lOMoARcPSD|11406384

GEC 103 - The Contemporary World - Reading Material

(UNIT II)
Political Science (Mindanao State University)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Ellen Grace P. Tadlas ([email protected])
 lOMoARcPSD|11406384

REPUBLIC OF THE PHILIPPINES

Mindanao State University

Department of Political Science
Brgy. Fatima, General Santos City

GEC 103: The Contemporary World

UNIT II: THE STRUCTURES OF GLOBALIZATION

Analyze the actors that facilitate economic globalization

2. Explain and elaborate economic globalization in accordance with the driving forces
of globalization and the two important ideas of the economy.
3. Explain the role of international financial institutions in the creation of a global economy
4. Compare and contrast the types of market integration.
5. Describe the challenges of global governance in the 21st Century

Lesson 1: The Global Economy

Economic globalization refers to the international mobility of individuals,

capital, technology, goods, and services. It’s also about how different countries and regions
have become interdependent across the globe. According to one of the most often cited
definitions, “economic globalization is a historical process, the result of human innovation and
technological progress. It
refers to the increasing integration of economies around the world particularly through the
movement of goods, services, and capital across borders.

P a g e 1 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

The term refers to the movement of people (labor)

and knowledge (technology).

When you buy a Toyota car, its parts have

probably been produced in several different
countries. Toyota is one of the hundreds of
companies with globalized operation. The
same with shirt sold in France could
have been made from Chinese cotton
by workers in Thailand. Also, dozens of
Asian restaurants in a western country and a
fashion trend in Europe can come to Pakistan.

According to United Nations, it refers to the increasing interdependence of world

economies as a result of the growing scale of cross-border trade of commodities and
services, flow of international capital and wide and rapid spread of technologies. It reflects the
continuing expansion and mutual integration of market frontiers and is an irreversible
trend for the economic development in the whole world at the turn of the millennium.

While increasing integration in the global economy tends to bring increased wealth to
nation, globalization is commonly associated with increased inequality. “Economic
globalization refers to the increasing interdependence of world economies as a result of the increasing
scale of cross-
border commodities and service trade, the flow of international capital, and the rapid and
widespread of technology. It reflects the ongoing expansion and mutual integration of market
boundaries and is an irreversible trend for worldwide economic development at the turn of
millennium.

Economic development, apart from GDP growth, also includes improvements

in literacy, life expectancy, and well-being for people.

The trend of economic globalization has certain definite advantages to it, but some
disadvantages must also be considered so that the economic opportunities continue to
grow larger as the world becomes even smaller.

ADVANTAGES OF ECONOMIC GLOBALIZATION

 It promotes local growth by stimulating overall growth. The theory of trickledown economics
works if it is appropriately implemented. That’s because it is all about spending.
Multinational businesses are providing their community with jobs and dollars. If a
business hoards their cash, the entire system will collapse, but theory as a whole
is right.
 Higher levels of mutual trust would be created. Different people can trust each other, the
only way business opportunities can grow. Different corners of the world have different views
on what is right or wrong. The colonial aspects of growing Business Empire can be
reduced by working together and learning from the different views that people will work
with other people to lift each other.
 Innovations in some fields would create new technologies. If there is a need to reach a
global audience for real business will need to focus on investment and innovation to make
that happen.

P a g e 2 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Whenever a change takes place, new technologies also arrive in many different fields. The
result is a better living standard for all those involved in the process of development.

DISADVANTAGES OF ECONOMIC GLOBALIZATION

 It gives more power to businesses to influence civil government businesses grow in wealth,
political election can be better shape. Because of their cash flow they can lobby for laws
that benefits their business. In the past, foreign firms have been restricted from influencing
domestic elections, but recent U.S Supreme Court ruling, and other legal entities have made it
more potent than ever before.
 It removes local culture’s emphasis. There is no doubt that in economic globalization, the
American business revolution takes over the leading role. In there are other
multinationals, but the US dominates the business world. This means that the
emphasis on local culture will be extinguished as globalization continues, instead of giving
influence from business perspective, there will only be three regions.
 It encourages disease development and spread. Having a globalized economy means more
people will travel internationally than ever before. As of 2014 Ebola outbreak showed,
when people hop on aircraft and travel anywhere in the world in 2 days or less, the
diseases will spread to places around the world where they are not generally
seen today.

