MODULE 2: HOW GLOBALIZATION IS FACILITATED

“Business, labor and civil society organizations have skills and resources that are
vital in helping to build a more robust global community.”
- Kofi Annan

OBJECTIVES. What will you learn from this module?

At the end of this module, you should be able to:

1. Identify the roles and functions of the United Nations
2. Identify the challenges of global governance in the 21st century
3. Explain the relevance of the state amid globalization
4. Define modern world system
5. Define economic globalization
6. Identify the actors that facilitate economic globalization and
illustrate the value chain of Mindanao products
7. Articulate a stance on global economic integration
8. Explain the role of international financial institutions in the creation
of a global economy
9. Narrate a short history of global market integration in the 20th
century
10. Identify the attributes of global corporations

INTRODUCTION

Advances in communication and transportation technology, combined with free-market

ideology, have given goods, services, and capital unprecedented mobility. Northern countries
want to open world markets to their goods and take advantage of abundant, cheap labor in the
South, policies often supported by Southern elites. They use international financial institutions
and regional trade agreements to compel poor countries to "integrate" by reducing tariffs,
privatizing state enterprises, and relaxing environmental and labor standards. The results have
enlarged profits for investors but offered pittances to laborers, provoking a strong backlash
from civil society. (Global Policy Forum, 2005)

What is included in the “global economy”? Those who organize and sustain it such as
states and governments, international organizations and associations; those who play a role
in it like capitalists and investors, international financial institutions (IFIs), production
managers, consumers and labor; those marginal but connected to it. For instance, the global
poor, small farmers, grey and black marketers; and trans-border flows of goods, information,
money, people and other things.
 ANALYSIS. Think and connect!

Identify the three branches of the Philippine government and write a brief
description about each branch. Use the diagram below.

THREE BRANCHES
 LESSON 1 CONTEMPORARY GLOBAL GOVERNANCE

ABSTRACTION

What is Global Governance?

Global governance brings together diverse actors to coordinate collective action at

the level of the planet. The goal of global governance, roughly defined, is to provide global
public goods, particularly peace and security, justice and mediation systems for conflict,
functioning markets and unified standards for trade and industry. One crucial global public
good is catastrophic risk management – putting appropriate mechanisms in place to
maximally reduce the likelihood and impact of any event that could cause the death of 1
billion people across the planet, or damage of equivalent magnitude.
The leading institution in charge of global governance today is the United Nations.
It was founded in 1945, in the wake of the Second World War, as a way to prevent future
conflicts on that scale. The United Nations does not directly bring together the people of the
world, but sovereign nation states, and currently counts 193 members who make
recommendations through the UN General Assembly. The UN’s main mandate is to preserve
global security, which it does particularly through the Security Council. In addition, the UN
can settle international legal issues through the International Court of Justice, and
implements its key decisions through the Secretariat, led by the Secretary General.
The United Nations has added a range of areas to its core mandate since 1945. It works
through a range of agencies and associated institutions particularly to ensure greater shared
prosperity, as a desirable goal in itself, and as an indirect way to increase global stability. As
a key initiative in that regard, in 2015, the UN articulated the Sustainable Development
Goals, creating common goals for the collective future of the planet.
Beyond the UN, other institutions with a global mandate play an important role in
global governance. Of primary importance are the so-called Bretton Woods institutions: the
World Bank and the IMF, whose function is to regulate the global economy and credit
markets. Those institutions are not without their critics for this very reason, being often
blamed for maintaining economic inequality.
 Global governance is more generally affected through a range of organizations acting
as intermediary bodies. Those include bodies in charge of regional coordination, such as the
EU or ASEAN, which coordinate the policies of their members in a certain geographical zone.
Those also include strategic or economic initiatives under the leadership of one country –
NATO for the US or China’s Belt and Road Initiative for instance – or more generally
coordinating defense or economic integration, such as APEC or ANZUS. Finally, global
governance relies on looser norm setting forums, such as the G20, the G7, the World
Economic Forum: those do not set up treaties, but offer spaces for gathering, discussing
ideas, aligning policy and setting norms. This last category could be extended to multi-
stakeholder institutions that aim to align global standards, for instance the Internet
Engineering Taskforce (IETF) and the World Wide Web Consortium (W3C).
In summary, global governance is essential but fragmented, complex and little
understood. In this context, the key questions raised by the Global Challenges Foundation
are, how to reform institutions, how to develop alternative institutions, and how to use the
new possibilities of technology to improve governance. (Global Challenges Foundation
2020)

