Introduction
Concerns surrounding regional integration have always dominated debates surrounding economic development. Indeed, many international organisations, such as the United Nations (UN) and Mo’Ibrahim Foundation have singled out regional integration as a key developmental concept of the developed and developing world. Accordingly, the last few decades have seen the emergence of several regional economic blocks that strive to foster economic growth in different parts of the world. For example, Apple Inc., and Boeing have successfully incorporated the concept of regional integration in their production processes. Relative to this assertion, one researcher, Meng, says, ‘Firms that are expanding their cross-border activities, such as vertical specialisation trade, outsourcing, and fragmentation products, have brought dramatic changes to the global economy in the last two decades.’
The increased dominance of global firms in the international business space has especially spurred the expansion of regional integration activities. Piasecki says the activities of these multinational corporations (MNCs) highlight the emergence of global value chains, which outline a representative phenomenon that includes vertical specialisation, fragmented production, outsourcing, and global supply chains. Using different languages and frames of analysis to understand regional integration, one issue underlies this concept – higher volumes of different goods produced across different countries and re-exported to other countries to undergo further production processes. Piasecki explains this phenomenon as the “second unbundling,” which is characterised by lower communication and fragmented production processes.
Essentially, many economists perceive regional integration through the lens of the creation of free trade areas, infrastructure development, and similar economic opportunities that emerge when member countries integrate.
With this new front of economic growth, many observers have posed questions regarding what regional integration offers to international businesses. Indeed, given the challenges faced by pioneers of regional integration, such as the World Trade Organisation (WTO), there has been considerable attention in academic circles accorded to this issue. This new interest stems from the fact that patterns of economic integration, in the last decade, demand new areas of discipline, which transcend the rules laid out by the WTO. While it is important to redefine these rules and underscore the challenges experienced by different countries as they integrate, few researchers would dispute the fact that regional integration is here to stay. Since MNCs champion international trade, the best way for boosting global economic growth would be to understand the implications for this trend to international businesses.
Certainly, economic agreements between different countries have different regional, economic, and political implications for business players that need further exploration. This paper therefore explores the advantages of regional integration to internal businesses by exploring the traditional and non-traditional benefits of the same.
Advantages of Regional Integration
Among the most compelling arguments for regional integration is the creation of stronger economic blocks of development. This argument is especially compelling for underdeveloped regions of the world, which are characterised by small economies and relatively low Gross Domestic Products (GDP). Piasecki says it is unwise for small economies to oppose regional integration because high production costs and unfavourable climates of investment usually prevent MNCs from investing in their economies. This realisation has forced some analysts to categorise the benefits of regional integration into two parts – traditional and non-traditional advantages of regional integration
Traditional Advantages of Regional Integration
Trade Gains and Improved Economic Governance
Historically, since the onset of regional integration, researchers have always mentioned that trade gains are among the primary advantages that member countries and MNCs enjoy from regional integration. A key argument in this analysis is the relatively low costs of goods and services that MNCs provide. For example,
If goods are sufficiently strong substitutes, regional trade agreements will cause the demand for third party goods to decrease, which will decrease prices. In addition, acute competition in the trade zone may induce outside firms to cut prices to maintain exports to the region.
The above statement shows that regional integration provides a favourable economic environment for member countries to enjoy, but this economic environment offers a huge potential for MNCs to monopolise the market since they have the financial muscle to sustain low prices that new enterprises cannot. The greatest flaw in this argument is welfare loss and the risk of trade diversion, which associate with different countries maintaining free trade, while other countries (outside the regional economic blocks) do not enjoy the same advantage. However, experts claim the creation of low tariffs between regional blocks and other countries may mitigate this drawback.
