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Lesson 2.2
Global Market Integration
Objectives: At the end of the lesson, the students are expected to
1. Explain the role of international financial institutions in the creation of a global economy
2. Narrate a short history of global market integration in the twentieth century
3. Identify the attributes of global corporations

Activity:
Film viewing and discussion (Film: “The Corporation” directed by Mark Achbar and Jennifer
Abbott)

References:
1. Chapter 17 of textbook: “The Rise of the Global Corporation” by Deane Neubauer
Bello
2. Walden F. 2006. “The Multiple Crises of Global Capitalism.” In Deglobalization: Ideas
for a New World Economy. Quezon City: Ateneo de Manila University Press, pp. 1-
31.

Introduction

International Financial Institution (IFIs) are institutions that provide financial support and professional
advice for economic and social development activities in developing countries and promote
international economic cooperation and stability. In providing financial support, countries acts as
borrowers, lenders or donors. International Financial Institution (IFIs) include the World Bank, the IMF,
and the International Finance Corporation. Today the largest IFI in the world is the European Investment
Bank which lent 61 billion euros to global projects in 2011.

THE ROLE OF INTERNATIONAL FINANCIAL INSTITUTIONS IN THE CREATION OF A GLOBAL ECONOMY

International Financial Institutions has the following roles in the creation of a Global Economy

1. Supporting programs that are global in scope

2. Providing technical assistance to programs at the country level.
3. Advising on development projects
4. Funding development projects
5. Assisting in the implementation of development projects.

International Financial Institutions provide financing for development to developing countries through
the following:

1. Long-term loans (with maturities of up to 20 years) based on market interest rates. To obtain
the financial resources for these loans, MDBs borrow on the international capital markets and
re-lend to borrowing governments in developing countries.
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2. Very-long-term loans (often termed credits, with maturities of 30 to 40 years) at interest rates
well below market rates. These are funded through direct contributions by governments in the
donor countries.
3. Financial grant
4. Technical assistance, advisory services, or project preparation.

TYPES OF INTERNATIONAL FINANCIAL INSTITUTIONS

1. Regional development banks. They focus on a single world region. These are
a. African Development Bank
b. Asian Development Bank
c. Inter-American Development Bank
d. European Bank for Reconstruction and Development.
2. Global development banks. Banks that are global in scope. These are
a. International Monetary Fund (IMF)
b. World Bank

The World Bank Group

Founded in 1945, the World Bank originally was

The shareholding countries are represented by a Board of Governors, which is the Bank’s ultimate policy
making body. Because they meet only annually, the governors delegate much of the Bank’s decision
making to 24 executive directors, who work on site at the Bank.

Composition of the World Bank

The World Bank Group is a bank composed of five (5) institutions with the corporate mission of reducing
global poverty and improving living standards in the developing world by providing low-interest loans,
interest-free credits, and grants to governments and the private sector for investments in education,
health, infrastructure, communications, and many other purposes.

The of five (5) institutions are:

1. International Bank for Reconstruction and Development (IBRD). This bank focuses on middle-
income countries and creditworthy low-income countries. IBRD lends only to governments.
2. International Development Association (IDA). This bank focuses on the poorest countries in the
world.
3. International Finance Corporation (IFC). This offers investment, advisory, and asset-
management services to encourage private-sector development in less developed countries.
4. Multilateral Investment Guarantee Agency (MIGA). This promotes cross-border investment in
developing countries by providing guarantees (political risk insurance and credit enhancement)
to investors and lenders.
5. International Centre for Settlement of Investment Disputes (ICSID). This is an international
arbitration institution established in 1966 for legal dispute resolution and conciliation between
international investors.
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Bank (Year Headquarter No. of Goals

Established) member
-country
The Inter- Washington, 47 To promote poverty reduction and social equity, as well
American D.C. as environmentally sustainable economic growth by
Development promoting multilateral financing for economic, social,
Bank (IDB) and institutional development projects as well as for
(1959). trade and regional integration programs.

This is the
oldest of the
regional
development
banks.

