Outsiders' Response to Europe 1992: Theoretical Considerations and Empirical Evidence
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JOURNALOF INTERNATIONALBUSINESS STUDIES,SECONDQUARTER1995
remove the impediments to complete economic integration.These include the abolitionof bordercontrols,amendmentof technicalregulations,openingof public procurementprogramsto all Communitymembers,eliminationof barriersto financial and business services, and numerous other steps to eliminate intraCommunitybarriersto the movementof goods, services, capital,andpeople. The Cecchini report, and other studies conducted by or on behalf of the Community,indicatethatthe steps takento complete the Europeaninternalmarket would enhance the economic welfare of the Community's residents and would increasethe growthrateof the EC's economies [Baldwin 1989; Cecchini et al. 1988; Commission of the EC 1988]. These studies enumeratethe positive effects which the adoption of integrative measures is expected to have on the economies of the membercountries.They distinguishbetween differenttypes of gains: gains from the removalof barriersaffecting tradeand overall production; gains fromexploitingeconomies of scale; andgains fromintensifiedcompetition, includingthe reductionof businessinefficiencies andmonopolyprofits. Clearly,not all economic actorsstandto gain from the implementationof EC92. On the whole, EC consumerswill benefit from the intensifiedcompetitionresulting from economic integration.EC producerswill also gain as a group,although some will inevitablyfare betterthan others.This paperfocuses on the effects of EC92 on a thirdgroup- the outsiders,or more specifically,producerslocated in countriesnot belongingto the EC who seek to serve its markets. The theoreticalsections of this paperexamine two aspects of EC92: (1) the effect of EC92 on the relative competitive position of outsider firms, and (2) the response,by means of foreigndirectinvestment(FDI) to EC92 by two groupsof outsiderfirms:producersof matureproductscharacterizedby publicly available technologies,which we label "Heckscher-Ohlin"goods, and"Schumpeter"goods. The latterare technology-intensiveproductscharacterizedby firm-specific,technical, marketing,andmanagerialknowledge. A numberof empiricallytestablehypothesesregardingthe FDI strategiesof outsider firms are derivedfrom the theoreticaldiscussion. They concerngeographic distribution,sectoraldistribution,and changes over time in anticipationof EC92. Data pertainingto FDI by Israelifirms duringtwo time periods - 1984-1987 and 1988-1991 - are used to illustratethe FDI patternsthatactuallyemerged, and to compareactualpatternswith the predictedones. THE EFFECTS OF EC92 ON OUTSIDER FIRMS: A CONCEPTUAL FRAMEWORK Trade theory teaches that internationaltransactions are determined by relative ratherthan by absolutecosts. Costs have numerouscomponents that include the outlays on gaining marketaccess. When the access costs of one supplierdecrease in relation to the access costs of a competitor, the competitive
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