European Union, Theory and Emerging Economies - Case Study Example

?European Union, Theory and Emerging Economies I. Introduction In recent years, Europe has reached an unprecedented economic integration through the European Union (EU). The economic integration to date has never been replicated by any other country, region or area of the world. The economic integration of Europe is an achievement envied by all the other regions worldwide and is a model for the future development. Asia, Africa, and Latin America have been looking up to Europe as the model of their future development. What are purposes of economic integrating Europe? What is the significance of a single European Market for EU-based companies? What are international trade and investment theories involved in the economic integration of Europe? Given emerging economies like China and Russia, what is the significance of a single European Market for both the emerging economy and the EU-based companies? What strategies can EU companies adopt to benefit from the rise of the emerging economies? These are among the questions that will be addressed by this report. The primary objective for the report is to illustrate the importance of economic integration both for European business companies and the emerging economies. II. Main Purposes of the European Union and Forms of Economic Integration The official webpage of the European Union emphasised that one of the key goals of the European Union is to “foster economic cooperation” (Economic Union paragraph 20). However, “what began as a purely economic union also evolved into an organisation spanning all policy areas, from development aid to environment” and the name change from the European Economic Community (EEC) into the European Union or the EU in 1993 “reflected this change” (European Union paragraph 3). For McIver, however, the EU comprise a set of “common supranational institutions established by member states, each of which gives up some of its sovereignty, to make decisions on matters of joint interest at a European level” (3). The EU is a “pooling of sovereignty” (McIver 3). The primary aim of the EU, however, is “bring about peace and security between and among the member states, and the rest of the world” (Atature 21). Viewed from the perspective of international trade theory, however, the European Union is a consequence of a desire of countries for economic or regional integration. The forms of economic integration or regional integration are a regional trading arrangement, free trade area, a customs union, common market and the economic union (Carbaugh 271-273). A regional trade arrangement is an agreement whereby participating countries agree to reduce international trade tariffs among themselves (Carbaugh 271). In a free trade area, countries maintain lower tariff among them but maintain variable trade policies with other countries (Carbaugh 273). In a customs union, countries impose lower tariffs among member countries and harmonises a common trade policies with non-member countries (Carbaugh 273). A common market integrates the economies of member countries by calling for features similar to a customs union while allowing unhampered factor flows (labour and capital) at the same time (Carbaugh 273). In contrast, an economic union as represented by the European Union, has the features of a common market but, in addition, it calls for the fiscal and monetary integration (Carbaugh 273). Monetary integration in the EU shields Europe from the potentially harmful effects of a flexible exchange rate (Krugman & Obstfeld 617). Other than having a basis in trade theory, economic integration has a sound basis in investment theory. III. Investment Theory and the European Union Economic integration or economic unionism promotes a united Europe but what does it do for business and investments? At least two investment theories support the view that the economic integration of Europe is a step forward. One of the investment theories pertain to the theory of economy of scale (Denisia 57). Economic theory holds that scale influences returns from investment. Firm size can influence returns to investments. There is a phase of investments in which firm size produces negative returns. This happens when demand is not significant and, thus, firm size can only reduce net returns from an investment. However, there is also a range when demand is high when firm size results to lower production costs per unit. This range is the range of economy of scale wherein scale is associated with increasing net returns. Another investment theory which favourably supports integration is the theory of transaction costs (Wink et al. 175). While the concept has economic roots, the theory’s application in investments is clear. Economic integration or unionism basically unifies country select policies across Europe. This is important for businesses to operate seamlessly across the region. Thus, with economic integration, a business organisation need only one basic set of business or investment policies across the region and will not be compelled to have a set of policies for each country in view of highly variable policy environments. Economic integration favours a single interest rate or close to a single interest rate and, thus, it promotes a uniform mark-up across countries and promotes simpler business administration. Economic integration also means a common currency and, thus, a common price or close to a common set of prices. In sum, economic integration facilitates and promotes a simpler management of businesses and promotes product flows across a wider area and a higher population of consumers. This being the case, economic integration promotes profitability by integrating markets and promoting a less variable environment for doing business. IV. European Companies and Emerging Economies EU companies benefit from emerging economies and the same is true for emerging economies in relation to EU companies. As early as 2004, the United Kingdom Department of Trade and Industry had declared that “the UK has already been able to benefit from enlargement and the liberalisation of the former socialist economies through the Europe agreements of the 1990s---trade between the new member states and the EU15 is already tariff-free in the majority of sectors” (1). Further, the UK Department of Trade revealed that UK trade with ten new members of the European Union increased by 208% compared to only 73% with the whole world (1). Enlarging the EU has also resulted to “more competition, more efficient production, potentially lower prices and more choice for consumers” (UK Department of Trade 5). In their 2004 estimate, the enlargement of the EU was expected to add 1.5% to the GDP growth of new member states and 0.2% to the EU15 GDP (5). The UK share of the 0.2% of the EU15 GDP additional growth was expected to be 14% and was worth ?1.75 billion a year in terms of 1999 prices (UK Department of Trade and Industry 7). The new members of the EU described in the UK Department of Trade and Industry material are actually the so-called “emerging economies” of Europe. Hennart pointed out that even before the EU, economic unionism