Core Principles of Global Governance

Five principles are critical to guiding the reforms of global governance and global rules
according to the United Nations’ Committee for Development Policy to wit:

I. Common but differentiated responsibilities and respective capacities:

This principle calls for recognizing differences among countries in terms of their
contribution and historical responsibilities in generating common problems, as well
as divergences in financial and technical capacities, in order to address shared
challenges. This principle also acknowledges the diversity of national circumstances
and policy approaches—a diversity which should be embedded in the architecture of
global governance as an intrinsic feature of the global community, not as an exception
to general rules.
II. Subsidiarity: Issues ought to be addressed at the lowest level capable of addressing
them. This principle implies that some problems can be handled well and efficiently
at the local, national, sub-regional and regional levels reducing the number of issues
that need to be tackled at the international and supranational level. Subsidiarity
suggests an important role for regional cooperation in addressing issues of mutual
concern.
III. Inclusiveness, transparency, accountability: Global governance institutions
need to be representative of, and accountable to, the entire global community, while
decision-making procedures need to be democratic, inclusive and transparent. Robust
governance implies mutual accountability, verified by transparent and credible
mechanisms and processes to ensure that agreed commitments and duties are
fulfilled.
IV. Coherence: Definitions of global rules and processes need to rest on comprehensive
approaches, including the assessment of possible trade-offs, so that actions in
different areas will not undermine or disrupt one another, but instead be mutually
reinforcing. Enhanced coherence is also needed between the international and
 national spheres of policymaking. This also requires improved coordination among
various stakeholders and enhanced information sharing.
V. Responsible sovereignty: This principle recognizes that policy cooperation is the
best way to achieve national interests in the global public domain. It also requires
Governments and States to be fully respectful of the sovereignty of other nations so as
to fulfil agreed policy outcomes. (The UN Committee for Development Policy 2014)

The Role of Government

As with many issues pertaining to globalization, concerns and hopes about

international investment revolve in many ways around what governments may do. This
means both what governments may do to regulate foreign investment, perhaps to make it
less volatile, as well as actions government may take simply to get out of the way of the
market, clearing the existing barriers to capital. In addition, the role of government refers
not only to individual nations, but to international institutions such as the WTO and the IMF,
which serve functions relating to global governance.

