology or products (Daniels, 2015). Therefore, it can be pointed that Mexico being a developing nation would be able to receive higher advantage from economic integration or economic bloc likewise other developing nations.

• Literature Review
  • Benefits of an Economic Bloc

According to Han and Ogawa (2008), economic bloc is an agreement where the group of nations mutually agrees to freely trade with each other. It has opened access to many firms to a large size of market for trading goods and services or technologies. Many emerging trade or economic blocs have a chief impact on investment and trade worldwide. They are highly accountable for shaping the business relationships among the firms across the globe. It has been found that via multilateral or bilateral accords, some nations have formed free trade agreements (FTA) such as NAFTA (North American Free Trade Agreement) whereas, some formed common markets and customs unions (Wise and Cypher, 2007). It has allowed the nations to substantially decrease barriers of trade among each other. Therefore, it can be pointed that several nations seeks to join economic bloc to receive trade advantage.

In context to that, Mexico also looks for acquiring benefit from economic bloc. It is evident that “The Pacific Alliance” has been formed as a regional integration initiative in 2011 that comprised nations Mexico, Peru, Costa Rica, Chile and Colombia (Daniels, 2015). The major objective of the Pacific Alliance is to form a strong economic integration that will ensure better growth and positive competition among the economies by encouraging free movement of people, capital, services and goods (Pellerin, 2013). This trade bloc has been sought by Mexico in order to boost free trade with the nations within the bloc. Through this bloc, the country viewed that they would be able to export and import goods in a free-way and tariffs would be abolished for swift movement of the economies. As per the report of World Trade Organisation, it has been found that the Pacific Alliance’s countries together in 2010 exported around $445 billion which was 60% more than Mercosur trade bloc (Hosny, 2013). It can be pointed that, economic bloc has allowed Mexico to increase their level of export along with other countries. On the other hand, Ramírez (2013) stated that only forming a trade agreements not necessarily ensure success as it is essential for the countries to understand the economic condition of each nation in order to facilitate effective and efficient trade. Therefore, Mexico has encouraged the companies of its nation to make investment in other country. It is evident that Sura, one of the financial groups of Mexico has taken over the Dutch group ING’s insurance assets and pensions for $3.6 billion in 2011in Chile, Peru and Colombia. In Peru, the company also invested around $400 million on pension funds (Guillin, 2013). It has allowed the company to enhance their financial integration to grow in the global market. It indicates that companies of Mexico through Pacific Alliance are able to make investment on higher scale that helps in the development of the economy.

Apart from that, Herreros (2016) pointed that integration of stock exchange is also sought by the countries under economic bloc. The Pacific Alliance helped in accelerating the agenda of Mexico with trade bloc nations. By initiating such integration, the investors would have much wider option to invest their capital. However, it has been witnessed that stock exchanges of member countries is on a disappointing side. Therefore, BanBajio, a Mexican financial company along with other companies are involved in promoting integration of stock exchange. On the other hand, it has been stated by Hosny (2013) that economic bloc provides and encourages joint ventures. It provides opportunities to foreign investors to set up new plant or invest in the existing business of other nation. Therefore, it would ensure higher productivity and earning foreign exchange. For example, Morton Buildings, Inc. of Mexico has made a joint venture with Conmetodo of Colombia that helped in increasing the business scale and to attract the potential clients. Thus, it can be mentioned that countries like Mexico seeks to improve their economy, develop infrastructure, facilitate FDI and encourage import and export goods and services and free movement of people through joining economic blocs like Pacific Alliance or NAFTA.

• • Link between Trading/Economic blocs and Growth

It has been opined by Han and Ogawa (2008) that empirical evidence and economic principles designates that the impact of membership in a trading bloc like NAFTA can be obtained from four diverse sources that are domestic policies, gains from trade itself, access to investments and new markets and access to the advance technology. These sources can largely support the countries like Mexico, Turkey, etc to develop their trade internationally, increase production level and gain comparative or competitive advantage. On the other hand, Wise and Cypher (2007) underlined that among the main significant properties of any trade agreement are the trade policies which is required by each member country of economic bloc to employ. Trade policy is important for Mexico or other nation as it sets out the important legal regulations that would need to be accepted by the countries before completely entering into trade agreement. Moreover, trade policies would be effective in creating a balance between equal and unequal trade which can ensure growth of the economy (Daniels, 2015). However, it is also argued that trade policies may not be affecting trade in a direct manner by influencing the price of the commodity, as the effect on national output and production would be equally significant and can be more long lasting. Therefore, it would be difficult for the countries like Mexico to seek growth through economic or trade bloc.