in Europe brought benefits to multinational firms in the tin industry by reducing transactions costs (147). According to Hennart, economic unionism even before the EU resulted to vertical integration in the tin industry led by British firms (147-150). Kramer and his colleagues reported that flagship multi-national companies in the automotive, life science and ICT sectors of Germany and the United Kingdom has been benefiting from innovation and the intangible asset of network capital resulting from the European Union (1). According to the author, the EU generated not only tangible or income benefits but also intangible benefits consisting of organisational and network capital and the drive to innovate (1-3). However, Overman and Winters, using an economic geography perspective, have pointed out that economic integration brought about by the European Union has led to a new trend in spatial development: economic prosperity has favoured more the firms located in southern part of the United Kingdom. In particular, membership in the European Union has favoured the growth of multinational manufacturing firm in Southern United Kingdom (Overman and Winters 8). Venables clarified, however, that economic integration and the European Union facilitates multinational penetration and the promotion of efficiency and productivity (6). Through market integration that the European Union facilitates, Finland’s Nokia used to be the number 1 mobile phone in Europe, including Eastern Europe, although the leadership in the cellphone market today may be in the hands of Samsung or Apple. Nokia’s Lumina 800, for instance, used to be on top of the sales charts in mobile phones of Europe (Page paragraph 1). V. Strategies in Which EU Companies May Benefit from Emerging Economies EU companies can adopt several strategies so both the emerging economics and the EU companies can benefit from each other. First, the EU companies can organize trade and investment missions to the emerging economies. The tasks that can be undertaken by the trade mission can consist in identifying areas for investments as well as check on the production process, abilities, and potentials of emerging economy firms, enterprises, products and services. In addition, the trade missions can build contacts as well as build preliminary arrangements and commercial partnerships with the firms of the emerging economies. Investment missions should be seen as arrangements between trade groups with each trade group covering a fairly significant area. It is important to think of trade and investment missions this way rather than conceiving them in terms of mere interaction between two firms. Although there can be gains in the interaction between two firms, especially big ones, the scope of the EU is a world region covering several countries and, therefore, results are optimised if the missions involve at least two trade groups with each group covering a significant area. Second, the EU companies can invite the firms and governments of the emerging economies and the latter can do the same for the older market economies. Third, product road-shows can be implemented by the EU companies in the emerging economies and the firms in the emerging economies can also be invited to do the same in Europe. Simply described, product road-shows are systematic ways of introducing a product or products to a population or potential partners. The road-shows can provide knowledge to ultimate consumers as well as middle-men or potential business partners. In addition, the road-shows should be designed such that they serve to establish long-term partnerships. In short, the primary purpose of a road-show is to build partnerships and alliances for product penetration and sustained sales. Fourth, cultural exchanges or goodwill visits among trade groups can also be helpful. In the cultural exchanges, trade groups can sponsor shows that facilitate cultural showcases or shows between two cultures. While government can sponsor or initiate the cultural exchanges, it is also possible for firms to do this with the interest of promoting trade and investments. Tastes for products can be promoted via a demonstration effect. Fifth, trade groups across world regions should introduce their counterparts to the trade or business laws being followed in each country. The knowledge on the matte can help business organisations map out exactly how business initiatives or tastes for products can be promoted in each other’s backyard. It is possible to have a comprehensive enumeration of how EU companies can benefit from emerging economies and vice-versa but it seems appropriate to identify only the most important strategies at this point. VI. Conclusion In summary, the main purposes of a European Union are not limited to the economic but also cover the political and other basic aspects of Europe. Nevertheless, the economic dimensions of the main purposes of the European Union are very important. Two key significance of a single European market for EU-based companies include the creation of possibilities for exploiting economies of scale and reducing transaction costs. The two points of significance also cover relevant investment theories involved. The international trade theories linked with the European Union basically involve theories associated with economic integration. EU based companies can adopt several strategies to benefit from the rise of emerging economies like Russia and China and five strategies are suggested in this work. Work Cited Atature, Suha. “The Historical Roots of European Union: Integration, Characteristics, and Responsibilities for the 21st Century.” European Journal of Social Sciences 7.2 (2008): 18-32. Carbaugh, Robert. International Trade. 13th ed. United Kingdom: South-Western CENGAGE Learning, 2011. Denisia, Vintila. Foreign Direct Investment Theories: An Overview of the Main FDI Theories. European Journal of Interdisciplinary Studies, 3 (2010), 53-59. European Union. “Basic Information on the European Union.” Web. 19 January 2013. Hennart, Jean-Francois. “Transaction Costs and the Multinational Enterprise: The Case of Tin.” Business and Economic History 16.2 (1987): 147-159. Kramer, Jan-Philipp, Javier Revilla Diez, Elisabetta Marinelli and Simona Lammarino. “Intangible Assets, Multinational Enterprises and Regional Innovation in Europe.” University of Sussex: IAREG, April 2009. Krugman, Paul and Maurice Obstfeld. International Economics. 6th ed. London: Addison-Wesley, 2003. McIver, Iain. “The European Union---A Brief History.” The Scottish Parliament: SPICe Briefing, 20 June 2011. Overman, Henry and Alan Winters. “North and South.” CentrePiece Winter (2004): 8-13. Page, Carly. Nokia Lumia 800 tops sales chart in Europe. Web. 19 January 2013. UKDTI. Trade and Investment Implications of EU Enlargement. London: United Kingdom Department of Trade and Industry, April 2004. Venables, Tony. “Multinationals: Heroes or Villains of the Global Economy.” CentrePiece Spring (2005): 2-7. Wink, Marcos Vinicio Junior, Hsia Hua Sheng, and Willian Eid. “Transaction Costs: An Empirical Analysis of their Relationship with Investment and Foreign Direct.” Rae 15.2 (2011): 175-187. Read More