Asian Manila, 65 To help its developing member countries reduce

Development Philippines poverty and improve the quality of life of their citizens
Bank (ADB) through policy dialogue, loans, technical assistance,
(1966) grants, guarantees, and equity investments.
The African Abidjan, 53 Promoting the economic development and social
Development Cote d’Ivoire African progress of its shareholder countries in Africa through:
Bank (AfDB) (but countries 1. Making loans and equity investments for the
(1964) temporarily and by economic and social advancement of the
located in 24 regional member countries
Tunis) countries 2. Providing technical assistance for the
in the preparation and execution of development
Americas projects and programs
, Europe, 3. Promoting the investment of public and private
and Asia. capital for development purposes

European Bank London Owned Work only in countries that are committed to
for by 60 democratic principles. EBRD, which is headquartered in
Reconstruction countries EBRD’s share capital is provided by its members. EBRD
and and 2 does not directly use shareholders’ capital to finance its
Development intergov loans. Instead, its triple-A creditworthiness rating
(EBRD) (1991) ernment enables it to borrow funds in the international capital
al markets by issuing bonds and other debt instruments at
institutio highly favorable market rates.
ns, the
Europea
n Union
and the
Europea
n
Investme
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nt Bank.

World Bank Washington, 189  Reconstruction of countries devastated by

(WB) D.C. sharehol World War II.
der-  After the world war, their primary focus shift to
member economic development of the world’s non-
countrie industrialized countries, with the goal of lifting
s the world out of poverty.
International Washington, 189  Promoting a stable and open global economic
Monetary Fund D.C. member and financial environment through its
(IMF) (1945) countrie surveillance of the economic policies of those
s countries.

History of global market integration in the 20th century

Global market integration means that price differences between countries are eliminated as all markets
become one. One way to the progress of globalization is to look at trends how prices converge or
become similar across countries. It began in the late 15th century, when the two Kingdoms of the
Iberian Peninsula – Portugal and Castile – sent the first exploratory voyages around the Cape of Good
Hope and to the Americas, "discovered" in 1492 by Christopher Columbus.

Short History of Global Economic Integration

 Two thousand years ago, the Romans unified their far-flung empire through an extensive
transportation network and a common language, legal system, and currency. This unification
promoted trade and economic development.
 At the end of the 15th century, the voyages of Columbus, Vasco da Gama, and other explorers
initiated a period of trade over even vaster distances. These voyages of discovery were made
possible by advances in European ship technology and navigation, including improvements in
the compass, in the rudder, and in sail design. The sea lanes opened by these voyages facilitated
a thriving intercontinental trade such as sugar, tobacco, spices, tea, silk, and precious metals.
Much of this trade ultimately came under the control of the trading companies created by the
English and the Dutch.
 Global economic integration took another major leap forward during the period end of
Napoleonic Wars in 1815 and the beginning of World War I because of the invention of steam
power which replaces the sail and railroads which replaces the wagon or the barge, the opening
of the Suez Canal which significantly reduced travel times, use of telegraph for communication.
Because of this trade monopolies were replaced by intense competition.
 It followed a "core-periphery" pattern. Capital-rich Western European countries, particularly
Britain, were the center, or core, of the trading system and the international monetary system.
Countries in which natural resources and land were relatively abundant formed the periphery.
Manufactured goods, financial capital, and labor tended to flow from the core to the periphery,
with natural resources and agricultural products flowing from the periphery to the core. For the
most part, government policies during this era fostered openness to trade, capital mobility, and
migration.
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 Domestic opposition to free trade eventually intensified, as cheap grain from the periphery put
downward pressure on the incomes of landowners in the core. Beginning in the late 1870s,
many European countries raised tariffs, with Britain being a prominent exception.
 international economic integration achieved during the nineteenth century was largely
unraveled in the twentieth by two world wars and the Great Depression. After World War II, the
major powers undertook the difficult tasks of rebuilding both the physical infrastructure and the
international trade and monetary systems. One manifestation of this re-integration was the rise
of so-called intra-industry trade.
 During the late-1960s and the 1970s noted that an increasing share of global trade was taking
place between countries with similar resource endowments, trading similar types of goods--
mainly manufactured products traded among industrial countries. Postwar economic re-
integration was supported by several factors, both technological and political. Technological
advances were the reduced the costs of transportation and communication, as the air freight
fleet was converted from propeller to jet and intermodal shipping techniques (including
containerization) became common. Telephone communication expanded, and digital electronic
computing came into use. In the policy sphere, tariff barriers were lowered as provided by the
General Agreement on Tariffs and Trade.