ASPECTS OF ECONOMIC GLOBALIZATION AND INTERNATIONAL RELATION

International relations attempt to explain the interactions of states in the global

interstate system, and it also attempts to explain the interactions of others whose behavior
originates within one country and is targeted toward members of other countries. In
short, the study of international relations is an attempt to explain behavior that occurs
across the boundaries of states, the broader relationships of which such behavior is a part, and the
institutions (private, state,
nongovernmental, and intergovernmental) that oversee those interactions. Explanations of that
behavior may be sought at any level of human aggregation.

 Ensures a more natural movement across nations of goods and services.

 To foster international economic ties, this is an absolute necessity.
Globalization, which is conducive to international industrial relations, has also
made it possible to move smoother people between countries. This also helps
people in one country migrate to another for work, thus tackling the
unemployment problem in many countries.
 Leads to nationwide free trade. Several bilateral trade agreements have been
signed between countries since the early days of globalization.

E.g. Economic Bilateral Relations

(US & Philippines)
 The United States and the Philippines have a strong trade and investment
relationship, with over $27 billion in goods and services traded (2086). The United
States is one of the largest foreign investors in the Philippines and is the
Philippines’ third-largest trading partner. Key imports from the Philippines are
semiconductor devices and computer peripherals, automobile parts, electric
machinery, textiles and
P a g e 3 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

garments, wheat and animal feeds,

coconut oil, and information
technology/business process outsourcing
services. Key U.S. exports to the
Philippines are agriculture goods,
machinery, cereals, raw and semi-
processed materials for the manufacture
of semiconductors, electronics, and
transport equipment. The two countries
have a bilateral Trade and Investment
Framework Agreement, signed in
1989, and a tax treaty. There are over
600 members in the Philippines chapter
of the American Chamber of Commerce,
which has national reach.
 The ensured information flows easier and faster across geographic boundaries.
Economic relationship success often depends on information.
 It has led to reduction in cultural barriers that have proved conducive to
nationwide economic cooperation.
 Movement of capital between countries due to globalization has also played
an essential role in international economic relations.
 It has given rise to several multinational corporations which undertake economic
activity across geographical borders.
 It has helped to address environmental issues which are strategic to
international economic relations. (e.g. Kyoto Protocol of 1997)

The Impact of Globalization on Developing, Transitional &

Developed Countries

Globalization clearly affects different countries in different ways. Some of the

channels by which developing countries are adversely affected confer benefits on the US
and other developed countries. Developing countries are forced, in effect, to hold vast
reserves in dollars or Euros, providing low or zero interest loans from developing countries
to developed countries. International financial arrangements which increase risk and force
the developing countries to bear risk increase the incomes of those who have a
comparative advantage in absorbing risk- the developed countries at the expense of those
who have a relative disadvantage- developing countries.

TYPES OF ECONOMIES
First, let's ensure that we understand the three types of economies we'll be discussing:

 Developing countries are nations with an underdeveloped industrial base where

people have lower life expectancy, less education, and less income. Examples of
developing countries are most of the countries in Africa and certain countries
in east Asia.

P a g e 4 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

 Transitional countries are those emerging from a different type of economy

towardsa market-based economy. Transitional economy refers to all countries that
attempt to change their basic economic structure and policies towards market-style
fundamentals. The best examples of transitional countries are China and
Russia.

 Developed countries are countries with a lot of industrial activities and where
people generally have high incomes. They have post-industrial economies, meaning the
service sector provides more wealth than the industrial sector. The United States
of America, Australia, and most of the European countries are examples of
developed countries.