Researchers that have focused on intra-regional cooperations say better institutions and shared infrastructures are some of the most valuable benefits of regional integration (compared to economic benefits such as the elimination of tariff barriers) that MNCs would enjoy. Improved governance and policies also emerge as other benefits that fall in the same category. Some analysts have linked this benefit with improved economic performance because they say an improvement of national institutions and economic policies help to improve economic performance. Although governments implement most economic policies at a national level, evidence shows that when they implement the same policies at a regional level and merge them with national policies, improved governance and economic successes are only some benefits that MNCs may enjoy because endless opportunities may emerge here through the creation of a better fiscal and macroeconomic business climate.
Improved Returns and Innovation
Companies that do not tap into the potential of regional integration may experience a significant trade off between increased economies of scale and increased competition from other companies. Comparatively, companies that exploit the potential of regional economic integration do not experience this trade off because of two main reasons. The first reason is the creation of larger firms with greater economies of scale. This leads to the elimination of production inefficiencies. The creation of regional economic blocks also leads to increased competition that forces companies to innovate, thereby leading to market and product innovation. To affirm this view, Meng says,
Given the high level of fragmentation in the global economic environment, market enlargement would allow firms in some sectors to exploit more fully economies of scale. Competition may lead to the rationalisation of production, creation of better products, and the removal of inefficient duplication of plants.
Meng further says that MNCs may further benefit from economic incentives through the lowering of tariffs within the economic block to allow for further trade between the economic block and other regional blocks. Ordinarily, most countries (especially from developing nations) prefer to reduce their tariffs because an association of powerful regional economic blocs (mostly from developed countries) would easily dominate developing economies. Moreover, developing nations know that MNCs may be discouraged from investing in their economies because their technology may be obsolete.
The need to deploy new technology and seek better infrastructure for trade (to attract such international businesses) would still rank such economies lower than their developed counterparts. Therefore, developing economies choose to lower their tariffs, as the best way to optimise the advantages of regional integration. This way, MNCs stand out as the greatest beneficiaries of regional integration.
New Investment Opportunities
Another traditional advantage of regional integration is the creation of new investment opportunities for MNCs. This may occur both within the economic block and outside the block. The best way for understanding how regional integration offers investment opportunities to MNCs is comparing Foreign Direct Investment (FDI) in integrated and fragmented regions. One study sampled more than 60 countries from the Organisation for Economic Cooperation and Development (OECD) and showed that regional integration doubles FDI.
The same study showed that between the periods of 1980 and 2000, MNCs from the United Kingdom (UK) and United States (US) invested in developing countries because of the increased investment opportunities that a membership to a regional economic block posed. By extension, increases in FDI investments have largely been associated with general economic growth and development. World Bank explains that this analysis is especially true for countries that have a sufficient level of trade and investment opportunities, which favour the inclusion of foreign firms in local development processes. One argument supporting this school of thought is the presence of increased productivities for firms that participate in regional economic activities. Increased productivity however depends on many factors, like the nature of economic cooperation and the type of region (among other factors).
Countries that integrate to form a greater economic block enjoy lumpy investments that may only be viable when there is a big market for MNCs to operate. For example, World Bank says regional integration in East Africa offers immense investment opportunities for MNCs. Illustratively, Willem says most of Uganda’s economic problems stem from the lack of regional integration between the East African country and some of its neighbours. In other words, the lack of regional integration has a forgone cost of poor (to negligible) economic growth.
Uganda’s economic growth is about 5%. The World Bank predicts that if there were better regional integration mechanisms between Uganda and its neighbours, the country’s economic growth would increase by between 2% to 4%. One example that exemplifies this fact is the low capacity for energy generation (electricity) in Uganda. Willem believes that MNCs would easily solve this problem through the construction of regional electricity grids, which Uganda lacks.
The same energy constraints also replicate in the transport system where Uganda suffers from railway network constraints. Therefore, to run its economy, Uganda highly relies on imports from its neighbouring country, Kenya, through the port of Mombasa. Uganda’s problems however mirror a larger economic problem facing the greater East Africa region because most countries in the region still suffer from the lack of economic integration. The rail network for example has failed to link Uganda and Kenya (effectively) because a private franchise, which has suffered from years of state mismanagement, has failed to run the company. To explain this problem, Willem says,
The rail link was broken at the time of conflict in Kenya, with big effects in Uganda. Finally, road connections are poor including in a regional context and better roads and other transportation would enhance exports to the region.