Some of the steps these institutions of governance can take to help influence the
choices made by international investors include:
• The creation of new infrastructure and other facilities to attract foreign
investment. As described earlier, an array of services can help promote foreign
investment in a country, ranging from basic services such as the provision of
electricity and clean water, to fair and effective dispute resolution systems.
• The ability of governments to prevent or reduce financial crises also has a great
impact on the growth of capital flows. Steps to address these crises include
strengthening banking supervision, requiring more transparency in
international financial transactions, reducing the risk of moral hazard, and
ensuring adequate supervision and regulation of financial markets. The
majority view among economists is that financial sector reform must precede
capital account liberalization. Other steps have been suggested to help limit the
volume of volatile short-term capital such as small taxes on foreign exchange
transactions. One prominent advocate of this idea was Nobel Prize winning
economist James Tobin. Although many countries have imposed limits or
taxes on capital outflows, another creative way to address volatility was applied
by Chile, which imposed a small transaction fee on capital inflows. This
measure served to limit the amount of short-term investment but did not
create a risk of deep concern to investors, namely, of having trouble getting
their money out of the country at some point in the future.
• Working with developing country governments in particular to help establish
more stringent labor and environmental standards to prevent either one from
being exploited.
• Protecting domestic infant-industries only long enough to allow them to
become competitive internationally. This step remains controversial, but some
economists have pointed out that a number of developing countries—indeed
many of the countries that have recorded the highest long-term growth rates—
have done so after resorting to some protection of sectors of domestic industry.
 As you can see from this list of policy options, people from almost the entire spectrum
of beliefs about globalization have prescriptions for government policy, even those who
advise that governments need only act to remove market-distorting tariff and regulatory
barriers. And this list is by no means comprehensive.
Ongoing events are leading an increasing number of analysts of globalization to
suggest that we explore the challenges and opportunities of globalization more fully, to better
understand its consequences and learn how to maximize its potential benefits while
mitigating its disruptions.
Economic events such as the East Asian financial crisis and more recent incidents
such as the collapse of the Argentinian economy in late 2001 have made many economists
argue for improved market mechanisms, such as regulatory measures and oversight. The fact
that different countries encountering similar problems have received different prescriptions
from the international community has also led many to argue for a more firmly established
set of ground rules.
Coordination between governments will be crucial for dealing with the global financial
and economic crisis of 2007-2009. According to UNCTAD, “the challenge is to restore the
credibility and stability of the international and financial system, to provide stimulus to
economic growth in order to prevent the risk of a spiraling depression, to renew a pragmatic
commitment to an open economy, potentially put at risk by rising protectionist tensions, and
to encourage investment and innovation” (United Nations Conference on Trade and
Development, 2009).
In addition, political events such as the large protests in 1999 at the Seattle WTO
meeting or in 2001 at the G8 meeting in Genoa, Italy, have led some political leaders to
conclude that certain kinds of market interventions or regulations are necessary to assist
those who are endangered by globalization, simply to sustain political support for continued
liberalization.
Joseph Stiglitz, formerly chief economist of the World Bank and Nobel Prize winner
for economics in 2001, has characterized the globalization of international finance as
suffering from “global governance without global government.” He notes that the
nationalization of the U.S. economy, which began 150 years ago and was analogous in many
ways to the process of globalization, was accompanied by a significant expansion in
government oversight and regulation, to help temper crises and provide accountability.
One surefire prediction about the globalization debate is that much of the discussion
will continue to revolve around appropriate government policies. (SUNY 2017)
 ACTIVITY. Get to know your locality!

In this activity, you need to list down the organizations in your

municipality/barangay that contributes to the development of your place/town. Indicate
their role in the development process. You can use a diagram or a graphic organizer.
 LESSON 2 THE GLOBAL ECONOMY

ABSTRACTION

The International Economy and Globalization

In today’s world, no nation exists in economic isolation. All aspects of a nation’s
economy—its industries, service sectors, levels of income and employment, and living
standard —are linked to the economies of its trading partners. This linkage takes the form of
international movements of goods and services, labor, business enterprise, investment
funds, and technology. Indeed, national economic policies cannot be formulated without
evaluating their probable impacts on the economies of other countries.
The high degree of economic interdependence among today’s economies reflects the
historical evolution of the world’s economic and political order. At the end of World War II,
the United States was economically and politically the most powerful nation in the world, a
situation expressed in the saying, ‘‘When the United States sneezes, the economies of other
nations catch a cold.’’ But with the passage of time, the U.S. economy has become
increasingly integrated into the economic activities of foreign countries. The formation in the
1950s of the European Community (now known as the European Union), the rising
importance of multi-national corporations in the 1960s, the 1970s market power in world oil
markets enjoyed by the Organization of Petroleum Exporting Countries (OPEC), and the
creation of the euro at the turn of the twenty-first century all resulted in the evolution of the
world community into a complicated system based on a growing interdependence among
nations.
Recognizing that world economic interdependence is complex and its effects uneven,
the economic community has made efforts toward international cooperation. Conferences
devoted to global economic issues have explored the avenues through which cooperation
could be fostered between industrial and developing nations. The efforts of developing
nations to reap larger gains from international trade and to participate more fully in
international institutions have been hastened by the impact of the global recession on
manufacturers, industrial inflation, and the burdens of high-priced energy.
Over the past 50 years, the world’s market economies have become increasingly
integrated. Exports and imports as a share of national output have risen for most industrial
nations, while foreign investment and international lending have expanded. This closer
linkage of economies can be mutually advantageous for trading nations. It permits producers
in each nation to take advantage of specialization and efficiencies of large-scale production.
A nation can consume a wider variety of products at a cost less than that which could be
achieved in the absence of trade. Despite these advantages, demands have grown for
protection against imports. Protectionist pressures have been strongest during periods of
rising unemployment caused by economic recession. Moreover, developing nations often
maintain that the so-called liberalized trading system called for by industrial nations serves
to keep the developing nations in poverty.
Economic interdependence also has direct consequences for a student taking an
introductory course in international economics. As consumers, we can be affected by changes
in the international values of currencies. Should the Japanese yen or UK pound appreciate
against the U.S. dollar, it would cost us more to purchase Japanese television sets or UK
automobiles. As investors, we might prefer to purchase Swiss securities if Swiss interest rates
rise above U.S. levels. As members of the labor force, we might want to know whether the
president plans to protect U.S. steel and autoworkers from foreign competition.
In short, economic interdependence has become a complex issue in recent times, often
resulting in strong and uneven impacts among nations and among sectors within a given
nation. Business, labor, investors, and consumers all feel the repercussions of changing
economic conditions and trade policies in other nations. Today’s global economy requires
cooperation on an international level to cope with the myriad issues and problems.
(Carbaugh, 2009)

