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Globalization and Economic Integration Effects Essay


Introduction

Globalization is a very contentious subject all over the world, starting from the definition of its impact on the economy. Alan Rugman defines globalization as a process through which the world is unified into one society and function1. Globalization is multifaceted since it is a mixture of economic, technological, social, cultural, and political aspects. Globalization is enhanced through economic integration (both regional and international)2.

Globalization is a contentious subject since different people understand it in different ways. For instance, those who oppose it believe that globalization is a major threat to the world. They argue that globalization increases the dominance of multinational corporations, erodes local cultures, and threatens the global environment. However, the proponents believe that free movement of goods and people between nations enhances economic growth and development3.

Due to increased demand and international trading systems in the modern world where international trade is no longer a treat but a necessity, regional integration is very important. Regional integration has become a necessity for the survival of many economies around the globe. This can be observed in the Middles East and Asian Pacific, where a considerable number of regional plans are in progress. Regional integration, as a significant policy to increase competitiveness, adds a new dimension to the existing business environment.

Most countries in the Middle East and Asian pacific are members of more than one regional organization, and therefore, it important for businesses in these countries to understand the rationale behind such integrations. This enables them to effectively take part in the integration process to promote and defend their interests. The underlying principle behind regional blocks in the Gulf region is the widening of the market for local goods and increased competition among companies4. Besides competition and market expansion, globalization and regional integration have affected diffusion of technology, macroeconomic policies, and product quality and quantity, among others.

An overview of the Petrochemical Cluster in UAE

Oil and gas still remain the backbone of the UAE economy. Abu Dhabi alone boosts about 7.5 percent and 3 percent of the global reserve in oil and gas, respectively. However, the petrochemical industry is still at the infancy stage. Borouge, which is the leading petrochemical company in Abu Dhabi, is only ten years of age, unlike the oil and gas industry, which have been in existence for more than four decades5.

In 2006, the Abu Dhabi government initiated a number of reforms in the oil and gas sector. These reforms led to the approval of the Abu Dhabi policy and endorsement of Abu Dhabi Vision 2030. The two policy documents aimed at creating a stable, diversified, and sustainable economy. This was to minimize over-reliance in oil and gas and to expand the export basket. Non-oil and gas sector by then only contributed less than 16 percent of the total revenue6. Petrochemical industry provided an opportunity for diversification of the economy.

Petrochemical companies have continued to expand in the United Arab Emirates especially in Abu Dhabi. This is largely attributed to the fast growing Asian Market. The UAE companies have joined other Gulf States in fronting for highly integrated mammoth projects. However, experts warn that lack of diversification on their products is likely to slow their margins. As a result, UAE is striving to overcome over-reliance on chemical products by venturing into innovative plastic solutions7.

Ethylene is the main raw material for the petrochemical companies and therefore, is the main determinant of cost and margins. Naphtha is another building block for petrochemical companies and produces other products such as propylene, butadiene, and benzene (benzene is extracted from butadiene). The two by products are mainly produced in Abu Dhabi. Another raw material used in petrochemical industry is ethylene which is derived from the natural gas (for instance, ethane, propane, and butane) which is also produced in large quantities by other gulf states besides UAE8.

Borouge

Borouge is a petrochemical company offering state of the art plastic solutions for different sectors of the economy. The company is a joint venture between Abu Dhabi National Oil Company (ADNOC) based in UAE and Borealis Company from Austria. ADNOC is a global supplier of oil and gas, while Borealis is among the world’s top providers of chemical and ground breaking plastic solutions9. Being a product of two global successful companies, Borouge is in the forefront of next generation plastic solutions. The company is based in Abu Dhabi and Singapore. The company also have subsidiaries in over fifty countries across Middle East, Asian Pacific, America, Europe, and Africa. At the moment, the company has employed approximately 1700 workers globally10.

Building from the success of its parents company’s, Borouge’s provides state of the art technology and products for different sectors of the economy. The company projects an output of about 6 million tones per annum in 2014 which will make it the largest single producer of polyolefins products. The company is also investing in more plants and subsidiaries both locally and internationally11.

Borouge is expected to finish the construction of its complex in Ruwais and Abu Dhabi by 2014. The two complexes are expected to add to the company’s capacity in the production of ethylene, polythene and polypropylene. Borouge’s planned Chemaweyaat complex, also in Abu Dhabi is expected to be the largest petrochemical unit in the world. The complex will host olefins plant, aromatic complex and numerous chemical and polymer plants. The Chemaweyaat complex is expected to be completed by 2016. The complex will consume large quantities of heavy naphtha in their aromatic units and light naphtha to produce about two million tonnes of ethylene and 700000 million tonnes of propylene per annum12.