A combination of these challenges shows that regional integration offers many investment opportunities for international businesses to exploit. Certainly, international companies that operate within countries that have regionally integrated are attracted to such markets because they stand a high chance of rationalising their production, reducing production distortion, and lowering their overall costs of production. Increased FDI flows mirror this attraction. World Bank says the need to expand their investments (and not to avoid tariffs) is one pre-condition that MNCs should meet to realise this benefit. This situation further exemplifies the need for a reduction in tariffs, if the true economic benefits of regional integration are to be realised.
Effective Utilisation of Natural resources
The argument surrounding the effective use of natural resources best applies to countries that have an abundant supply of natural resources. Most studies that have explored the advantages of regional integration through this framework of analysis (natural resource exploitation) have concentrated on resource-rich nations in Africa. However, this focus does not fully underscore how regional integration may help businesses to exploit natural resources through a more effective framework of regional integration. For instance, regional integration provides companies an opportunity to exploit resources that are not within their grasp. Meng says regional integration could help to redistribute such resources to countries that do not have them. He also says some countries are too politically unstable to exploit their resources and therefore, regional integration helps to provide a mechanism where such countries can by-pass such challenges to realise economic and social growth.
Willem did a study on African countries and established that most of the continent’s energy resources are concentrated in only a few countries, thereby leaving others to economic vulnerability. For example, energy resources in the Southern Africa region are sparsely distributed. Consequently, most South Africa states, such as Zambia and Zimbabwe, have to rely on other countries, such as South Africa, to supplement their energy needs. In fact, Willem says, South Africa exports about 5% of its energy to neighbouring countries through mechanisms setup by regional integration frameworks. Conversely, many South African nations like Lesotho and Botswana import more than 50% of the energy from South Africa.
Other regions of the continent have only partially embraced the concept of regional integration, although they have a huge potential for supplementing energy demand in their region. For example, World Bank says Ethiopia and the Democratic Republic of Congo (DRC) account for about 59% of the region’s potential for generating hydroelectric power. Other countries within the region do not tap into this potential because of the lack of a regional integration framework. Moreover, in some countries, like the DRC, political turmoil has stifled the ability to exploit such natural resources, not only for the benefit of the country, but also for the region.
Broadly, the greatest impediment to the realisation of the economic benefits of regional integration is the uneven landscape that characterises the economic and technical development among different countries. With respect to power generation in Africa, Willem says different countries have different institutional and technical capabilities because West African and South African countries have the most advanced capabilities, while Sub-Saharan Africa lag behind in this regard. Regional integration can help to mitigate some of these concerns since it creates some sense of balance in regional development. Particularly, it creates a framework for countries to benefit from the economic potential of natural resources that are not within their reach.
Nontraditional Advantages of Regional Integration
Domestication of Economic Reforms
The domestication of economic reforms is a product of an effort by governments to sign economic agreements with other countries. Indeed, the World Bank says it is common for countries to realise the development of welfare improvement policies when their governments sign trade agreements with other nations. One main precondition for the realisation of such reforms is the presence of increased advantages associated with adopting the reforms, as opposed to re-introducing the old order. Another precondition is the existence of more benefits through continued membership to the economic block, as opposed to exiting the agreement.
This situation creates a favourable business climate for MNCs to operate because reforms lead to the liberalisation of economies. From this background, Willem further adds that the true benefits of regional integration materialise only when countries maintain their commitment to support new trade policies that benefit members and investors. Through this analysis, World Bank says the openness of regional integration agreements help to cement economic reforms through the introduction of a strong sense of discipline in the implementation of macroeconomic policies.
