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Lecture 6 Government Intervention in International Business and Regional Economic Integration
Lecture 6 Government Intervention in International Business and Regional Economic Integration
Tamer
Cavusgil; Gary Knight; John Riesenberger.
International Business
“Government Intervention in International Business and Regi
onal Economic Integration”
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
Government intervention may also target foreign direct investment (FDI) flows
via investment barriers that restrict the operations of foreign firms. Government
intervention affects economic activity in a nation by hindering or helping the
ability of its homegrown firms to compete internationally. Often companies, labor
unions, and other special interest groups convince governments to adopt policies
that benefit them.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
Defensive Rationale:
Four major defensive motives are particularly relevant:
1. Protection of the nation’s economy: Proponents argue that firms in advanced
economies cannot compete with those in developing countries that
employ low-cost labor.
2. Protection of an infant industry: In an emerging industry, companies are
often inexperienced and lack the latest technologies and know-how. A
government may impose temporary trade barriers on foreign imports to ensure
that young firms gain a large share of the domestic market.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
Offensive rationale
Offensive rationales for government intervention fall into two categories:
national strategic priorities and increasing employment.
• Free trade area: A stage of regional integration in which member countries agree to
eliminate tariffs and other barriers to trade in products and services within the bloc.
• Customs union: A stage of regional integration in which the member countries agree to
adopt common tariff and nontariff barriers on imports from nonmember countries.
• Common market: A stage of regional integration in which trade barriers are reduced or
removed; common external barriers are established; and products, services, and factors of
production are allowed to move freely among the member countries.
• Economic union: A stage of regional integration in which member countries enjoy all the
advantages of early stages but also strive to have common fiscal and monetary policies.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
• Political Union: A larger and consolidated group of nations or states that share a joint
government that is internationally acknowledged.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
• Trade rules Customs procedures and regulations have been eliminated, streamlining
transportation and logistics within Europe.
• Standards harmonization Technical standards, regulations, and enforcement procedures
related to products, services, and commercial activities are being harmonized. For
example, where British firms once used imperial measures (pounds, ounces, and inches),
they have converted to the metric system that all EU countries use.
In the long run, the EU is seeking to adopt common fiscal, monetary, taxation, and social
welfare policies. Introduction of the euro—the EU’s common currency and now one of the
world’s leading currencies—simplified cross-border trade and enhanced Europe’s
international competitiveness. The European Central Bank is based in Luxembourg and
oversees EU monetary functions.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
• Asia Pacific Economic Cooperation (APEC) aims for greater free trade and
economic integration of the Pacific Rim countries. It incorporates 21 nations
on both sides of the Pacific, including Australia, Canada, Chile, China, Japan,
Mexico, Russia, and the United States
• The Australia and New Zealand Closer Economic Relations Agreement
(CER) was founded in 1983 and promotes free trade between the two nation
• Attract Direct Investment from Outside the Bloc: Foreign firms prefer to
invest in countries that are part of an economic bloc because factories they build there
receive preferential treatment for ex- ports to all member countries within the bloc.
Many non-European firms—for example, General Mills, Samsung, and Tata—invested
heavily in the EU to take advantage of Europe’s economic integration. By establishing
operations in a single EU country, these firms gain free trade access to the entire EU
market.
• Acquire stronger Defensive and Political Posture: Regional integration helps
strengthen member–countries relative to other nations and world regions. This
was one of the motives for creating the European Community (the precursor to the
EU), whose members sought to fortify their mutual defense against the former
Soviet UnionToday, the EU is one way Europe counterbalances the power and
international influence of the United States. Broadly speaking, countries are
more powerful when they cooperate than when they operate alone.
Reference: International Business: The New Realities. 4th Edition; S. Tamer
Cavusgil; Gary Knight; John Riesenberger.
• Regional products and marketing: As firms increasingly view the bloc as one large
market, they tend to standardize their products and marketing. They start selling much the
same products, using similar marketing approaches, to all countries inside the bloc.
Thank you