Bretton Woods System and 1944 Agreement

How Bretton Woods Introduced a New World
Order

The Bretton Woods agreement of 1944 established a new global monetary system.
It replaced the gold standard with the U.S. dollar as the global currency. By so doing, it
established America as the dominant power in the world economy. After the agreement
was signed, America was the only country with the ability to print dollars. The agreement
created the World Bank and the International Monetary Fund (IMF), U.S.-backed
organizations that would monitor the new system.

The Bretton Woods Agreement

The Bretton Woods agreement was created in

a 1944 conference of all of the World War II
Allied nations. It took place in Bretton Woods,
New Hampshire.
Under the agreement, countries promised
that their central banks would maintain fixed
exchange rates between their currencies and the
dollar. If a country's currency value became too
weak relative to the dollar, the bank would buy
up its currency in foreign exchange
markets.

Members of the Bretton Woods system agreed to avoid trade wars. For example,
they wouldn't lower their currencies strictly to increase trade. But they could regulate their
currencies under certain conditions. For example, they could act if foreign direct
investment began to destabilize their economies. They could also adjust their currency
values to rebuild after a war.

Replacing the Gold Standard

Before Bretton Woods, most countries followed the gold standard.5 That meant
each country guaranteed that it would redeem its currency for its value in gold. After
Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold.

P a g e 5 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])
 lOMoARcPSD|11406384

Why dollars? The United States held three-fourths of the world's supply of gold. No other
currency had enough gold to back it as a replacement. The dollar's value was 1/35 of an
ounce of gold. Bretton Woods allowed the world to slowly transition from a gold
standard to a U.S. dollar standard.
The dollar had now become a substitute for gold. As a result, the value of the dollar
began to increase relative to other currencies.

The transition created more demand for dollars, even though its worth in gold remained the
same. This discrepancy in value planted the seed for the collapse of the Bretton Woods
system three decades later.

Why the Agreement Was Needed

Until World War I, most countries were on the gold standard. However, they cut the
tie to gold, so they could print the currency needed to pay for their war costs. This inflow
of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the
war, countries returned to the safety of the gold standard.

Hyperinflation caused the value of money to fall so dramatically that, in some

cases, people needed wheelbarrows full of cash just to buy a loaf of bread.

All went well until the Great Depression. After the 1929 stock market crash, investors
switched to commodities trading. It drove up the price of gold, resulting in people
redeeming their dollars for gold. The Federal Reserve made things worse by defending the
nation's gold reserve by raising interest rates.

The Bretton Woods system gave nations more flexibility than strict adherence to
the gold standard. It also provided less volatility than a currency system with no standard
at all. A member country still retained the ability to alter its currency's value, if needed, to
correct a "fundamental disequilibrium" in its current account balance.

Role of the IMF and World Bank

The Bretton Woods system could not have worked without the IMF. Member
countries needed it to bail them out if their currency values got too low. They'd need a kind
of global central bank they could borrow from if they needed to adjust their currency's
value and didn't have the funds themselves. Otherwise, they would just slap on trade
barriers or raise interest rates.

The Bretton Woods countries decided against giving the IMF the power of a global
central bank. Instead, they agreed to contribute to a fixed pool of national currencies and
gold to be held by the IMF. Each member country of the Bretton Woods system was then
entitled to borrow what it needed, within the limits of its contributions. The IMF was also
responsible for enforcing the Bretton Woods agreement.

The IMF was not designed to print money and influence economies with monetary policies.

The World Bank, despite its name, was not (and isn't) the world's central bank. At
the time of the Bretton Woods agreement, the World Bank was set up to lend to the
European countries

P a g e 6 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

devastated by World War II. The purpose of the World Bank changed to loaning money
to economic development projects in emerging market countries.

The Collapse of the Bretton Woods System

In 1971, the United States suffered from massive stagflation—a combination of

inflation and recession, which causes unemployment and low economic growth.
In response to a dangerous dip in value caused by too much currency in circulation,
President Nixon started to deflate the dollar's value in gold. Nixon devalued the dollar to
1/38 of an ounce of gold, and then to 1/42 of an ounce.

