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Chapter 09 - Regional Economic Integration
carefully crafted response by Greek labor unions to government officials who are
negotiating with the International Monetary Fund (IMF) and European Union (EU) for
financial assistance. The labor unions hope to attract attention to their plight, and raise
awareness of just how painful additional austerity measures would be. However, with a
cumulative drop in GDP of some 20 percent, government officials appear to have few
alternatives.
The situation in both countries has highlighted the political instability plaguing not only
Spain and Greece but the European Union in general. In Greece, despite assurances from
parliamentarians like Kyriakos Mitsotakis that there will be no further austerity measures,
there is concern that the resistance to the proposed reforms could result in government
Discussion Questions and Answers:
1. What is the European Union? How do debt problems in Greece and Spain affect the
European Union as a whole and its member countries? What are the potential political
implications of the austerity measures being currently being proposed in Greece and
Spain?
Answer: The European Union is comprised of 27 countries. The agreement eliminates
tariffs among member countries, establishes a common policy toward nonmembers,
allows for the free movement of people and capital, and harmonizes fiscal and monetary
9-15
2. Consider the opposition to further austerity programs in Greece. Labor unions claim
that they cannot endure any further cuts to their wages or pensions. In your opinion, are
they being short sighted? Do you think additional cuts could help the country recover
from its recession and debt burden? What role does the European Union play in the
proposed reforms?
Answer: The violent protests in front of the Greek parliament building by 6,000 laborers
last week were just one more indication of the high level of frustration of Greek workers.
Labor unions were hoping to not only draw attention to their plight, but also stop a new
3. Discuss the notion of political moral hazard and why it is a concern in the European
Union.
Answer: Germany, along with other members of the European Union is approaching the
bailout of Greece with a great deal of trepidation. There is considerable concern that if a
4. Reflect on the long term implications of high unemployment among the younger
generations in Spain and Greece. In your opinion, does membership in the European
Union increase the chance for brain drain?
Answer: Unemployment levels have reached extraordinary highs in both Greece and
Spain. The problem is particularly bad for the younger generation raising concerns for
Chapter 09 - Regional Economic Integration
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INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following from
International Business DVD Volume 6:
Title: Twitter and Haiti
Learning Objectives
The purpose of this video is to help you:
❖ Understand how social media platforms are increasing the pace of globalization.
Key Words
❖ Globalization
Synopsis
When the earthquake hit Haiti last year, many people, both within the country and
outside, immediately got on Twitter and Facebook to get information about what was
happening, and to communicate with each other. This crisis was one of the first of its
kind in that rather than using more traditional forms of communication like the telephone
or television, large numbers of people turned to new forms of technology like Twitter and
Facebook. Even news reporters were scanning postings to learn more about the crisis.
This may reflect a global trend in which social media platforms are replacing long
established means of communication.
Chapter 09 - Regional Economic Integration
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Discussion Questions
1. Discuss how new technologies emerged as a preferred form of communication after the
earthquake in Haiti. What conclusions might a company targeting consumers in a
developing country like Haiti draw from this phenomenon?
2. What challenges do social network platforms like Twitter and Facebook face in
developing countries? Why might first mover advantages be important in these markets?
INCORPORATING globalEDGE™ EXERCISES
Exercise 1
The World Trade Organization maintains a database of regional trade agreements. You
can search this database to identify all agreements that a specific country participates in.
Search the database to identify the trade agreements that Japan currently participates in.
What patterns do you see? Which region(s) of the world does Japan seem to be focusing
on its trade endeavors?
Exercise 1 Answer
Search phrase: Regional Trade Agreements
Chapter 09 - Regional Economic Integration
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Additional Info:
The Regional Trade Agreements page of the WTO provides a lot of background and
Exercise 2
Your company has assigned you with the task of investigating the various trade blocs in
Africa to see if your company can benefit from these trade agreements while expanding
into African markets. The first trade bloc you come across is COMESA. Prepare a short
executive summary for your company, explaining the level of integration the bloc has
currently achieved, the level it aspires to accomplish, and the relationships it has with
other African trade blocs.
Exercise 2
Search phrase: COMESA
End of Part Case Notes
Part Three
Legal Outsourcing
1. What are the benefits to a law firm of outsourcing of legal services to a foreign
country? What are the potential costs and risks?
Answer: Outsourcing routine legal tasks to foreign law firms helps keep costs down and
2. What kind of legal services are most amenable to outsourcing?
Answer: Many legal tasks are routine and are easy to outsource. These include reviewing
Chapter 09 - Regional Economic Integration
9-19
3. Which groups gain from the outsourcing of legal services? Which groups lose?
Answer: Lawyers in foreign countries such as India stand to gain from outsourced legal
4. On balance, do you think that this kind of outsourcing is a good thing or a bad thing?
What are the risks here?
Answer: Students’ answers will vary. From a client standpoint, sending “routine” legal
5. Why were the services in this case outsourced to India, as opposed to another country
such as China? What does this case tell you about the kinds of factors that are important
when a firm is considering whether to outsource a value creation activity, and where to
outsource it to?
Answer: India is favored because local universities produce a steady stream of lawyers
The Global Financial Crisis and Protectionism
1. Why do you think calls for protectionism are greater during share economic
contractions than during boom periods?
Answer: Sharp economic contractions are of course directly linked to slowdowns in
demand forcing companies to adopt new strategies. One such strategy may be to lobby
2. Despite the sharp economic contraction during 2008–2009, the increase in protectionist
measures was fairly modest. Why do you think this was the case?