The company also expect to increase its ethylene capacity from 3.5 million tonnes to 5 million tonnes by 2012. Generally, the company expect to increase their production capacity by 170 percent by the end of 2016. The driving force behind these expansions is the growth and strength of the Chinese market. Heavy use of naphtha in the Borouge’s Abu Dhabi plants will enhance the position of UAE in the Asian market (ahead of Saudi Arabia and Qatar). According to BMI’s Middle East index, United Arab Emirates (UAE) has remained behind Kuwait and Saudi Arabia. Luckily, UAE is ahead of Qatar with a slim margin. Their position is also under threat from other regional states13.

SWOT Analysis of Borouge Company

Strengths

The company is co-owned by two giant companies which are among the global leaders in their trade. Abu Dhabi National Oil (one of the co-owner) provides cheap feedstock/ raw materials used in the company. On the other hand, Borealis offers advanced technological knowhow to the company having over 50 years experience in the same. Borouge also enjoy strong logistical, fiscal, and edifying facilities available in the Abu Dhabi14. The growth of the petrochemical industry in general is strongly supported by the strong macroeconomic policies in the country. Experts predicts that the industry will largely contribute to the country’s surplus in 2015 (15 percent) from the current 5.1 percent15.

Borouge is a major player in UAE’s petrochemical industry and is in fact an extension of the oil and gas industry. Borouge receives its raw material suppliers mostly from numerous oil and gas companies owned by ADNOC (one of the parent company). The contractual relationship between these two leading companies has helped to front UAE in the global stage and to protect the country’s energy sector. ADNOC’s direct control of Borouge’s raw material suppliers means that the company is guaranteed cheap and steady supply16.

According to the World Bank index, UAE is ranked the highest among all Arab states in the Middle East and North Africa in terms of good governance. In addition, the country’s well developed infrastructure (transport and telecommunication) eases the company’s operations. The company’s active participation and dominant position in the regional and global economic market also provides an added advantage especially in negotiating better terms of trade17.

Weaknesses

The demand for petrochemical products in UAE is relatively low evidenced by the low number of converter industries. Limited number of converter industries is also attributed to the limitation imposed on foreign ownership. In addition, the demand for petrochemical products is still short in UAE compared to western economies. United Arab Emirates is a member of the OPEC (Organization of the Petroleum Exporting Companies). OPEC dictates the policies of the member states and as a result limits their oil production capacity. This also limits the production of the associated gases which are building blocks in the petrochemical companies including Borouge. The potential capacity of the petrochemical industry is additionally limited by the high ethane consumption in the power generation plants in the region18.

The general unemployment rate in UAE is relatively low (less than 3.9 percent). However, this rate is much higher for the locals and stands at two digits. This is mainly attributed to attractive remunerations in the public sector which makes it harder for the private sector to attract the local labour. Majority of the local labour is dominated by unskilled work force. Therefore, private entities including Borouge Petrochemical Company are forced to part with higher remunerations to attract the locals and to employ expatriates from other countries19.

Opportunities

Despite of the increase in non oil and gas product (approximately 23 percent in 2011), experts still predicts dominance of oil and gas in the near future. The country’s macroeconomic policies mostly apply to the city of Abu Dhabi. This is the reason why Abu Dhabi is not only the richest city in UAE, but also in the entire gulf region. Abu Dhabi being the main producer of UAE’s oil and gas, its products is less diversified than the country in overall. Therefore, increased pressure to diversify products in Abu Dhabi presents an opportunity for the development of petrochemical companies20.

UAE business environment is conducive compared to other gulf states. One of its principle strength is the complimentary tax policy. The country’s corporate tax or income tax is argued to be among the lowest in the world. This is a major incentive to petrochemical companies including Borouge. UAE used the tax incentive to attract foreign investors regardless of its limit on foreign ownership of local firms/companies (not more than 50 percent). The limit to foreign ownership is meant to ensure that locals remain the principle stakeholders in the county’s economy21.

Experts hint at the use of Naphtha as a substitute for ethane. This is likely to offer an opportunity for the government to review its policy on direct foreign investment to expand oil and gas industry. The country has been increasing investment in the development of human capital. UAE government expanded the Petroleum Institute in Abu Dhabi into a world class institution offering engineering courses and other research courses related to oil, gas and petrochemical industries. Petroleum Institute in Abu Dhabi is also affiliated with numerous Universities in Europe and Asia (for instance, University of Maryland and China University of Petroleum)22.

