Chapter 3- Market Integration

Integration by Koester(2000)- is a state of affairs or a process involving attempts to combine separate national
economies into larger economic regions.

2 types of Market Integration

1. Negative Integration- reduces non-tariff and tariff barriers to trade as main tool for integrating markets. In this
type of integration, government plays a minor role when it comes to regulation on the movement of goods and
factors of production on national borders.
2. Positive Integration- this adjust domestic policies and institutions through the creation of supranational
arrangements. More effective in agricultural sector.

5 forms of Integration

1. Preferential greement- involves lower trade barriers between those countries, which have signed the
agreement. Preferences can be given in the form of tariff reductions for unlimited volumes or imports from
specific countries or for specified import quantities.
2. Free Trade Area (FTA)- reduces barriers to trade among member countries to zero, but each member country
can still has autonomy in deciding on the external rate of tariff for its trade with non-member countries.
 EFTA- European Free Trade Area
 CEFTA- Central European Free Trade Area
3. Customs Union- represents a higher stage of economic integration. This was the first phase of the European
Community on the way to common market.
4. Common Market- allows for free movement of labor and capital within the member-countries. The intention of
common market is to integrate both product and factor markets of member-countries.
 Single Market of EU (January 1, 1993)- Constitutes a common market.
5. Economic Union- is the highest form of economic integration. Member-countries also agree to integrate
monetary, fiscal, and other policies.

INTERNATIONAL FINANCIAL INSTITUTIONS

3 major international/ financial economic institutions

1. World Trade Organization (WTO)- Mindful welfare loss from trade restrictions, the United States after world
war II invited its trading partners to negotiate less stringent restrictions.
 General Agreement on Tariffs and Trade (GATT)- an international treaty adopted in 1947 by 23 countries,
including the United States. Their agreement includes:
 Treats all member nations equally with respect to trade.
 Reduce tariff rates through multi-national negotiations.
 Reduce import qoutas.

This agreement resulted in thousands of tariff reductions (McEachern, 1997). In 1995, GATT was transformed
into the World Trade Organization.

 World Trade Organization- is the only global international organization dealing with the rules of trade
between nations.
 WTO Agreements- negotiated and signed by the bulk of the world’s trading nations and ratified in their
parliaments.
 Goal of WTO agreements- is to ensure that trade flows as smoothly, predictably, and freely as possible.
 WTO- is the place where member-governments try to sort out the trade problems that they face with each
other.
 2. International Monetary Fund (IMF)- was established after World War II to prevent economic chaos like seen
after World War I. Provided such an institution as would exert control on international exchange rates as well as
act as a reserve base for bailing out BOP deficit countries.
 Reserve pool was to be created out of the contributions from the member-countries with each country’s
contribution. The contributed quota of a country was determine its borrowing rights and voting
strength.
 International Monetary Fund (IMF)- is an organization affiliated to the UNIO. From an initial members of 31
members, it now commands a 125-strong membership.

The functions of IMF include:

1. works as a short-term credit institution;
2. provides for the orderly adjustment of exchange rates;
3. acts as a reserve base for member- countries to borrow from;
4. provides foreign exchange loans against current transactions; and
5. provides international financial consultancy services.

3. WORLD BANK- is the International Bank for Reconstruction and Development, more popularly known as the
World Bank. It was created primarily to offer economic assistance to the war-ravaged economies of Europe and
Asia and later, to the poor countries of the world.
 is an International intergovernmental institution for providing long-term loans on easy terms for specific
developmental projects.
 Its capital stock is entirely owned by the 181 strong member Governments.

4 functional bodies of World Bank:

1. IDA- International Development Association.

2. IFC- International Finance Corporation.
3. MIGA- Multi-lateral Investment Guarantee Agency.
4. ICSID- International Centre for Settlement of Investment Disputes.

5 major categories of World Bank:

1. Provides loan services to member Governments- world bank can lend only, or with of Governments of
member countries.
2. Provides development loans on soft terms to poor member nations- a function assigned to International
Development Association (IDA), which changes zero interest and only small handling fee.
3. Provides support to private or joint sector projects- a function performed by the International Finance
Corporation (IFC), which disburses its fund both by the way of equity and by loans.
4. Provides insurance guarantees to foreign investors- a function performed by Multi-lateral Investment
Guarantee Agency (MIGA) in cases of cross border investment.
5. Setting investment-related disputes among member nations through conciliation or arbitration- is a
function performed by the International Centre for Settlement of Investment Disputes (ICSID). It provides
knowledge up gradation courses to senior officers involved in economic development programs in less
developed countries.