Answer: Thanks to the greater number of trade agreements in place today as well as
Chapter 09 - Regional Economic Integration
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3. During 2008–2009, many developed nations gave subsidies to their automobile
producers. How might this have distorted international trade? Was this a reasonable thing
to do given the circumstances?
Answer: The 2008-2009 financial crisis prompted many countries including the United
States to provide subsidies to automakers. While the assistance helped companies remain
in business and protected jobs, it also created an artificial environment for them and may
4. What might occur if renewed economic slowdown triggered a wave of protectionist
measures around the world? Would protectionism protect jobs, or would it make things
worse?
Answer: In mid-2011, the global economy was still unstable, and the threat of a double-
dip recession was very real. Many students will probably suggest that if the economy
5. The volume of world trade rebounded sharply in 2010 on the back of a fairly modest
growth rate in the world economy. What does this tell you about the nature of
international production in today’s global economy? What does this tell you about the
vulnerability of the world economy to any future trade wars?
Answer: Most students will probably recognize that today’s economy is truly global in
nature. A modest increase in demand can result in a substantial increase in the volume of
world trade thanks to the global nature of production where parts for products may come
Chapter 09 - Regional Economic Integration
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NAFTA and Mexican Trucking
1. What are the potential economic benefits of the trucking provisions in the NAFTA
treaty? Who benefits? Who might lose?
Answer: Under the NAFTA agreement trucks from Mexico are no longer required to
unload their goods and reload them onto U.S. trucks. Instead, Mexican trucks can simply
2. What do you think motivated the Teamsters to object to the trucking provisions in
NAFTA? Are these objections fair? Why did Congress initially align itself with the
Teamsters?
Answer: The Teamsters have rigorously objected to the provisions of NAFTA allowing
Mexican truckers to cross U.S. borders and deliver their goods to their destination. Prior
3. Does it make economic sense for the United States to bear the costs of punitive tariffs
as allowed for under NAFTA, as opposed to letting Mexican trucks enter the United
States?
Answer: When the United States initially failed to abide by provisions set forth in
NAFTA regarding trucks, Mexico gave the country a second chance to honor its
Chapter 09 - Regional Economic Integration
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4. Why do you think the Obama administration brokered a deal with Mexico to allow
Mexican truck drivers to access the United States? Do you think this is a reasonable deal?
Answer: Under NAFTA, Mexico has the right to place tariffs on goods shipped from the
The Rise of the Indian Automobile Industry
1. What are the attractions of India as a base for producing automobiles for domestic sale,
and for export to other nations?
Answer: From 2003 to 2008, India’s exports of automobiles jumped five fold. South
Korean automaker Hyundai led the way exporting more than one third of its Indian
2. Both Hyundai and Nissan made their investments in the southern Indian city if
Chennai. Is there an advantage to be had by investing in the same region as rivals? What
is it?
Answer: Nissan’s decision to invest in the same city as Hyundai was probably driven by
the support structure that Hyundai’s investment helped to create. When Hyundai initially
3. What are the drawbacks of basing manufacturing in a country like India? What other
locations might be attractive?
Answer: One of the major challenges facing companies in India is its inadequate
Chapter 09 - Regional Economic Integration
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4. If Hyundai, Nissan, their suppliers, and other automobile companies continue to make
investments in the Chennai region of India, how might this region evolve over time?
What does this suggest about manufacturing location strategy?
Answer: It has been suggested that over time, India’s Chennai region could develop into
a mini Detroit where most global auto companies have a presence and where the supplier
Logitech
1. In a world without trade, what would happen to the costs that American consumers
would have to pay for Logitech’s products?
Answer: Logitech moved its manufacturing to Taiwan and China in an effort to save
money and maintain a competitive advantage. While labor costs were a factor in the
2. Explain how trade lowers the costs of making computer peripherals such as mice and
keyboards?
Answer: The theories of Smith, Ricardo, and Hecksher-Ohlin show why it is beneficial
for a country to engage in international trade even for products it is able to produce for
3. Use the theory of comparative advantage to explain the way in which Logitech has
configured its global operations. Why does the company manufacture in China and
Taiwan, undertake basic R&D in California and Switzerland, design products in Ireland,
and coordinate marketing and operations from California?
Chapter 09 - Regional Economic Integration
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Answer: The theory of comparative advantage suggests that it makes sense for a country
to specialize in producing those goods that it can produce most efficiently, while buying
4. Who creates more value for Logitech, the 650 people it employs in Fremont and
Switzerland, or the 4,000 employees at its Chinese factory? What are the implications of
this observation for the argument that free trade is beneficial?
Answer: Logitech has taken great care in configuring its global value chain to lower
production costs while maintaining the value of those assets that lead to differentiation.
5. Why do you think the company decided to shift its corporate headquarters from
Switzerland to Fremont?
Answer: Switzerland is still important to Logitech. Indeed the company undertakes basic
6. To what extent can Porter’s diamond help explain the choice of Taiwan as a major
manufacturing site for Logitech?
Answer: According to Porter, four broad attributes of a nation shape the environment in
which local firms compete, and these attributes promote or impede the creation of
7. Why do you think China is now a favored location for so much high-technology
manufacturing activity? How will China’s increasing involvement in global trade help
that country? How will it help the world’s developed economies? What potential
problems are associated with moving work to China?
Chapter 09 - Regional Economic Integration
Answer: Foreign companies now account for three-quarters of China’s high tech exports.
Porter’s diamond would suggest that like Taiwan, China has strong factor endowments
