The Contemporary World 2020

UNIT II THE STRUCTURES OF GLOBALIZATION

Coverage: Week 3, 4, and 5

Duration:9 hours

The Global Economy (2.25 hours; week 3)

Market Integration (2.25 hours; week 3 and 4)
The Global Interstate System (2.25 hours; week 4 and 5)
Contemporary Global Governance (2.25 hours; week 5)
Learning Objectives: After studying the unit, the students should be able to:

 define economic globalization

 explain the two major driving forces of global economy
 differentiate economic globalization from internationalization
 trace the origin of economic globalization

1.The Global Economy

2. Market Integration
3.The Global Interstate System
4. Contemporary Global Governance

MARKET INTEGRATION

Market integration refers to how easily two or more markets can trade with each
other (54a). It occurs when prices among different locations or related goods follow similar
patterns over a long period of time. Groups of prices often move proportionally to each
other and when this relation is very clear among different markets it is said that the
markets are integrated (54b).

The term is further used in identifying related phenomenon of market of goods

and services experiencing similar patterns of increase or decrease in prices of products.
It may also refer to the movement of prices of related goods and services sold in a
defined geographical location in similar patterns. When government implement certain
strategy to control the direction of economy then integration is intentional while shifting

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in supply and demand that has a spillover effect on several markets is another factor of
market integration. One way of helping integration of market by reducing barriers to
trade and increasing fluidity between markets is through foreign trade.

Market integration exists when there are exerted effects that prompt similar
changes or shifts in other markets that focus on related goods on events occurring
within two or more markets.

Example:

China produces toys at a cheaper price than the US. If foreign trade increased
between the two countries, toys could be sold to the US more easily, making them more
available, thus reducing price (55a).

If the demand for baby dolls within a given geographical market were to suddenly
be reduced by 50%, there is a good chance that the demand for baby doll clothing
would also decrease in proportion within that same geographical market. Should the
baby market increase, this would usually mean that the market for doll clothing would
also increase. Both markets would have the chance to adjust pricing in order to deal
with the new circumstances surrounding the demand, as well as adjust other factors,
such as production (55b).

Types of Related Markets where Market Integration Occurs

Stock Market Integration

This is a condition in which stock markets in different countries trend

together and depict same expected risk adjusted returns. Two markets are
perfectly integrated if investors can pass from one market to another without
paying any extra costs and if there are possibilities of arbitration which
ensures the equivalence of stock prices on both markets (56) .

Financial Market Integration

It is an open market economy between countries facilitated by a common

currency and the elimination of technical, regulatory and tax differences to
encourage free flow of capital and investment across borders (57). It occurs when
lending rates in several different markets begin to move in tandem with one
another. Emergence of similar patterns within the capital, stock, and financial

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markets with those trends coming together to exert a profound influence on the
economy of that nation is involved in the integration within a nation.

Global Corporation

A global corporation is a business that operates in two or more countries. It

also goes by the name "multinational company" (58). Several advantages are offered by
global expansion of business over running a strictly domestic company. Success in
different types of economies is achieved by means of multiple countries operation while
it causes also logistic and cultural challenges. Expanding revenue opportunities and
diversifying business risk are the purposes of becoming global corporation. Access to
more customers and capital is obtained through a model that works domestically well
and translates foreign markets well.

Example:

One can find more customers in a country whose economy is vibrant and
expanding in lieu of stagnant local and domestic economy or market share that has hit a
plateau.

Historical Periods of Global Corporation

An approach to the study of globalization that locates the phenomenon itself in

early patterns of trade and exchange is known as historical globalization.
In early historical periods as both cities and countries extended their reach
beyond their own borders, a form of globalization was initiated which then followed
complex patterns of interactive engagements organized through trade and industry
directly influenced by the emergent and subsequently dominant technologies especially
in shipping and navigation (59). The entities operating within this environment were
functionally and organizationally not different from contemporary organizations being
possessed with head offices, foreign branch plants, corporate hierarchies,
extraterritorial business law, and even bit of foreign direct investment and value-added
activity (60).
Combination of invention and social organization resulting to increase in
worldwide capital and wealth of nation is allowed by modern nation state system that
emerged in the period prior to the end of World War II. American Corporations led the
economic recovery and expansion after the World War II destruction. This period up to
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the reentry of Japanese and European corporation to the global scene is viewed as
multinational corporations (MNCs) (61). From the end of World War II to the present is
considered the period of transformation of global corporation.
The Finance Function in a Global Corporation
As corporations go global, capital markets open up within them, giving
companies a powerful mechanism for arbitrage across national financial markets (62).
Chief financial officers (CFOs) must balance the opportunities with the challenges of
operating in multiple environments in managing their internal markets in building an
advantage. These three functions can be created by CFOs through exploiting their
internal capital markets.