Apart from that, Carrieri, Errunza and Hogan (2009) points out that regional trade agreement (RTA) time and again provide broad political purposes and some nations like Indonesia, Turkey, and etc. use bloc membership within RTAs in order to lock-in ineffective domestic policies. Mexico, being one member of NAFTA, is usually referred as a case where an agreement locked a nation into domestic policies that had an affirmative effect on liberal economic and political reforms. It can be illustrated that locking domestic policies would allow the country to boost the economy in context to international trade ground. Furthermore, Guillin (2013) stated that trade blocs facilitates import of new technologies from one nation to other stimulates the growth of domestic technology through the enhancement and imitation of imported products. Thus, it can be illustrated that Mexico can accelerate their technological progress through trade which in turn can be the key source of long-term economic development as per the growth theory. On the other hand, it can also be pointed that transferring technology under economic blocs can accelerate the economic growth in developing or less-developed nations via improved comparative benefits in production. Therefore, it would be said that there is a positive link between trade bloc and growth.

• • Advantages brought by bloc membership and their impact on firms’ competitive position

As per Herreros (2016), bloc memberships are those nations that establish trade agreement among each other for free trade or exchanging technology or goods. In case of NAFTA trade bloc, the trade members are Canada, the United States and Mexico. Therefore, the trading countries are the bloc members that ensure flow of commerce across the borders through allowing free trade. Bloc members provide substantial advantage to one nation that helps in enhancing their economy and can be also effective in increasing the production level (Balassa, 2013). It has already been mentioned that under the Pacific Alliance, the major members are Mexico, Peru, Costa Rica, Chile and Colombia. The other nations apart from Mexico has significant role in developing the Mexican economy. These bloc members have helped Mexico to freely trade their products and services at a reduced tariffs and low cost. It is evident that KUO Automotive of Mexico has been allowed by Pacific Alliance members to supply the auto-parts which made the company to produce the parts in large volume. This has helped the company to increase the sale by 13.2% in 2013 and increase market size and also helped them to open their branch in trade bloc countries (Daniels, 2015). This in turn, has allowed the company to make investment in other country and gain the advantage from the foreign market. Moreover, it has also been viewed that the bloc members have supported the company to have competitive positioning in the market through economic integration and produce the auto-parts as per the demand of the consumers. This has helped the company in competing with big brands automobile companies like General Motors (Kohl and Brouwer, 2014). Therefore, it can be pointed that bloc members and economic integration not only provide bigger market for operation to the firms of Mexico but also helps them to be competitive.

On the other hand, encouraging economic integration allows bloc members to eliminate quotas, tariffs and other restrictions. Therefore, members of trade blocs can allow companies of Mexico to do business in their country and compete on equal footing that can lead to rise in strong competition (Herreros, 2016). It is known that competition generally reduces prices and enhances quality by itself. For instance, in Mexico, NAFTA seems to be assisting to keep the prices of shoes, some agricultural goods, textiles, etc low. It is evident that Lanix, a Mexican electronics company has experienced competitive success as they were able to supply the electronics product to Canada at low tariff rates that helped in generating higher revenue and in expanding market. Further, it has also been seen that Mexico has reduced tariff rates with the rise in exports of steelcase furniture from 18% in 1994 to 10% in 1996 (Han and Ogawa, 2008). The decline in the tariffs has increased the competition for the manufacturing company and it has been encouraged only through economic integration. Furthermore, the bloc membership facilitates other country to take the advantage of the cheaper natural resources, lower labour cost and access to specialized knowledge and quality services. For example, Corona in Mexico uses low-cost Colombian labour for production and assembles of raw materials. Therefore, access to low cost labour supports the companies in producing product in large volume with less capital investment which can assist in gaining competitive advantage (Carrieri, Errunza and Hogan, 2009). Thus, it can be illustrated that bloc members bring many advantages to the country and their companies that helps in the growth of not only company but also the economy.