GLOBAL CORPORATIONS

Global Corporations- are integral part of economic growth. Global corporations account for a significant share of
the world’s industrial investment, production, employment and trade. (Sinha, 2009)
The Birth of Global Corporations

Global corporations can be traced in the early historical period wherein patterns of trade and exchange are
evident. During this time, cities and countries extended their reach beyond their borders. This is the time wherein a form
of globalization started. Complex patterns of interactive engagements through organized trade followed influence by the
emergent and dominant technologies particularly in shipping and navigation. Entities in this time are organized and
functional with head offices, foreign branch plants, corporate hierarchies, extra-territorial business law, foreign direct
investment and value-added activity (Steger, Battersby & Siracusa, 2014).

The period of modern nation state system emerged prior to the end of World War II. In this period, invention
and social organizations combined vastly increased world capital and the wealth of nation states. Industrial revolution
increased global population, wherein societies invent new ways to organize the world through colonialism and
imperialism. This is possible through the interaction between people, states, and regions. This is also referred to as the
era of global interaction.

After World War II, American corporations led the economic recovery and expansion until such time that Japan
and European corporations made their entry into the global scene. This gives rise to multinational companies (MNCs).
The transformations of the global corporation occurring within this third period have been far reaching and distinctive,
reflecting changes taking place within the broader structural dimensions of globalization itself and at the same time
significantly contributing to those continuing changes (Steger, Battersby & Siracusa, 2014).

 Multinational Corporation (MNC)

 Transnational Corporation (TNC)
1. International companies - are importers and exporters, typically without investment outside of their home
country.
2. Multinational companies- have investment in other countries, but do not have coordinated product offerings in
each country. They are more focused on adapting their products and services to each individual local market.
3. Global companies- have invested in and are present in many countries. They typically market their products and
services to each individual local market.
4. Transnational companies- are more complex organizations, which have invested in foreign operations, have a
central corporate facility but give decision-making, research and development (R&D) and marketing powers to
each individual foreign market.

The Power of Global Corporations

In Understanding the Role of Global Corporations: The Contribution of Development Education, Andy Egan
enumerated the following powers of a global corporation:

1. Economic control - that global corporations have on world trade, financial markets, technology, patents, intellectual
property rights, and the media.

2. Political influence - corporations have governments and that global on national regional governance structures (e.g.,
the EU) and national and international economic and social policies.

3. Social and cultural influence - that global corporations have on people's attitudes, values, and lifestyle choices
through media control, advertising, branding, and sponsorship, and the impact they have on people's well- being in
terms of rights, health, income, employment, and working conditions.

4. Environmental impact - that global corporations have on the natural environment.

The powers of global corporations will be discussed fully in the succeeding.

MULTINATIONAL CORPORATIONS

Multinational companies (MNCs) - gained popularity about 20 years ago. They have their origins back to the
years of the escalation of globalization. Multinational corporations are very often known as transnational corporations.
However, there is a slight difference between them. MNCs are known to be independent from government. They are
known to produce and deliver goods and services to numerous countries.

TNCs are able to plan, control, and implement business activities across different nations or countries.

Included in the Fortune 500 Global (2018) are General Electric, Royal Dutch Shell, Sinopec, Toyota, Samsung, Honda,
Volkswagen, Johnson and Johnson, Procter & Gamble, Coca-cola, Nestle, among many others. Many of these companies
are familiar to us. Whether we want to admit it or not, we live and breathe the products of these multinational
companies.

The Role of Multinational Companies

Lapko (2015) discussed the different role of multinational companies:

1. MNCs act as modernizers of the world economy. It is reflected as a result of constant promotion of new technologies
and introduction of innovations across the world, as far as relatively remote places. The innovations are seen not only in
technological realm, but also in the fields of medicine, education, and social policies. Goods and services offered by
MNCs may facilitate the lives of the people. By bringing progress to the poorest economies, MNCs employ people and
educate them. Additionally, some products contribute to people's high standard of living.

2. Promote efficiency and growth of the world economy. Multinational corporations are likely to establish
interconnection between the domestic economies of some isolated countries and the world's greatest economies. The
introduction of some products and services may change the economic life and standing of the people in a particular
country.

3. Promote regional agreements and alliances. Regional alliance is a way of creating a single world market. They bring
innovations in technology as well as in the organizational structures. Some local companies may modify their level of
management in order to comply with the national standards set by this single world market.

4. Increase of money circulation in the economy. MNCs' activities are very likely to result in profit maximization because
one company can provide the same service and implement same strategies in several countries. This situation may lead
to companies competing with one another for the highest possible sales or services.

When this happens, the buyer is in a win - win situation.

Challenges of Multinational Companies

However, despite the general opportunities a global market provides, there are significant challenges MNCs face in
penetrating these markets.

Four challenges may be defined through four factors.

1. 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.
2. 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. Maintaining the highest ethical standards while operating in developing
countries is an important consideration for all MNCs.

3. Organizational Structure. Another significant hurdle is the ability to efficiently and effectively incorporate
newregionswithin the value chainand 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.

4. 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
worldwide, and attracting talented managers with high intercultural competence is a critical step in developing an
efficient global strategy.