The devaluation plan backfired. It created a run on the U.S. gold reserves at Fort
Knox as people redeemed their quickly devaluing dollars for gold. In 1971, Nixon unhooked
the value of the dollar from gold altogether. Without price controls, gold quickly shot up to
$120 per ounce in the free market, ending the Bretton Woods system.

The creation of Bretton Woods resulted in countries pegging their currencies to

the U.S. dollar. In turn, the dollar was pegged to the price of gold, and the U.S. became
dominant in the world economy. The U.S. was the only nation that could print the globally
accepted currency, and countries had more flexibility than they did with the old gold
standard.

When the dollar ceased to be pegged to the price of gold, it became the monetary standard
with other currencies pegging their currencies to it.

The establishment of Bretton Woods System in 1944 is after fears of another

Depression after World War II. This was an attempt to create institutional structures which
would foster international economic cooperation and encourage the free flow of capital around
the world. The US dollar was adopted as the standard, almost a “global currency,” in order
to establish stable international exchange rates.

The Bretton Woods System led to the creation, either directly or indirectly, of various
global economic structures. While the International Trade Organization (ITO) was
unsuccessful because of a lack of US support, the General Agreement on Trade and
Tariffs (GATT) sought to facilitate the liberalization of trade by the reduction of tariff barriers.
GATT was eventually replaced by the World Trade Organization (WTO), which added a
concern for the reduction of non - tariff barriers.
This included the General Agreement on Trade in Services (GATS), protection of
intellectual property through TRIPS, and TRIMS measures that allow a nation - state to control
the distorting effects of foreign investment. The World Trade Organization (WTO) is a forum
for international negotiations on trade, with member countries participating in successive
“rounds” of discussions. Bretton Woods also led to the creation of the International
Monetary Fund in order to create a stable global monetary system.

P a g e 7 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

According to Hamilton (2008), one of the dimensions of globalization is the

economic globalization it involves trading and investing between countries. Trade is a driving
force behind international relations and trade impacts nearly every aspect of society. This global
economy has involved the global decentralization of production simultaneous to the centralization of
command
and control of the global production system within
global cities. Here Sassen draws on the basic
insight from the sociology of organization that
any increase in the complexity of social
activity must involve a concomitant increase in
the mechanisms of coordination. (Robinson,
2008)

Global trade operates through various

economic networks such as supply chains,
international production networks, global
commodity chains and, most importantly,
global value chains. Global value chains follow
the
creation of value through different stages, from the
creation of a product, to its disposal after use.

Furthermore, commodities are often the first link in this chain. The demand for
commodities is sky - rocketing, fueled primarily by enormous demand in the developed
countries and increased consumption in developing countries (especially East Asia). Oil is
a case in point. Not only are prices escalating because of increased demand, but it is also
becoming increasingly difficult to procure oil. These problems will be exacerbated in the
future by a decrease in the global supply of oil, as well as by the fact that some of the
current oil - exporting countries will start to import (rather than to export) oil to meet their
domestic needs. Some countries stimulate trade and investment through low prices and
low wages. This often leads to a “race to the bottom” among countries vying for increased
investment and export business. However, some theorize that after a point, there is a
move toward industrial “upgrading.”

In global flow outsourcing is also important which the offshore outsourcing involves
contracting work to companies located in other countries. Apart from the economic domain, this
process is also prevalent in the health care and military domains. Not only does the
process operate at a macro - level, but increasingly, it can also be observed at micro - and
meso - levels.
Interconnection of worldwide economic activities known as Global Economy that
take place between multiple countries. These economic activities can have either a positive or
negative impact on the countries involved.

P a g e 8 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])
 lOMoARcPSD|11406384

There are some characteristics of Global Economy:

Globalization describes a process by which nation al and regional economies, societies,

and cultures have become integrated through the global network of trade,
communication, immigration, and transportation.

 International trade is considered to be an impact of globalization., and it has

also helped countries to specialize in products which they have a comparative
advantage in.
 International finance: Money can be transferred at a faster rate between
countries compared to goods, services, and people; making international
finance one of the primary features of a global economy.
 Global investment This refers to an investment strategy that is not constrained by
geographical boundaries. Global investment mainly takes place via foreign
direct investment (FDI).