International Trade

Globalization has led to a phenomenal increase in world trade. One measure is to

consider exports as a proportion of world GDP.

The pattern of world trade has also been greatly affected by the entry of China as a
major manufacturer.
 The Basis of Free Trade Law: The Law of Comparative Advantage

The law states that, even if one country has an absolute advantage in the production
of all goods, it can still benefit from specialization and trade, if it specializes in the production
of goods in which it has a comparative advantage.
A country has a comparative advantage in producing a product if the opportunity cost
of producing it is less than its potential trading partner.
Say the UK take 5 hours to make cheese, and China 1. Also, the UK takes 15 hours to
make cars, but China 2. China clearly has an absolute advantage in producing both cars
and cheese. However, look at the opportunity cost. The UK gives up 3 cars if it producing 1
cheese. China gives up 2 cars if it’s producing 1 cheese. Therefore, China has a comparative
advantage in cheese production. The UK gives up 1/3 a car if it produces one cheese, and
China gives up 1/2. So, the UK has a comparative advantage in car production. Therefore,
the UK should specialize in producing cars, and China should produce cheese. For trade to
be beneficial, the terms of trade must lie between opportunity cost ratios. In other words,
the UK will only trade for cheese with china if the price is above 1/3 of a car, and China will
only trade if it is below 1/2 of a car.

Terms of trade = (index of export prices / index of import prices) x 100

You should note that, if opportunity costs were the same, then there would be no
benefit from specialization and trade.
However, widespread acceptance of the law of comparative advantage amount
economists and the benefits of free trade, various criticisms can be made:

• Free trade is not fair trade i.e. the rich countries might exert their monopsony
power to force producers in developing countries to accept low prices.
• The law of comparative advantage is based on unrealistic assumptions such as
constant costs of production, zero transport costs, and no barriers to trade.
 Limits of Free Trade: The Case for Protectionism

The term protectionism refers to measures designed to limit free trade. Arguments
supporting the need for protectionism might include the following:

• To protect infant industries: this argument might be particularly relevant to

developing countries that are in the process of industrialization. Without
protection, infant industries might be unable to compete because they have yet
to establish themselves and are too small to benefit from economies of scale.
• To protect geriatric industries: these are industries that might demand
protection so that they have time to restructure and rationalize production so
that they can become competitive again. Typically, these occur in developed
economies that are losing their comparative advantage.
• To ensure employment protection: cheap imports might threaten jobs in the
domestic economy and workers might demand that the government takes action
to limit imports.
• To prevent dumping: the term dumping refers to goods exported to another
country below at a price below the average cost of production. It is a form of
predatory pricing and, if it can be proved, it is illegal under WTO rules. This is
one of the few arguments in favor of protectionism that can be justified under
economic theory because it unfairly distorts comparative advantage.
• To correct a balance of payments deficit on current account: restrictions on
imports might help to reduce the imbalance of between the value of import and
the value of exports. However, under the floating exchange rates system, it is
possible that this correction will happen automatically.
• To restrict imports from counties whose health and safety regulations and
environmental regulations are less stringent: some argue that developing
countries have an unfair comparative advantage because production is not
under the same laws and regulations as developed countries, so enabling them
to produce at lower average cost.
• For strategic reasons: a country might introduce protectionist policies on goods
of strategic importance in time of war so that it is not dependent on imports.
Food, defense equipment and energy are items frequently used as examples of
such goods.
• To raise tax revenues: tariffs may be an important source of tax revenue for
developing countries.
• In retaliation: barriers to trade may be imposed by a country because another
country has restricted the imports of its goods.

Types of Protection/Import Barriers

There are numerous ways by which free trade can be prevented. The most common
are tariffs, quotas and subsidies to domestic producers and administrative regulations. In
countries where the exchange rate is not freely floating, the authorities might also hold
down the value of the currency artificially to give their good a competitive advantage.
 Tariffs

Before the tariff is imposed:

• The price paid by consumers is P1, domestic output is Q1, imports are Q1 to Q2.
Once the tariff is imposed:
➢ the price paid by the consumer increases to P2, reducing consumer surplus
➢ domestic output rises to Q4, increasing producer surplus
➢ imports fall to Q4Q3
➢ tax revenue collected by the government is KLMN
➢ net deadweight welfare loss is the loss in consumer welfare that is not made up
for by producer welfare or government revenue – X and Y

Quotas

Import quotas place a physical restriction on the amount of goods that can be
imported. They have a similar effect as tariffs, in that the price of imported goods will rise
and domestic producers should gain more business.
However, unlike tariffs, the government does not gain any extra revenue.

Subsidies to Domestic Producers

v Grants given to domestic producers artificially lower their production costs, so
enabling their goods to become more competitive. Subsidies therefore act as a barrier to
trade.

Administrative Regulations

v These take a variety of forms, including labelling, health and safety regulations,
environmental standards and documentation on country of origin. In effect, such
regulations increase the costs of foreign producers and so act as a barrier to trade.
 The Case Against Protectionism
V There are several problems with protectionism including:

• Inefficient resource allocation: trade barriers distort comparative advantage and

reduce specialization, which will result in lower world output and therefore reduce
living standards
• Higher prices and less choice for consumers
• Less incentive for domestic producers to become more efficient in order to
compete on a global scale
• Difficulty of removing trade barriers. Once such barriers are introduced, it might
prove to be difficult to remove them because of the adverse effect on domestic
producers (Brewer 2012)

Global Actors
V A global actor refers to any social structure which is able to act and influence and
engage in the global or international system. These specific actors include:

• International Economic and Financial Organizations. International

economic and financial organizations provide the structure and funding for many
unilateral and multilateral development projects. Such organizations deal with the
major economic and political issues facing domestic societies and the
international community as a whole. Their activities promote sustainable private
and public-sector development primarily by: financing private sector projects
located in the developing world; helping private companies in the developing
world mobilize financing in international financial markets; and providing advice
and technical assistance to businesses and governments. (Lund University
Libraries, 2018)
• International Governmental Organizations (IGOs). IGOs have
international membership, scope and presence. Their primary members consist of
sovereign states. These organizations bring member states together to cooperate
on a particular theme or issues that have global impacts and implications such as
human rights, trade, development, poverty, gender or migration. (Lund University
Libraries, 2018)
• Media. Media are the communication outlets or tools used to store and deliver
information or data. The term refers to components of the mass media
communications industry, such as print media, publishing, the news media,
photography, cinema, broadcasting (radio and television), and advertising.
(Wikipedia “Media,” 2019)
• Multilateral Development Banks. Multilateral development banks are
international financial institutions owned by countries. In addition to the World
Bank Group, there are four regional multilateral development banks: The Inter-
American Development Bank, the African Development Bank, the Asian
Development Bank, and the European Bank for Reconstruction and Development.
These institutions provide loans, grants, guarantee, private equity and technical
 assistance to public and private sector projects in developing countries. (Lund
University Libraries, 2018)
• Nation-States. Nation-states refer to a certain form of state that derives its
political legitimacy from serving as a sovereign entity for a nation within its
sovereign territorial space. The state is a political and geopolitical entity while the
nation is a cultural and/or ethnic entity. The term "nation-state" implies that the
two geographically coincide, and this distinguishes the nation state from the other
types of state, which historically preceded it. (Lund University Libraries, 2018)
• Non-Governmental Organizations (NGOs). Non-governmental
organization (NGO) refers to a legally constituted organization created with no
participation or representation of any government and driven. These
organizations are task-oriented perform a variety of service and humanitarian
functions. Some are organized around specific issues such as human rights,
environment, gender, or health. In many jurisdictions these types of organization
are defined as "civil society organizations." (Lund University Libraries, 2018)
• Trans-National Corporations (TNCs). "Transnational Corporations exert a
great deal of power in the globalized world economy. Many corporations are richer
and more powerful than the states that seek to regulate them. Through mergers
and acquisitions corporations have been growing very rapidly and some of the
largest TNCs now have annual profits exceeding the GDPs of many low and
medium income countries. It is important to explore how TNCs dominate the
global economy and exert their influence over global policy making." (Global
Policy Forum, 2005)
• United Nations (UN) System. The United Nations System consists of the
United Nations, and the six principal organs of the United Nations: The General
Assembly, Security Council, Economic and Social Council (ECOSOC), Trusteeship
Council, International Court of Justice (ICJ), and the UN Secretariat, specialized
agencies, and affiliated organizations. The executive heads of some of the United
Nations System organizations and the World Trade Organization, which is not
formally part of the United Nations System, have seats on the United Nations
System Chief Executives' Board for Coordination (CEB). This body, chaired by the
Secretary-General of the United Nations, meets twice a year to co-ordinate the
work of the organizations of the United Nations System. (Wikipedia “United
Nations System,” 2019)

Global Actors
V Below is the Top 25 World’s Best Companies in 2019 according to Forbes:
Rank Company Industry Headquarters
1 Visa Consumer San
Financial Francisco,
Services California
2 Ferrari Auto & Truck Maranello,
Manufacturers Italy
3 Infosys Computer Bangalore,
Services India
4 Netflix Internet & Los Gatos,
Catalog Retail California
5 PayPal Consumer San Jose,
Financial California
Services
6 Microsoft Software & Redmond,
Programming Washington
7 Walt Disney Broadcasting Burbank,
& Cable California
8 Toyota Auto & Truck Toyota,
Motor Manufacturers Japan
9 Mastercard Consumer Purchase,
Financial New York
Services
10 Costco Discount Issaquah,
Wholesale Stores Washington
11 Apple Computer Cupertino,
Hardware California
12 Siemens Conglomerates Munich,
Germany
13 Kellogg Food Battle Creek,
Processing Michigan
14 IBM Computer Armonk, New
Services York
15 Cemex Construction San Pedro
Materials Garza García,
Mexico
16 Amazon Internet & Seattle,
Catalog Retail Washington
17 Kraft Heinz Food Chicago,
Company Processing Illinois
18 Carlsberg Beverages Copenhagen,
Denmark
19 Emirates Regional Dubai,
NBD Banks United Arab
Emirates
20 Emaar Real Estate Dubai,
Properties United Arab
Emirates
21 Nintendo Recreational Kyoto, Japan
Products
22 Tata Computer Mumbai,
Consultancy Services India
Services
23 Samsung Investment Seoul, South
Securities Services Korea
24 Volvo Heavy Gothenburg,
Group Equipment Sweden
25 Electrolux Household Stockholm,
Group Appliances Sweden
 ACTIVITY. Think comprehensively!
Answer the following questions below and write your answer on the space
provided.
1. How does those global actors affect the global economy in terms of production
process?
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________