Apart from that, the bloc membership of Mexico facilitates free movement of knowledge as free trade permit the firms to set up subsidiaries in other nations where they can simply access and employ their existing technology (Ramírez, 2013). It has allowed the businesses of Mexico to develop the arrangements where their firm can sell knowledge comfortably to other businesses. A Mexican pharmaceutical company, BioPharma can now produce and sell medicines to Canada, Colombia and other bloc members, allowing consumers in those nations to receive benefits of the medical discoveries made by the company. Also, it can be pointed that this pharmaceutical company can negotiate deals with bloc members companies to package, market and distribute the products which in turn can ensure competitive positioning of the company both in the domestic and foreign markets. Furthermore, a Mexican company that discovers a superior engine for vehicles or trucks can sell the knowledge or engine to the companies of trade bloc countries; thereby, exposure of the company would internationally grow and can ensure competitive advantage (Hosny, 2013).

According to Balassa (2013), as the economic integration ensures number of benefits to bloc members but it can also bring negative aspect as there would be probability that the world would segregate into major blocs thereby impeding trade liberalization. Small economies under trade blocs like Peru and Costa Rica would be affected due to their little bargaining power. Therefore, the companies of these economies would have limited opportunities to grow or expand in Mexico or other nations and they would not be able to compete in large market (Daniels, 2015). However, it can be mentioned that companies of Mexico would have better advantage in these small economies as they would be able to setup their businesses at low cost and would have higher bargaining power thereby providing better competitive advantage. Thus, it can be mentioned that under economic integration, the nations with better economies have much advantage on smaller economies and the companies of those nations grows substantially. On the other hand, bloc membership has brought an advantage of direct investment. As the cost of labour in Mexico is comparatively low than Canada and the US; therefore, the companies of Mexico encourage the companies of the US and Canada to make investment (Carrieri, Errunza and Hogan, 2009). It is evident that Cemex Company of Mexico has made significant investment in the US for producing cement which supports the company in competing on wide platform with other similar entities in the US. It is also reported that the New York Times and Even Saks Fifth Avenue Company are also supported by the Mexican investment (Wilson, 2016). Thus, it can be denoted that bloc members open number of opportunities for other bloc nations to grow and allow the firms to gain competitive position through economic integration initiative.

• Analysis

From the research, it can be analysed that countries through an economic bloc receive much benefit in the form of free trade, low tariffs, investment, etc. Number of countries under economic or trade bloc such as the US, India, China and others have been successful in improving and increasing their GDP growth and foster trade and commerce. It has been found that Mexico, being one of the members of Pacific Alliance economic bloc along with other four nations has been able to gain advantage in trading their auto-parts and other products. It significantly contributed in the economy of the nation’s GDP (4.8%). Also, it helped the country in providing a wider opportunity to their companies to develop and expand their business operations and serve large number of customers. On the other hand, it can be assessed that Mexico also looked for integrating stock exchanges under economic bloc. However, it has been analysed that large stock exchange market significantly reduces the chances of stock exchange integration as these markets hold higher systematic risk. Therefore, nations under Pacific Alliance bloc have smaller exchange market which ensures probability of integration. The reason behind for such integration is to attract the foreign investors to invest in the stock so that investors can earn more return and investment of fresh capital would be sought by the companies. An evidence of BanBajio has been presented which is highly involved in the promotion of stock exchange integration.

Furthermore, it has been found that Mexico is encouraging joint ventures for availing the advantage of foreign exchange earnings and wide business market. It would help the company in using the technology and other resources of another country at low cost. Therefore, it can be analysed that by joining an economic bloc, countries look to provide joint ventures opportunities to their companies. It would ensure long term advantage to the firms in terms of earning and producing goods at low cost. Example of Morton Buildings, Inc. has been highlighted which proves the point that joint venture under economic bloc is only effective for the companies but also for the country’s economy (Wilson, 2016).

On the other hand, it has been reflected from the research that bloc membership has brought number of advantage to Mexico. Trade blocs like NAFTA and the Pacific Alliance have provided potential opportunities to bloc members in freely trading products. It can be analysed from the example of KUO Automotive that the company is trading auto-parts in free manner without facing any trade restrictions. The bloc members have laid easy trade rules that help the companies of Mexico in trading the products in large quantity. The bloc members They facilitates foreign direct investment which supports the firms to compete on a global scale and capture the advantage of foreign market in terms of technology, low cost labour, etc. Furthermore, it can be pointed that bloc members through economic integration assists in reducing or removing tariffs or barriers to trade which allows the Mexican firms to have competitive positioning by providing the goods at competitive or reduced price.

