The Common Pool Resources Extra-Regional Investments and Exports

There are at least two ways in which regional economic integration improves regions’ competitiveness on the global market. Firstly, size effects result from the fact that economically integrated regions constitute larger markets than do each of their respective member states. Here, the attractiveness of regional markets increases with the number of member states and the size of their economies, as well as with the degree of market integration. The larger and the better integrated regional markets are, the more attractive they are for extra-regional actors, which may profit from scale effects when acting in these markets. Secondly, regional integration is associated with various positive effects on the political and macroeconomic stability of respective regions. For example, the member states of integrated regions are more committed to not fighting wars against each other (Adler and Barnett 1998), strong regional institutions may help to stabilise the commitments of politically unstable member states (Schirm 2002), and macroeconomic coordination within regions reduces the risks of macroeconomic shocks (Dullien et al. 2013). Here, the density of regional institutions—may they be procedural or substantive in character—and the degree of implementation are decisive for the economic attractiveness of world regions. The more regional institutions exist, and the better they are implemented, the more they express a credible commitment of the member states towards political and macroeconomic stabilisation of the respective regions.

Both the size and stability effects of regional integration may have positive influences on extra-regional investment inflows. It is assumed that the stability and size effects of regional integration make well-integrated regions more attractive as targets for investments (Bende-Nabende 2002; Buthe and Milner 2008; Goldstein 2004; Jaumotte 2004). However, at this point, one has to distinguish between three kinds of investments, namely resource-seeking, market-seeking and efficiency-seeking investments (Dunning and Lundan 2008: 63-78). Regional integration is unlikely to have any effect on resource-seeking investments, which are made in order to extract scarce natural resources and to ensure access to these resources. Here, neither the stability nor the size effects of regional integration are likely to influence investors’ utility calculation significantly. However, the size effects of regional integration can of course influence market-seeking investments because well-integrated regions allow investors to sell their products with fewer barriers to each of the regions’ member states. Thus, regional markets are more attractive than any of the member states’ markets alone. In addition, efficiency-seeking investments, that is, investments that seek low labour costs for the global market, are more likely to be influenced by the stability effects of regional integration. In the global struggle for such efficiency-seeking investments, the stability effects of regional integration are a competitive advantage vis-a-vis other world regions because they signal to potential investors that investments are unlikely to be lost due to political or macroeconomic instability.

Regional integration should also help to increase extra-regional export outflows because integrated regions should ceteris paribus have more bargaining power in multilateral (Mansfield and Reinhardt 2003) and interregional trade negotiations (Aggarwal and Fogarty 2004; Gilson 2005; Hanggi 2003; Hanggi et al. 2006). The improved bargaining power of integrated regions results from the increased size and stability of regional markets, which makes them more attractive as economic partners. This, in turn, leads to more concessions from the negotiation partners of these regions. As a result, the member states of integrated regions may receive improved market access to other world regions, which leads to increased extra-regional exports. Thus, although regional integration itself cannot directly influence the regions’ exports to other world regions, it may nevertheless support the respective regions in international trade negotiations, which may indirectly lead to increased extra-regional exports.

Of course, regional integration is one but not the only factor in the decisions of extra-regional actors on where to invest and to whom to grant preferential access to their own markets. A variety of additional economic, political and cultural factors may influence extra-regional actors in their decisions as well. As already mentioned, the availability of scarce resources cannot be influenced by regional integration, but it may nevertheless be a decisive factor in investing in and signing bilateral trade agreements with concerned countries. Security concerns may be an important political factor that leads to investments in the form of development aid for key states in order to gain their cooperation or to stabilise their economies (Bearce and Tirone 2010)—even if such key states should not cooperate in regional organisations. Moreover, cultural similarities, which may, for example, result from colonial history, can also influence the decisions of extra-regional actors on where to invest and with whom to trade—inde- pendently of the regional integration efforts of the concerned countries. As a result, the positive relationship between regional integration on the one hand and extra-regional investment or export flows on the other hand only holds true under a ceteris paribus assumption, that is, everything else being equal. In real life, the positive effects of regional integration may be overshadowed by the other economic, political or cultural concerns of extra-regional actors. Thus, regions may improve their economic attractiveness through regional integration, but they have no guarantee that this will be systematically rewarded by extra-regional actors.

In contrast to intraregional trade, extra-regional investment inflows and export outflows are common pool resources for the receiving regions because they are distinguished by non-excludability but yet rivalry of consumption (see Fig. 2.1; for the problem of common pool resources, see Hardin 1968; Ostrom 2003). There is rivalry for extra-regional investment and export flows between and within world regions, because the consumption of the common pool resources by one region or state reduces the available amount of these resources for other regions or states. Although it is likely that better investment and trade possibilities in the world lead to growing levels of global investment and trade, there is nevertheless distributional conflict between regions and states for their respective shares of these flows. Furthermore, even if single states can generally be excluded from the consumption of extra-regional investment and export flows, the member states of regional organisations cannot decide independently on such an exclusion; they are dependent on the decisions of extra-regional actors. Although the member states of regional organisations can exclude certain states from their regional club, this does not necessarily imply that they also exclude these states from the common pool resources extra-regional investments and exports. If extra-regional actors decide to invest in or to grant market access to states that are outside of regional organisations, there is nothing that the regional organisations can do to exclude these states from the consumption of these common pool resources. Thus, dependence on extra-regional actors transforms extraregional investment and export flows into common pool resources for regional organisations.

The rivalry in the consumption of the common pool resources extraregional investments and exports leads to global competition for these resources (Bjorvatn and Eckel 2006; Goldberg and Knetter 1999; Kind et al. 2000). It is exactly this competition that generates the extra-regional rationale for regional integration. By integrating regionally, regions aim to become economically more attractive and to get bigger shares of the global distribution of these common pool resources. If one region seems to be effective with this instrument, this creates pressure for other regions to integrate economically as well—which explains why new regionalism spread so quickly all over the world during the 1990s (Mansfield and Milner 1999; Mattli 1999). However, competition for the common pool resources extra-regional investments and exports is not only a motivation, but also an obstacle for regional integration. The problem for regional integration is that global competition is mirrored by regional competition between the member states of regional organisations. The rivalry of consumption does not stop at the regional level, but also leads to distributional struggles within regions, because specific extra-regional investment or export flows can only be consumed by one member state at any one time. Thus, whereas global competition is a major motivation for regional integration, intraregional competition may be a significant obstacle for regional cooperation.

The non-excludability from consumption of extra-regional investments and exports prevents regional groups from being able to punish defecting member states effectively. It is not the regional organisations or their member states that decide the distribution of these common pool resources, but rather extra-regional actors that decide where they invest and to whom they grant market access. Thus, only extra-regional actors can sanction defecting member states effectively, whereas sanctions by other regional states alone do not really have bite. If extra-regional actors decide for economic, political or cultural reasons to invest in and to trade with defecting member states, there is nothing the regional organisations can do about it. Thus, the regions alone have no effective means to punish the defection of single member states, and are therefore dependent on the reactions of extra-regional actors.

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