Attributes of global corporations

Global Corporations

A global company is generally referred to as a multinational corporation (MNC), a corporation that is

incorporated in one country which
produces or sells goods or services in
various countries.

Main characteristics of MNCs

1. large size
2. their worldwide
activities are
centrally
controlled by
the parent
companies.
Source: https://ceoworld.biz/2019/06/28/the-top-100-best-performing-
Examples of Global Corporations companies-in-the-world-2019/

Consider Coca-Cola, which, in 1886, was struggling to get by. By World War II, Coca-Cola was 50 years
old and had proudly maintained its price at 5 cents, so as to enable many people to afford the beverage.
The company would sell its drink to U.S. soldiers stationed all over the world for 5 cents a bottle, but no
more.

Coca-Cola now sells its beverages in more than 200 countries. Not only does the Coca-Cola company sell
its popular fizzy drinks such as Coke, Fanta, and Sprite, it also sells some 3,800 other products, including
soy-based beverages that have been enriched with vitamins. The Coca-Cola company also sells juices,
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iced teas, bottled water, and a lot more. One of the reasons why Coca-Cola has seen such monumental
success in nearly every country it has established itself is that it never has a standardized view of all
countries. Instead, each country is considered on an individual basis. The company will make sure it only
provides products that fit with the tastes and culture of the local community. Often, this means that
Coca-Cola must create entirely new products to fit a market's demographics, or it may tweak an existing
product so that it will appeal to residents in a specific locality. You may have noticed this. Some Coca-
Cola products are available in some countries but not in others; this is because those products were
created for that country or were tweaked to suit the preferences of a specific country.

There are other global companies, such as the Hilton and Hyatt Hotels, Adobe, Cisco, 3M, Monsanto,
and American Express. These companies range from hospitality companies to tech and manufacturing
companies. This shows that many types of global corporations exist. Some aren’t global in a purely
physical sense. Consider internet giants Facebook and Google, which have a presence in virtually every
country in the world that has an internet connection. Their presence is more virtual than physical, but
it's global.

All contemporary global companies once had been mere startups. Coca-Cola was once a drugstore in
Atlanta, Georgia. Google started out as nothing more than a research project undertaken by Larry Page
and Sergey Brin. You, too, can become a global company. However, do not rush it. Take it one country at
a time.

Four Dimension of Corporate Globalization

1. Globalization of market presence—refers to the degree the company has globalized its market
presence and customer base. Oil and car companies score high on this dimension. Wal-Mart, the
world’s largest retailer, on the other hand, generates less than 30% of its revenues outside the
United States.
2. Globalization of the supply base—hints at the extent to which a company sources from different
locations and has located key parts of the supply chain in optimal locations around the world.
Caterpillar, for example, serves customer in approximately 200 countries around the world,
manufactures in 24 of them, and maintains research and development facilities in nine.
3. Globalization of the capital base—measures the degree to which a company has globalized its
financial structure. This deals with such issues as on what exchanges the company’s shares are listed,
where it attracts operating capital, how it finances growth and acquisitions, where it pays taxes, and
how it repatriates profits.
4. Globalization of the corporate mind-set—refers to a company’s ability to deal with diverse cultures.
GE, Nestlé, and Procter & Gamble are examples of companies with an increasingly global mind-set:
businesses are run on a global basis, top management is increasingly international, and new ideas
routinely come from all parts of the globe.

Comparing Global corporations

1. A global corporation is one that has significant investments and facilities in multiple countries
and lacks a dominant headquarters. Global corporations are governed by the laws of the
country where they are incorporated. A global business as one that maintains a strong
headquarters in one country, but has investments in multiple foreign locations. Such
investments may involve direct investments in foreign assets, such as manufacturing facilities or
sales offices. The headquarters generally is its home country, though some move to more
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favorable regulatory or taxation locations over time. Global corporations strive to create
economies of scale by selling the same products in multiple locations, limiting local
customization.
2. An international company has no foreign direct investment and makes its wares only in its home
country. Its involvement outside its borders is essentially limited to importing and exporting
goods.
3. A multinational company invests directly in foreign nations, but this is usually limited to a few
areas. Products are customized to local preferences, rather than homogenized, limiting the
ability to create economies of scale.
4. Transnational companies take the global corporation a step further. A transnational company
invests directly in dozens of countries and distributes decision-making capabilities to its various
local operations.
5. International companies are importers and exporters, they have no investment outside of their
home country.
6. Global companies have invested and are present in many countries. They market their products
through the use of the same coordinated image/brand in all markets. Generally one corporate
office that is responsible for global strategy. Emphasis on volume, cost management and
efficiency.
7. Transnational companies are much more complex organizations. They have invested in foreign
operations, have a central corporate facility but give decision-making, R&D and marketing
powers to each individual foreign market.