Petroleum Institute offers courses such as mechanical and petroleum engineering, metallurgical and polymer science, chemical engineering among others. To supplement the government efforts Abu Dhabi National Oil and Borealis Company have set up a competency assurance management system among its affiliate companies including Borouge to develop new and existing man power. This is aimed at equipping the new and existing workers with skills necessary to tackle the current challenges23.

Generally, the innovative capacity of UAE and Abu Dhabi lower than a number of Gulf States and European nations. However, the local institutions have tried to avert this situation by undertaking joint research projects with foreign institutions especially from the west to enhance the innovative capacity of the petroleum industry. Petroleum Institute in collaboration with Maryland University and Colorado School of Mines has direct research contracts with local petrochemical companies. This provides a great opportunity to improve their innovative capacity. Borouge on the other hand, has been enjoying the services of Borealis’ (parent company) innovative centres based in Australia, Finland, and Sweden. In addition, the company is looking forward to establishing its own centre in Abu Dhabi in the near future24.

Abu Dhabi government has created Specialized Economic Zones and Khalifa Industrial Zones targeting mostly metallurgic and petrochemical industries. These industrial zones have been developed along with state of the art sea port which will be operational before the end of 2012. Companies operating in these zones are exempted from custom duty, other tax exemptions, and long-term land leases. This provides a great opportunity for the local petrochemical companies including Borouge25.

Threats

The anticipated instability in Iran provides a major threat to the oil, gas and petrochemical industries in UAE. Iran is one of the UAE’s main trading partners and any disruption in Hormuz strait, UAE’s strategic maritime channel, passing through Iran could have massive impact on the economy. However, the country is trying to explore an alternative route through the gulf of Oman. Nonetheless, instability in Iran could mean opportunity for other gulf states to market their petroleum products26.

Impact of Regional Integration on the company

UAE is a member of numerous regional blocks including Gulf Cooperation Council (GCC), Organization of the Petroleum Exporting Companies (OPEC), and Gulf Petrochemical and Chemical Association (GPCA) among others. These regional blocks have provided an avenue for harmonizing policies relating to the petroleum industry27. GPCA provides an avenue for media collaboration among the petrochemical companies in the gulf region. GPCA was founded by eight members from the gulf region. Its main objective was to offer technological assistance and resources required for the development of the petrochemical and chemical industry. GPCA was speedily formed and was right away accepted by the member states. At the moment it is the main trade association, revered and accepted by petrochemical and chemical industries as their voice in the region and world at large. GPCA provides trusted data on the region’s petrochemical and chemical industries and has gone ahead to provide all members with a platform to network and share ideas28.

Initially, petrochemical industries in Europe and North America dominated the global market. However, emergence of Petrochemical and Chemical Association (GPCA) has completely changed the competitive landscape of the global petrochemical and chemical market. Even though Borouge has a relatively low market share in the international arena, its global expansion hints at a brighter future. Regional integration has enabled the petrochemical companies in the gulf region to effectively compete in the global market. Borouge has been able to form global partnership with well established global companies, for instance, Dow Chemical to take advantage of the growing Asian market and to increase it global market share29.

Petrochemical industry being a capital intensive sector, it is very significant for the company to have a global presence. Borouge has managed to achieve these using two approaches: geographical expansion and product segmentation. A lot of attention is being put on the polymer markets in Asia. Over the recent past, the company took advantage of the stringent measures adopted by European and American petrochemical companies like Dow Chemicals to enhance its status in the global market30.

One of the most important aspects of the petrochemical industry is research and development. Most GPCA members have been carrying out research and development together and sharing best practices. This has relatively reduced the company’s cost on the same. The leading research centres on oil, gas and petrochemical products are in Europe and U.S. Globalization and joint partnerships have enabled the company to acquire innovative and value creating plastic solutions. The European and American petrochemical industry spends more than 3 percent of their revenues in research and development. Meanwhile Borouge spends less than 0.4 percent of its revenue in research and development. Therefore, globalization/joint partnership has enabled the company to cut cost on research and development while maintaining its global presence31.

The demand for petrochemical products in Abu Dhabi and UAE is relatively low and is estimated to be less than 20 kilogram per individual per year compared to European countries which register more than 75 kilograms per individual per year. Therefore, regional and global economic blocks provide a great opportunity for the company to expand its market. Especially for polyethylene and propylene products whose demand is almost negligible in the local market32. The global petrochemical market has grown beyond oil and gas and is currently estimated to be 3 trillion dollars. However, the markets for these products are concentrated in Europe, Asia and America33.