1. Financing

A group’s tax bill can be reduced by the CFO like borrowing in countries
with high tax rates and lending to operations in countries with lower rates.

2. Risk Management

Global firms can offset natural currency exposures through worldwide

operations instead of managing currency exposures through financial markets.

3. Capital budgeting

Getting smarter on valuing investment opportunities CFOs can add value.

Foreign Direct Investment

Foreign Direct Investment (FDI) was of corporate origin. It is a major driver of

extended global corporate development. It is an investment made by a company or
individual in one country in business interests in another country, in the form of either
establishing business operations or acquiring business assets in the other country, such
as ownership or controlling interest in a foreign company and the key feature of foreign
direct investment is that it is an investment made that establishes either effective control
of, or at least substantial influence over, the decision making of a foreign business (63).

Foreign direct investment is made open to economies; frequently involves more

than just a capital investment and includes provision of management or technology as
well. There are many methods to establish FDIs such as opening a subsidiary or
associate company in a foreign country; acquiring a controlling interest in an existing
foreign company, or by means of a merger or joint venture with a foreign company.

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BRICS Economies

Brazil, Russia, India, China and South Africa (BRICS) is an acronym for the
combined economies of Brazil, Russia, India, China and South Africa. BRIC, without
South Africa, was originally coined in 2003 by Goldman Sachs, which speculates that by
2050 these four economies will be the most dominant. South Africa was added to the
list on April 13, 2011 creating "BRICS"(64a). These five countries were among the fastest
growing emerging markets as of 2011.

Further, Brazil, Russia, India and China (BRIC) refer to the idea that China and
India will, by 2050, become the world's dominant suppliers of manufactured goods and
services, respectively, while Brazil and Russia will become similarly dominant as
suppliers of raw materials. Due to lower labor and production costs in these countries
now including a fifth nation, South Africa, many companies have also cited BRIC as a
source of foreign expansion opportunity i.e. promising economies in which to invest (64b).

General Agreement on Trade in Services (GATS)

The General Agreement on Trade in Services (GATS) is the first multilateral

agreement covering trade in services which was negotiated during the last round of
multilateral trade negotiations, called the Uruguay Round, and came into force in 1995.
The GATS provides a framework of rules governing services trade, establishes a
mechanism for countries to make commitments to liberalize trade in services and
provides a mechanism for resolving disputes between countries (65).
GATS has similar principle with the General Agreement on Tariffs and Trade
(GATT) that deals with trade in goods. The two primary objectives of GATTS are to
ensure that all signatories are treated equitably when accessing foreign markets; and
second, to promote progressive liberalization of trade and services.

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References

Market Integration

54.(a,b) De Braux, P. (2017) “What is Market Integration” Retrieved from: https:// www. qoura. Com/
What –is-market-integration. Dated March 3, 2017.

55.(a,b) “What is Market Integration” Retrieved from: http://www.wisegeek.com/what-is-market-

integration.html (n.d.)

56. Arouri, M.E.H. and Jawadi, F. (2009), “Stock market integration in emerging countries: further
evidence from the Philippines and Mexico”, Retrieved from:
www.finance‐innovation.org/risk09/work/1208330.pdf Dated: October 9, 2010.

57. Investorwords.com Website. “Integrated Financial Market” Retrieved from: http:// www. investorwords.
Com/ 15491/ integrated financial markets. html #ixzz55 p6oq8Hb.

58. Kokemuller, Neil. (2018). “What is a Global Corporation?” Retrieved from: http:// smallbusiness,chron.
com/ global- corporation- 63267. Html

59. Harvey D. (1990). The Condition of Post Modernity: An Inquiry into the Origins of Cultural Change .
Oxford: Blackwell Publishers.

60. Moore K. and Lewis D. 2000 Foundation of Corporate Empire. London: Prentice Hall.

61 Barnet and Mueller (1974). Global Reach: The Power of the multinational corporations. New York:
Simon and Schuster

62.Desai, Mihir A. 2008. The Finance Function in a Global Corporation. Harvard Business Publishing.

63. Foreign Direct Investment (FDI) https://www. investopedia.com/ terms/f/fdi. asp#ixzz58qxoZoR0

64.(a,b,) Brazil, Russia, India, China And South Africa (BRICS) https://www.
investopedia.com/terms/b/brics.asp#ixzz58r2tplyS

65.General Agreement on Trade in Services (GATS) 2013 http://www. international. gc.ca/trade-

agreements-accords-commerciaux/wto-omc/gats-agcs/index.aspx?lang=eng