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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 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  Increasing the size of the company also
 Bigger Base of Customers increases the size of the problems,
 Increased Revenue bigger 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.

Vertical Integration
Advantages
 Decrease transportation costs and reduce
delivery turnaround times
 Reducing supply disruptions from
suppliers that might fall into financial
hardship
 Increase competitiveness by getting
products to consumers directly and
quickly
 Lower costs through economies of scale,
which is lowering the per-unit cost by
Disadvantage
 Companies might get too big and
mismanage the overall process
 Outsourcing to suppliers and vendors
might be more efficient if their expertise
is superior 
 Costs of vertical integration such as
purchasing a supplier can be quite
significant
 Increased amounts of debt if borrowing
is needed for capital expenditures

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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.

Global Corporations
from lumenlearning.com

 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 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

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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?

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?

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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?

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

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 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
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

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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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