Economic Stability/Insurance
Regional integration also offers a sense of stability for MNCs to operate. Mainly, it shields them against external economic shocks. Trade wars and price instabilities are some of the challenges that MNCs would not experience through regional integration. The insurance argument especially surfaces when different member countries have varying economies. For example, an oil-rich nation (that is mainly dependent on the oil sector) may not experience oil price vulnerabilities if it signs trade agreements with countries that do not depend on oil. This analysis shows that regional integration offers insurance for asymmetric terms of trade shocks.
Besides insuring MNCs against asymmetric terms of trade shocks, evidence shows that regional integration may also promote economic stability through monetary and fiscal policies. For example, recent research has mainly focused on the creation of a common currency as the main tool of economic stability that regional integration provides. Willem says the creation of a common currency helps to eliminate common transaction costs associated with using different currencies in one region. To support this claim, he says, ‘Monetary integration aims to provide financial stability and better economic and financial cooperation and would provide free access to member state capital markets.’
Several regional economic blocks have realised this advantage. For example, the European Union enjoys a common currency that maintains economic stability among member states. Countries also use the US dollar across many regions of the world, as an acceptable international currency because of its stability. Other regions of the world are contemplating the option of creating one currency for trade. For example, there are ongoing talks regarding how to introduce a common currency among Gulf Cooperation Countries (GCC). These monetary tools provide a stable environment for MNCs to operate.
Increased Coordination and the Development of Bargaining Power
A core pillar in the success of regional trade agreements is the art of negotiation. Countries develop successful trade agreements by eliminating their differences and creating a new framework of doing business. This renewed spirit of doing business mainly increases coordination among member states in business and other economic activities because regional integration agreements operate through a lens of “give and take.” Therefore, it is easy to realise economic trade-offs among international businesses as well because businesses also enjoy the same goodwill that member countries do (the same is false for multilateral agreements).
By forging a coordinated position, member countries and businesses also enjoy the advantage of developing common positions when negotiation with other regional blocks/companies, thereby strengthening their bargaining positions. Again, this advantage is more practical for poor and fragmented economies, especially when they negotiate for better terms of engagement with richer and wealthier companies. To affirm this position, Willem argues,
It may help countries to develop common positions and to bargain as a group rather than on a country-by-country basis, which would contribute to increased visibility, credibility and even better negotiation outcomes.
Security
The concept of security, as an advantage associated with regional integration, closely associates with the concept of regional insurance from economic instabilities. However, as Meng suggests, it would be naive to assume that economic stability/security merely exists from its independence. He therefore introduces the concept of political cooperation as a pillar for regional economic and political stability. Indeed, political cooperation is a key tenet of regional integration because member countries cannot participate in useful economic integration talks if they do not share a close political relationship as well. For example, Willem says political cooperation was an instrumental prerequisite for the creation and development of the European Union, as a regional economic bloc. Therefore, in most situations, it is often difficult to realise economic cooperation without political cooperation.
Sometimes, economic integration births political cooperation among member countries. Certainly, it is from this background that Willem says,
Given that today’s trade agreements are often multifaceted dealing not only with trade in goods and services but also competition policy and intellectual property rights, such behind the border dimensions of regional integration may help to pave the way for further cooperation such as in infrastructure cooperation, regional environmental protection or other political integration.
Through the above statement, it is correct to affirm a direct correlation between regional security issues and regional economic integration. To affirm this position, Meng says regional economic blocks have successfully played the role of conflict resolution managers. For example, Africa’s regional economic blocks ECOMOG and SADC have successfully intervened in the Congo civil war. The Pacific region has also witnessed similar interventions when regional economic blocks, such as the Regional Assistance Mission to the Solomon Islands (RAMSI), intervened in several local political and social unrests (like in Haiti).
Although political security and economic security emerge as the most vivid forms of stability that could be realised from regional integration, food security and social security also arise from regional integration. For example, most developing countries do not enjoy food security and rely on regional integration to alleviate this situation. In Africa, several regional economic blocks have engaged in spirited attempts to harmonise trade and economic policies to boost food and agricultural security in the content. There has been a bolder attempt for such regional economic blocks to bolster the activities of the fishery and forestry industries to eliminate inefficiencies and improve productivity for the same purpose.