• Conclusion and Recommendations

From the overall study, it can be concluded that the trade bloc or economic integration initiative have provided advantage to countries over the years that has helped in boosting the economy and improving the situation of market in context to international perspective. It has been studied that trading bloc provides access to the firms to a larger export market or a greater size of market. Therefore, it has been seen that some of the companies of Mexico has been successful in grading the opportunities that were provided under the trading blocs. It has also been witnessed that firms are able to receive competitive position both in domestic and international market as economic integration provide facility of using the resources and technology at lower cost which leads to increase in the production level at minimum cost. Moreover, the rise in competition due to trade blocs can lead to more efficiency and greater productivity in the country.

On the other hand, it has been noticed that as trading bloc facilitates in market expansion then it would trigger higher and faster investment rates in bloc members’ countries and non-bloc member countries. In relation to that, it is understood that bloc members can encourage better cooperation and political stability among the companies involved in the trade agreement. Mexico and its companies receive considerable supports from the bloc members to develop and avail market advantage. Apart from that, the particular report majorly focuses on the positive aspect of economic integration initiative and the problem related to while entering into economic integration is hardly discussed. Therefore, it can be suggested that further, in depth investigation can be done on the issues related to the economic integration from the context of both nations and companies.

However, some recommendation would be valuable for the countries to gain more advantage from economic integration. In the process of making decisions under economic integration, the central body of the bloc can also involve domestic government as it would help in maintaining the political sovereignty of a country like Mexico or other country. The bloc members may need to avoid discriminatory policies against any non-members in order to avoid any political tension and diplomatic relations. Therefore, it would be effective in building better political environment for the companies to grow. On the other hand, the bloc members may need to constantly check whether there is any hidden tariff charge of imports or not. It can be useful in facilitating an effective free trade that can be helpful in building long term relationships with the bloc members and enhancing economic integration initiative.

Reference List

Balassa, B., 2013. The Theory of Economic Integration (Routledge Revivals). London, Routledge.

Carrieri, F., Errunza, V. and Hogan, K., 2009. Characterizing world market integration through time. Journal of Financial and Quantitative Analysis, 42(04), pp.915-940.

Daniels, C., 2015. Pacific Alliance and Its Effect on Latin America: Must a Continental Divide Be the Cost of a Pacific Alliance Success, The. Loy. LA Int'l & Comp. L. Rev., 37(3), pp.153.

Guillin, A., 2013. Trade in services and Regional Trade Agreements: do negotiations on services have to be specific? The World Economy, 36(11), pp.1406-1423.

Han, L. and Ogawa, H., 2008. Economic integration and strategic privatization in an international mixed oligopoly. FinanzArchiv/Public Finance Analysis, 81(1), pp.352-363.

Haufler, A. and Wooton, I., 2010. Competition for firms in an oligopolistic industry: The impact of economic integration. Journal of International Economics, 80(2), pp.239-248.

Herreros, S., 2016. The Pacific alliance: a Bridge BeTween laTin america and The asia-Pacific? Trade Regionalism in the Asia-Pacific: Developments and Future Challenges, 63(2), pp.273.

Hosny, A.S., 2013. Theories of economic integration: a survey of the economic and political literature. International Journal of Economy, Management and Social Sciences, 2(5), pp.133-155.

Kohl, T. and Brouwer, A.E., 2014. The development of trade blocs in an era of globalisation. Environment and Planning A, 46(7), pp.1535-1553.

Pellerin, H., 2013. Borders, migration and economic integration: Towards a new political economy of borders. Global Surveillance and Policing, 41(3), pp.51.

Ramírez, S., 2013. Regionalism: the pacific alliance. Americas Quarterly, 7(2), pp.101.

Wilson, C., 2016. Perspective: U.S. Competitiveness: The Mexican Connection | Issues in Science and Technology. [online] Issues.org. Available at: <http://issues.org/28-4/p_wilson/> [Accessed 10 May 2016].

Wise, R.D. and Cypher, J.M., 2007. The strategic role of Mexican labor under NAFTA: Critical perspectives on current economic integration. The ANNALS of the American Academy of Political and Social Science, 610(1), pp.119-142.