How does the global economy work?

The functioning of the global economy can be explained through one word —
transactions. International transactions taking place between top economies in the world help
in the continuance of the global economy. These transactions mainly comprise trade
taking place between different countries. International trade includes the exchange of a
variety of products between countries. It ranges all the way from fruits and foods, to
natural oil and weapons. Such transactions have a number of benefits including:

What are the effects of global economy?

The main cause of these effects is economics — based on the production and
exchange of goods and services. Restrictions on the import and export of goods and
services can potentially hamper the economic stability of countries who choose to
impose too many.

What are the benefits of global economy?

Movement of labor: Increased

Free trade is an excellent method
migration of the labor force is
for countries to exchange goods and
advantageous for the recipient country
services
as well as for the workers.

Increased economies of scale: The

specialization of goods production in Increased investment: Due to the
most countries have led to advantageous presence of global economy, it has
economic factors such as lower become easier for countries to attract
average costs and lower prices for short-term and long-term investment
customers.

FACTORS AFFECTING GLOBAL ECONOMY

According to the latest economic news, here are some of the key factors that
influence and affect how well the global economy works:
P a g e 9 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Population Infrastructure
Human capital; Technology;

Natural resources Law.

The BRANDT LINE MAP

The Brandt Line is an imaginary division that has provided a rough way of diving all
of the countries in the world in to the rich north and poor south. It is also the report
written by the independent Commission, first chaired by Willy Brandt in 1980,
to review international development issues. The result of this report provided an
understanding of drastic differences in the economic development for both the
North and South hemispheres of the World.

In the 1980s, the Brandt Line was developed as a way of showing the how the
world was geographically split into relatively richer and poorer nations. According to
this model:

 Richer countries are almost all located in the Northern Hemisphere, with the exception
of Australia and New Zealand.

 Poorer countries are mostly located in tropical regions and in the Southern Hemisphere.

However, over time it was realized that this view was too simplistic. Countries such as
Argentina, Malaysia and Botswana all have above global average GDP (PPP) per capita, yet still
appear in the ‘Global South’. Conversely, countries such as Ukraine appear to be now amongst
a poorer set of countries by the same measure.

P a g e 10 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

The gap between the ‘North’ and ‘South’ Despite very significant development
gains globally which have raised many millions of people out of absolute poverty, there is
substantial evidence that inequality between the world’s richest and poorest countries is
widening. In 1820 western Europe's per capita income was three times bigger than Africa’s
but by 2000 it was thirteen times as big. In addition, in 2013, Oxfam reported that the
richest 85 people in the world owned the same amount of wealth as the poorest half
of the world’s population.

Today the world is much more complex than the Brandt Line depicts as many poorer
countries have experienced significant economic and social development. However, inequality
within countries has also been growing and some commentators now talk of a ‘Global
North’ and a ‘Global South’ referring respectively to richer or poorer communities which
are found both within and between countries. For example, whilst India is still home to the
largest concentration of poor people in a single nation it also has a very sizable middle
class and a very rich elite.

There are many causes for these inequalities including the availability of natural
resources; different levels of health and education; the nature of a country’s economy and
its industrial sectors; international trading policies and access to markets; how countries
are governed and international relationships between countries; conflict within and
between countries; and a country’s vulnerability to natural hazards and climate
change.

P a g e 11 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Lesson 2: Market Integration

Introduction:

Integration shows the company’s market relationship. The extent of integration affects
the company’s behavior is different from disintegrated market behavior.

After the World War II, almost all countries around the world faced the great
challenge of bringing their feet back on the ground. As a substitute to the unsuccessful
League of Nations, The United Nation was established on October 24, 1945. It was tasked
to promote international cooperation to restore international order.

What is Market Integration?

Market integration in a term that is used to identify a phenomenon in

which markets of goods and services that are somehow related to one
another being to experience similar patterns of increase or decrease in terms of
the prices of those products. The term can also refer to a situation in which the
prices of related goods and services sold in a defined geographical location
also begin to move in some sort of similar pattern to one another.