2. Name at least five products of the Philippines that is commonly exported for
international use and how does it contribute to the Philippine economy.
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________

3. What have you learned about the topic?

_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
 LESSON 3 MARKET INTEGRATION

ABSTRACTION

Defining Market Integration

Markets are said to be integrated if they are connected by a process of arbitrage. A

well-integrated market system is central to a well-functioning market economy. The
economic proposition of integration is that an element of efficiency is attainable in the
unified operation than in independent actions. According to McDonald (1953), “the
integrated economy is one in which various economic processes are so functionally related
to every other process that the totality of separate operation forms a single unit of production
with characteristics of its own. He gave some of the signs of integration as below:

a) Many diverse, specialized and independent economic processes or operations, none

of which is complete or self-sufficient.
b) A system of relations between the various processes which serves to register this
interdependence upon the conduct of each process so that all are caused, in some
manner to fall under the overall plan.
c) A concatenation of processes in unified pursuance of the aims and purposes of the
larger scheme of things.
d) A mutual replenishment to spent resources to the end that the continuity of each and
all processes shall not be jeopardized”.

Market integration is the phenomenon by which price interdependence takes place. As per
Faminow and Benson (1990) integrated markets are those where prices are determined
interdependently; which is assumed to mean that price change in one market affects the
prices in other markets. Goodwin and Schroeder (1991) described that markets that are not
integrated may convey inaccurate price information which might distort producer marketing
decisions and contribute to inefficient product movements. What market integration delivers
to the economy will be clear from the following views. Information on market integration
presents specific pieces of evidence as to the competitiveness of the market, the effectiveness
of arbitrage (Carter and Hamilton, 1989) and the efficiency of pricing (Buccola, 1983). Monke
and Petzel (1984) defined, “integrated market in which prices of differentiated products do
not perform independently. Spatial market integration refers to a situation in which prices
of a commodity in spatially separated markets move together and price signals and
information are transmitted smoothly across the markets. Spatial market performance can
be evaluated by the knowing relationship between the prices of spatially separated markets
and spatial price behavior in regional markets may be used as a measure of overall market
performance (Ghosh, 2000)”.

Another definition given by Behura and Pradhan (1998) described, “market integration as a
situation in which arbitrage causes prices in different markets to move together. Here two
markets are said to be spatially integrated; when even trade takes place between them, if the
price differential for a homogeneous commodity equals the transfer costs involved in moving
that commodity between them. Equilibrium will have the property that, if a trade takes place
at all between any two places which are physically separated, then price in the importing area
equals price in the exporting area plus the unit transport cost incurred by moving between
the two”. If this holds then the markets can be said to be spatially integrated as per Ravallion
(1986). According to Slade (1986), “two trading localities are integrated if price changes in
one locality cause price changes in the other. The transmission machinery could be that price
increases in one location result in the product moving into that location from the other, hence
reducing the supply of products in the exporting region and causing the price to increase.
Hence, an interrelated or interdependent movement of prices between spatially separated
markets can be said to be a situation of market integration”. (Deepak 2014)

Types of Market Integration

When two businesses are brought together through a merger or takeover, it is possible
to define the nature and type of integration based on the activities of each business and where
they operate in the supply chain of an industry.

The types of integration are illustrated in the diagram below:

 The main types of integration are:

1. Backward vertical integration. This involves acquiring a business

operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a
brewer buys a hop farm.
2. Conglomerate integration. This involves the combination of firms that
are involved in unrelated business activities.
3. Forward vertical integration. This involves acquiring a business
further up in the supply chain – e.g. a vehicle manufacturer buys a car parts
distributor.
4. Horizontal integration. Here, businesses in the same industry and
which operate at the same stage of the production process are combined.
(Riley 2018)

