Academic journal article Management International Review

Increasing the Size of the "Country": Regional Economic Integration and Foreign Direct Investment in a Globalised World Economy

Academic journal article Management International Review

Increasing the Size of the "Country": Regional Economic Integration and Foreign Direct Investment in a Globalised World Economy

Article excerpt

Abstract

* The establishment of trading blocs is a way of increasing the "size of the country" and the preference for local production. We focus first on the theoretical implications on firms' strategies of the increasing move towards regional economic integration in Europe and North America. Then we examine the impact regional integration in North America has had on the foreign investment strategies of firms by their country of origin.

Key Results

* Our result points to the conclusion that collectively, European multinational firms raised their level of FDI into the USA as a result of North American integration. However, so far as individual European countries are concerned, we have not found unambiguous support for the big country hypothesis. This indicates that more detailed research is needed.

Introduction

Two contradictory trends have characterised the world economy during the approach to the Millennium. First, the globalisation of the economy, together with the successful conclusion of the Uruguay Round and the establishment of the World Trade Organisation (WTO), have brought about a steady decline in barriers to international business transactions. Second, however, as countries have lost their conventional powers to protect themselves from the outside world, they have grouped together, often on a pan-continental basis, into regional trading blocs. Regional economic integration, in the form of institutions such as NAFTA, the EU or APEC, represents the main way that remains accessible to countries in their attempt to maintain and promote their levels and shares of world investment, employment, income and growth.

Regional economic integration (REI) is therefore a way of increasing the preference of multinational enterprises (MNEs) for local production within the integrating area, and of increasing relative discrimination against firms outside the area of integration. Regional integration offers insider firms incentives to invest more locally, by reducing transaction costs and thereby increasing the rate of return on capital. At the same time and it creates motives for outsider firms to become insider firms. Much regional integration represents an attempt to `increase the size of the country', to obtain the benefits of large countries over small countries, with all the implications that this carries for the investment strategies of multinational firms. Regional integration fosters the environment for firms themselves to grow to a large efficient scale. The two processes are therefore intertwined.

The search for size-of-country benefits mirrors the growing importance of created, as opposed to naturally-occurring, assets in production processes. These assets progressively account for a higher proportion of value added in most manufacturing and service activities. The rise of these created assets has generated a new breed of location-specific motives for regional integration. This is evident if we contrast present-day REI with the earlier imperial groupings of geographically disparate countries. The qualitative difference so revealed reflects the ascendancy of economies of scale (at both the firm and plant level), of scope (benefiting from the joint production economies gathering together a greater range of activities) and of learning at the firm level. At the same time it reflects the relative decline of international strategies based on naturally-occurring locational advantages. Though these last mentioned strategies certainly exist, they are prevalent mainly in the international vertical disintegration of production, e.g., in the location of labour-intensive stages of production processes in low-wage developing economies.

Therefore, the prima facie evidence suggests that country size matters, and regional economic integration is a means of obtaining the economic benefits of country size without, necessarily, the complete elimination of separate sovereign countries. …

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