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Study Guide in GE 5: Contemporary World Module No.3

STUDY GUIDE FOR MODULE NO. 3

Market Integration
MODULE OVERVIEW

Economy is the social institution that has the biggest impact on society. We usually think of
economy in terms of numbers – number of unemployed, GDP, or how the stock market is doing
today. While we often talk about it in numerical terms, the economy is composed of people. The
people is the social institution that organizes everything happening in the society; production,
consumption, and trade of goods. There are many ways in which a product can be made, exchanged
and used. Think about capitalism or socialism. These economic systems– and the economic
revolutions that created them – shape the way people live their lives.

MODULE LEARNING OBJECTIVES

 Define market integration.

 Discuss the three basic types of market integration.
 Differentiate the pros and cons of each type of market integration.
 Define global corporation and identify the challenges encountered by multinational
corporations (MNCs).

MODULE CONTENT

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.

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(d) A mutual replenishment to spent resources to the end continuity of each and all processes
shall not be jeopardized”.

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.

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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 operating at the same
production stage 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  Increasing the size of the company also
 Bigger Base of Customers increases the size of the problems, bigger
 Increased Revenue companies are harder to handle.
 Reducing Competition  Does not always yield the synergies and
 Increasing other synergies such as added value that was expected.
marketing  Can even result in negative synergies
 Creating economies of scale and which reduce the overall value of the
economies of scope business.

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Global Corporations
from lumenlearning.com
Vertical Integration
Advantages Disadvantage
 Decrease transportation costs and reduce  Companies might get too big and
delivery turnaround times mismanage the overall process
 Reducing supply disruptions from  Outsourcing to suppliers and vendors
suppliers that might fall into financial might be more efficient if their expertise
hardship is superior
 Increase competitiveness by getting  Costs of vertical integration such as
products to consumers directly and purchasing a supplier can be quite
quickly significant
 Lower costs through economies of scale,  Increased amounts of debt if borrowing
which is lowering the per-unit cost by is needed for capital expenditures
buying large quantities of raw materials
or streamlining the manufacturing
process
 Improve sales and profitability by
creating and selling its own brand
Conglomerate Integration
Advantages Disadvantage
 Through diversification, the risk of loss  Diversification can shift focus and
lessens. resources away from core operations,
 An expanded customer base contributing to poor performance.
 Cross-selling of new products, leading  If the acquiring firm is inadequately
to increased revenues. experienced in the industry of the
 The new firm benefits with increased acquired firm, the new firm is likely to
efficiencies with the merged company develop ineffective corporate
governance policies and an
inexperienced, underperforming
workforce.
 It can be challenging for firms to
successfully develop a new corporate
culture.

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.

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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 ding are critical components of all
components of most business. 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 new within the value chain and corporate structure rate
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 worldwide, 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 1

Activity: Film Review

Directions: Watch Mark Achbar and Jennifer Abbott’s “The Corporation” and let’s discover the facts
behind it. Fill in the following chart to find out.

What do you see in this film?

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What do you think is happening in this film?

What materials do you think the artist used to

make this film?

Does this film remind you of anything?

What questions do you have about this film?

Pretend you can enter inside this film? What

do you see? What do you hear? What do you
smell? What do you taste?

Which part of this film do you like? Why?

If you could change one thing about this film,

what would you change?

How does this film make you feel? Can you

say why?

If you would describe this film to a friend,

what kind of words would you use?

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Activity 2

Research: Transnational Corporation

Instruction: Search for an example of Transnational Corporation and gather data which is stated in
the table below.

Corporation Name

Headquarters

Annual Revenue (Gross

Income)

Number of Employees

Number of Countries
Represented

Products and Services Sold

Other Projects

Other Information about

the TNC

Picture of the TNC

SUMMARY

Market integration occurs when prices among different locations or related goods follow

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similar patterns over a long period of time. Groups of goods often move proportionally to each other
and when this relation is very clear among different markets it is said that the markets are integrated.
Thus, market integration is an indicator that explains how much different markets are related to each
other. A marketer plays the role of an integrator in the sense that he collects feedback or vital inputs
from other channel members and consumers and provides product solutions to customers by
coordinating multiple functions of organization.
Integrated marketing allows us to spread our marketing message across multiple channels and
increases the chances of it being heard. Best of all, customers engaged through multiple channels
tend to spend more than other customers. Therefore, spreading our marketing message can increase
our return on investment.

REFERENCES

Aldama, Prince Kennex R. The Contemporary World First Edition.Rex Bookstore, Inc. 2018.
Steger, Manfred B., Paul Battersby, and Joseph M. Siracusa, eds. 2014.The SAGE
Handbook of Globalization. Two volumes. Thousand Oaks: SAGE Publications.

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