Pros and Cons of Each Type of Market Integration

The table below shows the advantages and disadvantages of each type of market
integration.
Horizontal Integration
Advantages Disadvantages
Larger Market Share
Bigger Base of Customers • Increasing the size of the company also increases
Increased Revenue the size of the problems, bigger companies are
Reducing competition harder to handle
Increasing other synergies such as • Does not always yield the synergies and added
marketing value that was expected
Creating economies of scale and • Can even result in negative synergies which reduce
economies of scope the overall value of the business
Reducing other production costs
Vertical Integration
Advantages Disadvantages
Decrease transportation costs and
reduce
delivery turnaround times
Reducing supply disruptions from
suppliers that might fall into • Companies might get too big and mismanage the
financial hardship overall process
Increase competitiveness by getting • Outsourcing to suppliers and vendors might be
products to consumers directly and more efficient if their expertise is superior
quickly Lower costs through • Costs of vertical integration such as purchasing a
economies of scale, which is supplier can be quite significant
lowering the per-unit cost by • Increased amounts of debt if borrowing is needed
buying large quantities of raw for capital expenditures
materials or streamlining the
manufacturing process Improve
sales and profitability by creating
and selling its own brand
Conglomerate Integration
Advantages Disadvantages

Through diversification, the risk of
loss lessens.
An expanded customer bases
Cross-selling of new products,
leading to increased revenues.
The new firm benefits with
increased efficiencies with the
merged company.
• Diversification can shift focus and resources away
from core operations, contributing to poor
performance.
• If the acquiring firm is inadequately experienced in
the industry of the acquired firm, the new firm is
likely to develop ineffective corporate governance
policies and an inexperienced, underperforming
workforce.
• It can be challenging for firms to successfully
develop a new corporate culture

Global Corporations

A global company is generally referred to as a multinational corporation (MNC). An

MNC is a company that operates in two or more countries, leveraging the global environment
to approach varying markets in attaining revenue generation. These international operations
are pursued as a result of the strategic potential provided by technological developments,
making new markets a more convenient and profitable pursuit both in sourcing production
and pursuing growth.

International operations are therefore a direct result of either achieving higher levels
of revenue or a lower cost structure within the operations or value-chain. MNC operations
often attain economies of scale, through mass producing in external markets at substantially
cheaper costs, or economies of scope, through horizontal expansion into new geographic
markets. If successful, these both result in positive effects on the income statement (either
larger revenues or stronger margins) but contain the innate risk in developing these new
opportunities. As gross domestic product (GDP) growth migrates from mature economies to
developing economies, it becomes highly relevant to capture growth in higher growth
markets.

However, despite the general opportunities a global market provides, there are
significant challenges MNCs face in penetrating these markets. These challenges can loosely
be defined through four factors:
• Public Relations: Public image and branding are critical components of most
businesses. Building this public relations potential in a new geographic region is an
enormous challenge, both in effectively localizing the message and in the capital
expenditures necessary to create momentum.
• Ethics: Arguably the most substantial of the challenges faced by MNCs, ethics have
historically played a dramatic role in the success or failure of global players. For
example, Nike had its brand image hugely damaged through utilizing ‘sweat shops’
and low wage workers in developing countries. Maintaining the highest ethical
standards while operating in developing countries is an important consideration for
all MNCs.
• Organizational Structure: Another significant hurdle is the ability to efficiently
and effectively incorporate new regions within the value chain and corporate
structure. International expansion requires enormous capital investments in many
 cases, along with the development of a specific strategic business unit (SBU) in order
to manage these accounts and operations. Finding a way to capture value despite this
fixed organizational investment is an important initiative for global corporations.
• Leadership: The final factor worth noting is attaining effective leaders with the
appropriate knowledge base to approach a given geographic market. There are
differences in strategies and approaches in every geographic location world-wide and
attracting talented managers with high intercultural competence is a critical step in
developing an efficient global strategy.

Combining these four challenges for global corporations with the inherent
opportunities presented by a global economy, companies are encouraged to chase the
opportunities while carefully controlling the risks to capture the optimal amount of value.
Through effectively maintaining ethics and a strong public image, companies should create
strategic business units with strong international leadership in order to capture value in a
constantly expanding global market. (Lumen Learning “Global Corporation,” 2019)

ACTIVITY. Essay!

Answer the question in not less than 100 words.

1. How can a small local business enterprise compete against a global corporation?
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