Chapter 8 Outline

Implications For Business

Currently the most significant developments in regional economic integration are occurring in the EU, NAFTA, and MERCOSUR groups. Although some of the other Latin American trade blocs and APEC may have greater economic significance in the future, at present the EU, NAFTA, and MERCOSUR have more profound and immediate implications for business practice. Accordingly, in this section we will concentrate on the business implications of those three groups. Similar conclusions, however, could be drawn with regard to the creation of a single market anywhere in the world.

Opportunities

The creation of a single market offers significant opportunities because markets that were formerly protected from foreign competition are opened. For example, in Europe before 1992 the large French and Italian markets were among the most protected. These markets are now much more open to foreign competition in the form of both exports and direct investment. Nonetheless, the specter of "Fortress Europe" suggests that to fully exploit such opportunities, it will pay non-EU firms to set up EU subsidiaries. Many major US firms have long had subsidiaries in Europe. Those that do not would be advised to consider establishing them now, lest they run the risk of being shut out of the EU by nontariff barriers. In fact, non-EU firms rapidly increased their direct investment in the EU in anticipation of the creation of a single market. Between 1985 and 1989, for example, approximately 37 percent of the FDI inflows into industrialized countries was directed at the EC. By 1991, this figure had risen to 66 percent.³⁵

Additional opportunities arise from the inherent lower costs of doing business in a single market--as opposed to 15 national markets in the case of the EU or 3 national markets in the case of NAFTA. Free movement of goods across borders, harmonized product standards, and simplified tax regimes make it possible for firms based in the EU and the NAFTA countries to realize potentially enormous cost economies by centralizing production in those EU and NAFTA locations where the mix of factor costs and skills is optimal. Rather than producing a product in each of the 15 EU countries or the 3 NAFTA countries, a firm may be able to serve the whole EU or North American market from a single location. This location must be chosen carefully, of course, with an eye on local factor costs and skills.

For example, in response to the changes created by EU after 1992, the Minneapolis-based company 3M has been consolidating its European manufacturing and distribution facilities to take advantage of economies of scale. Thus, a plant in Great Britain now produces 3M's printing products and a German factory its reflective traffic control materials for all of the EU. In each case, 3M chose a location for centralized production after carefully considering the likely production costs in alternative locations within the EU. The ultimate goal of 3M is to dispense with all national distinctions, directing R&D, manufacturing, distribution, and marketing for each product group from an EU headquarters.³⁶ Similarly, Unilever, one of Europe's largest companies, began rationalizing its production in advance of 1992 to attain scale economies. Unilever concentrated its production of dishwashing powder for the EU in one plant, toilet soap in another, and so on.³⁷

Even after the removal of barriers to trade and investment, enduring differences in culture and competitive practices often limit the ability of companies to realize cost economies by centralizing production in key locations and producing a standardized product for a single multicountry market. Consider the case of Atag Holdings NV, a Dutch maker of kitchen appliances that is profiled in the accompanying Management Focus. Due to enduring differences between nations within the EU's single market, Atag still has to produce various "national brands," which clearly limits the company's ability to attain scale economies.

Threats

Just as the emergence of single markets in the EU and the Americas creates opportunities for business, it also presents a number of threats. For one thing, the business environment within each grouping will become more competitive. The lowering of barriers to trade and investment between countries is likely to lead to increased price competition throughout the EU, NAFTA, and MERCOSUR. For example, before 1992 a Volkswagen Golf cost 55 percent more in Great Britain than in Denmark and 29 percent more in Ireland than in Greece.³⁸ Such price differentials will vanish in a single market. This is a direct threat to any firm doing business in EU, NAFTA, or MERCOSUR countries. To survive in the tougher single-market environment, firms must take advantage of the opportunities offered by the creation of a single market to rationalize their production and reduce their costs. Otherwise, they will be severely disadvantaged.

A further threat to firms outside these trading blocs arises from the likely long-term improvement in the competitive position of many firms within the areas. This is particularly relevant in the EU, where many firms are currently limited by a high cost structure in their ability to compete globally with North American and Asian firms. The creation of a single market and the resulting increased competition in the EU is beginning to produce serious attempts by many EU firms to reduce their cost structure by rationalizing production. This could transform many EU companies into efficient global competitors. The message for non-EU businesses is that they need to prepare for the emergence of more capable European competitors by reducing their own cost structures.

A final threat to firms outside of trading areas is the threat of being shut out of the single market by the creation of "Trade Fortress." The charge that regional economic integration might lead to a fortress mentality is most often leveled at the EU. As noted earlier in the chapter, although the free trade philosophy underpinning the EU theoretically argues against the creation of any "fortress" in Europe, there are signs that the EU may raise barriers to imports and investment in certain "politically sensitive" areas, such as autos. Non-EU firms might be well advised, therefore, to set up their own EU operations as quickly as possible. This could also occur in the NAFTA countries, but it seems less likely.