Characteristics of a Multinational Corporation

Not all businesses can be called a multinational corporation. There are certain features that must be met
for them to be named as such. The following are the characteristics of multinational corporations:

1. Very high assets and turnover. To become a multinational corporation, the business must be large
and must own a huge amount of assets, both physical and financial. The company’s targets are so
high that they are also able to make substantial profits.
2. Network of branches. Multinational companies keep production and marketing operations in
different countries. In each country, the business oversees more than one office that functions
through several branches and subsidiaries.
3. Control. In relation to the previous point, the management of the offices in other countries is
controlled by one head office located in the home country. Therefore, the source of command is
found in the home country.
4. Continued growth Multinational corporations keep growing. Even as they operate in other
countries, they strive to grow their economic size by constantly upgrading and even doing mergers
and acquisitions.
5. Sophisticated technology. When a company goes global, they need to make sure that their
investment will grow substantially. In order to achieve substantial growth, they need to make use of
capital-intensive technology, especially in their production and marketing.
6. Right skills. Multinational companies employ only the best managers who are capable of handling
huge funds, using advanced technology, managing workers, and running a huge business entity.
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7. Forceful marketing and advertising. One of the most effective survival strategies of multinational
corporations is spending a huge amount of money on marketing and advertising. It is how they are
able to sell every product or brand they make.
8. Good quality products. Because they use capital-intensive technology, they are able to produce top-
of-the-line products.

 Reasons for Being a Multinational Corporation

There is a reason why many companies want to become multinational corporations. Here are some of
them:

 1. Access to lower production costs. It is a very common reason for companies to go global because if
they set up production in other countries, especially in developing economies, they spend less on
production costs. Though outsourcing is a way of doing this, setting up manufacturing plants in other
countries may be even cheaper.

2. Proximity to target international markets. It is beneficial to set up business in countries where the
target market of a company is. It helps reduce transport costs, and it gives multinational corporations
easier access to consumer feedback and information, as well as to consumer intelligence.

 3. Avoidance of tariffs. When a company produces or manufactures its products in another country
where they sell them, they are exempt from import quotas and tariffs.

Models of Multinational Corporations

The following are the different models of multinational corporations:

1. Centralized. They have an executive headquarters in their home country and then build various
manufacturing plants and production facilities in other countries. Its most important advantage is
being able to avoid tariffs and import quotas and take advantage of lower production costs.
2. Regional. They keep headquarters in one country that supervises a collection of offices that are
located in various countries. Unlike the centralized model, the regionalized model includes
subsidiaries and affiliates that all report to the headquarters.
3. Multinational. They have a parent company that operates in the home country and puts up
subsidiaries in different countries that are independent in their operations.

 Advantages of Being a Multinational Corporation

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There are many benefits of being a multinational corporation including:

1. Efficiency. In terms of efficiency, multinational companies are able to reach their target markets
more easily because they manufacture in the countries where the target markets are. Also, they can
easily access raw materials and cheaper labor costs.
2. Development. In terms of development, multinational corporations pay better than domestic
companies, making them more attractive to the local labor force. They are favored in some way by
the government because they also pay local taxes, which help boost the country’s economy.
3. Employment. In terms of employment, multinational corporations hire local workers who know the
culture of their place and are thus able to give helpful insider feedback on what the locals want.
4. Innovation. As multinational corporations employ both locals and foreign workers, they are able to
come up with products that are more creative as a result of their convergence.

References:

Bhargava V. (2006). The Role of the International Financial Institutions in Addressing Global Issues.
Retrieved from siteresources.worldbank.org/EXTABOUTUS/Resources/Chapter20.pdf

CFI Education Inc. (2019). What is Multinational company? Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/strategy/multinational-corporation/