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    regional economic integration


    A) What are the pros and cons of regional economic integration?

    B) How would you describe American culture?

    C) Why is it important to understand the political and economic history of a region when expanding into markets in that region?

    D) What kinds of business risks does your organization face? Would these risks differ in a global environment?


    Solution Preview


    Let us first see the role of regional integration such as NAFTA or EU in promoting global business or in other words, its core advantages.

    Trade gains: If goods are sufficiently strong substitutes, regional trade agreements will cause the demand for third party goods to decrease, which will drive down prices. In addition, more acute competition in the trade zone may induce outside firms to cut prices to maintain exports to the region. This will create a positive terms of trade effect for member countries.

    Increased returns and increased competition: Within a tiny market, there may be a trade-off between economies of scale and competition. Market enlargement removes this trade-off and makes possible the existence of (i) larger firms with greater productive efficiency for any industry with economies of scale and (ii) increased competition that induces firms to cut prices, expand sales and reduce internal inefficiencies.

    Investment: Regional trade agreements may attract FDI both from within and outside the regional integration arrangement (RIA) as a result of (i) market enlargement (particularly for "lumpy" investment that might only be viable above a certain size), and (ii) production rationalization (reduced distortion and lower marginal cost in production).

    Security : Entering RTAs (Regional Trade agreements) may increase intra-regional trade and investment and also link countries in a web of positive interactions and interdependency. This is likely to build trust, raise the opportunity cost of war, and hence reduce the risk of conflicts between countries.

    Coordination and bargaining power: Within RTAs, coordination may be easier than through
    multilateral agreements since negotiation rules accustom countries to a give-and-take approach, which makes tradeoffs between different policy areas possible.

    source: ...

    Solution Summary

    What are the pros and cons of regional economic integration?