United Arab Emirates is a member of the OPEC (Organization of the Petroleum Exporting Companies). OPEC dictates the policies of the member states and as a result limits their oil production capacity. This also limits the production of the associated gases which are building blocks in the petrochemical companies including Borouge. The adoption of Capture Technology by the oil companies to recover the large volumes of fleeing associated gases has really been relatively successful. However, this has not been able to meet the current gas demand. The potential capacity of the petrochemical industry is additionally limited by the high ethane consumption in the power generation plants34. Regional economic blocks have significantly influenced the country’s macroeconomic policies. These policies tend to favour local petrochemical companies, mainly Borouge to enable it to compete in the region and world at large. These policies include tax waivers, expansion of research institutions and training facilities to develop skilled labour, government acquisition among other.

Conclusion

UAE’s petrochemical industry has considerably grown over the past 10 years. The industry was an extension of oil and gas sector. Globalization and regional integration have had considerable impact on the petrochemical cluster in UAE. Essentially, globalization and regional integration have increased competition and widened the market for petrochemical products. They have influenced the adoption of cutting edge technologies and global expansion by the local companies35. They have also enhanced sharing of ideas and best practices among different stakeholders. Regional blocks have significantly influenced the country’s macroeconomic policies in oil, gas, and petrochemical sector. Globalization and regional integration have even influenced the level of output and product differentiation in UAE’s petrochemical sector36.

Bibliography

Alan, Rugman, The Regional Multinationals: MNEs and “Global” Strategic Management. Cambridge, UK: Cambridge University Press, 2005.

Alan, Rugman, Globalization and Regional Business Strategy, Oxford: Oxford University Press, 2000.

Borealis AG. Annual report 2011, Web.

Borouge. Shaping the World with Plastics, Web.

Business Monitor. , Web.

Saudi Basic Industries Corporation. Annual report 2011, Web.

The Dow Chemical Company. Annual report 2011, Web.

Footnotes

1 Alan, Rugman, Globalization, and Regional Business Strategy, 2.

2 Alan, Rugman, Globalization, and Regional Business Strategy, 3.

3 Alan, Rugman, The Regional Multinationals: MNEs and “Global” Strategic Management, 6.

4 The Dow Chemical Company. Annual report 2011, 2.

5 of Business Monitor. United Arab Emirates Petrochemical Report 2011, 4.

6 Borealis AG. Annual report 2011, 1.

7 Business Monitor, United Arab Emirates Petrochemical Report 2011, 4.

8 Borealis AG. Annual report 2011, 3.

9 Borouge. Shaping the World with Plastics, 1.

10 Business Monitor, United Arab Emirates Petrochemical Report 2011, 3.

11 Business Monitor, United Arab Emirates Petrochemical Report 2011, 5.

12 Borouge. Shaping the World with Plastics.

13 Saudi Basic Industries Corporation. Annual report 2011, 2.

14 Borouge. Shaping the World with Plastics.

15 Business Monitor. United Arab Emirates Petrochemical Report 2011, 4.

16 Borealis AG. Annual report 2011, 3.

17 Business Monitor. United Arab Emirates Petrochemical Report 2011, 5.

18 Borouge. Shaping the World with Plastics.

19 Business Monitor. United Arab Emirates Petrochemical Report 2011, 6.

20 Saudi Basic Industries Corporation. Annual report 2011, 4.

21 Business Monitor. United Arab Emirates Petrochemical Report 2011, 6.

22 Business Monitor. United Arab Emirates Petrochemical Report 2011, 5.

23 Business Monitor. United Arab Emirates Petrochemical Report 2011, 7.

24 Borealis AG. Annual report 2011, 8.

25 Business Monitor. United Arab Emirates Petrochemical Report 2011, 10.

26 Business Monitor. United Arab Emirates Petrochemical Report 2011, 11.

27 Borouge. Shaping the World with Plastics.

28 Business Monitor. United Arab Emirates Petrochemical Report 2011, 13.

29 Business Monitor. United Arab Emirates Petrochemical Report 2011, 14.

30 Borouge. Shaping the World with Plastics.

31 Business Monitor. United Arab Emirates Petrochemical Report 2011, 15.

32 Borouge. Shaping the World with Plastics.

33Borealis AG. Annual report 2011. 7.

34 Borealis AG. Annual report 2011, 8.

35 Business Monitor. United Arab Emirates Petrochemical Report 2011, 16.

36 Saudi Basic Industries Corporation. Annual report 2011, 4.

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