While the concept of security is multifaceted, it is difficult to ignore the fact that social cohesion appears as the dominant overarching principle supporting other forms of securities enjoyed from regional integration. Researchers have mainly investigated this concept within the precincts of political and social sciences. The European Union has also cited the same advantage as a benefit of its regional integration; although it has gone a step further to differentiate economic and social cohesion. Meng says their main aim has been to bridge the developmental and social gaps that exist among member states. Observers have identified several goals to support the primary goal of social cohesion. A reduction in unemployment levels, a reduction in trade imbalances, provision of market support, and the modernisation of economic and social institutions are some of these goals.
The River Blindness Control Programme is one health initiative that West African nations have spearheaded through regional integration. The programme has been operational since 1974 and brought together more than ten national governments from the same region. So far, the programme has demonstrated regional success. Willem explains that, ‘Such a coalition was possible because all actors have shared the strong sense of purpose and agreed about the leadership and the according contributions of the single actors.’ The program’s success has also seen international organisations and nongovernmental organisations (NGOs) think of replicating its success to other regions of the world. Certainly, the program has provided adequate medical and health services to more than 40 million people in the last few decades. Moreover, the program has been able to provide regular health services to “abandoned” communities in West Africa, which could not previously access the services.
Through the realisation of some of the above goals, regional integration has strived to promote social cohesion. For instance, a reduction in unemployment levels has led to social stability in the EU. Some regional blocks have decided to approach the issue of social cohesion directly by formulating policies that promote social dialogue, harmonise labour standards, coordination of development policies, and regional redistribution of people. To affirm this position, Meng says,
In other regions, social cohesion is also encouraged by trade measures, such as special and differential treatment for the poorest members. This is a less efficient measures compared by using social policies.
Thus, security emerges from the cordial relationship that member countries enjoy from economic cooperation. Indeed, countries that enjoy economic cooperation also enjoy a web of positive interaction among themselves. This sense of interaction cultivates a sense of trust and cooperation among the member countries, thereby reducing the probability that cooperating countries would go to war with one another.
The advantages discussed above can only thrive in an environment where economic cooperation provides more convergence than divergence. For example, such an advantage would not exist when economic benefits seem to concentrate in one country/industry, while other members play a secondary role. Member countries therefore need to provide the same treatment to all companies within the economic agreement. Relative to this assertion, Meng says, ‘Developing a culture of cooperation works to promote issues of intra-regional security that would be beneficial to MNCs’. It would also be unsurprising to see military and political cooperation emerging from the precincts of economic cooperation.
Conclusion
After weighing the findings of this paper, it is difficult to ignore the potential of regional integration to international businesses. This paper has largely analysed the benefits of regional integration through the perception of how MNCs would benefit from the same. The traditional advantages of regional integration offer a direct understanding of the benefits that international businesses could enjoy from regional integration. The non-traditional advantages of regional integration however provide a different lens of understanding regarding how regional integration provides the right environment for international businesses to thrive and flourish. Regardless of the framework of analysis, regional integration broadly helps to provide direct business opportunities and create a better environment for international businesses to operate. These advantages show that regional integration is a mutually beneficial concept that provides endless social, economic, and political benefits to MNCs.
References
Meng, B, Measuring Global value Chains and regional Economic Integration: An International Input-Output Approach, Institute of Developing economies, Chiba, Japan, 2012. Web.
Piasecki, R, ‘The evolution of development economics and globalization’, International Journal of Social Economics, vol. 31, no. 3, 2004, pp. 300 – 314. Web.
Willem, D, Regional Integration in African, Caribbean and Pacific Countries, European Union, 2008. Web.
World Bank, Regional Integration: Concepts, Advantages, Disadvantages and Lessons of Experience, WB, 2005. Web.