(Tatum, 2020) Market integration is a term that is used to identify a

phenomenon in which markets of goods and services that are somehow
related to one another being to experience similar patterns of increase or
decrease in terms of the prices of those products. The term can also refer to
a situation in which the prices of related goods and services sold in a
defined geographical location also begin to move in some sort of similar
pattern to one another. At times, the integration may be intentional, with a
government implementing certain strategies as a way to control the direction
of the economy. At other times, the integrating of the markets may be due
to factor such as shifts in supply and demand that have a spillover
effect on several markets.

P a g e 12 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Effect of Integration on Market Development

1. Market integration provides opportunity to expand market coverage by selling local
products in the global market.
2. Market integration help to reduce market failure
3. Difference in the prices in integrated market should be equal if they are well integrated.

The integration of global market started when big American corporations began to
emerge after World War II with the rise of new corporations. International Telephone
and Telegraph bought Avis Rent-a-Car, Continental Banking, Sheraton Hotels, and Hartford
Fire Insurance (American History, 2018). Later, Japan and Europe followed suit. Japanese
global Automobile Corporation like Toyota, Nissan, and Isuzu took off after the giant
American companies flourished. Renault automobiles, a French multinational automobile
manufacturer, was also used to help the military post- war operations. The rise of American,
Japanese, and European global corporations paved the way for further development of
international trade. Iwan (2012) identifies the difference among international, multinational,
transitional, and global companies.

• International companies are importers and exporters with no investments

outside their home countries.

• Multinational companies (MNCs) have investments in other countries, but do

not have a coordinated product offering in country. They are more focused on adapting their
products and services to each individual local market.

• Global companies have investments and are present in many countries.

They typically market their products and services to each individual local market.

• Transitional companies (TNCs) are more complex organizations that have

investments in foreign operations, have a central corporate facility but give decision
making, research and development, and marketing powers to each individual foreign
market.

P a g e 13 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Multinational Corporation (MNC) & Transnational Corporation (TNC)

Multinational corporations comprise businesses

operating or having business interests in more than one
country, mostly headquartered in the parent country. There
have been several definitions of multinational
enterprise, which are also known as transnational
corporations (Kumar, 2015). Lazarus (2001) defines a
multinational corporation as a “business organization
whose activities are located in more than two
countries”. Similarly, Dunning (1992) defined
multinational enterprise as “an enterprise that
engages in foreign direct investment and owns or
controls value-adding activities in more than one
country”. In a more recent publication Kumar (2015)
define multinational corporations as “those large firms
which are incorporated in one country, but which
own, control or
manage production and distribution facilities in several countries”. Therefore, multinational
corporations are involved in the transactions of large volume of businesses.

According to Udoka (2015) multinational corporations are organizations which operate

strategically on an international scale. A multinational corporation is a company, firm or
enterprise that operates worldwide with its headquarters in a metropolitan or developed
country. Hill (2005) defines Multinational Enterprise as “any business that has productive
activities in two or more countries”.

All the definitions cited above suggest different distinct characteristics of multinational
enterprise. Lazarus pointed out that, for a corporation to qualify to be called multinational, it
must have functional offices in at least two countries. While, Dunning suggested that, the
organization must be involved in foreign direct investment and should be operating not just in its parent
country. Kumar supported this view. However, he noted that, they should have production
facility or distribution channel in several countries. All the definitions seem to agree that,
multinational corporations should be present in more than two countries.

Advantages of Multinational Companies – MNC’s

 As one can imagine, there are a lot of merits of having a multinational corporation
exist and function in an economy. They also bring many advantages to the
consumers as well. Let us see some merits of an MNC in both the host country
and the home country.

Merits of a Multinational Companies in a Host Country

I. One of the main advantages to the host country is that MNCs boost their
economic growth. They bring with them huge investments and capital. And
then through subsidiaries, joint ventures, branches, factories they promote rapid
industrial growth. In fact, MNCs are known as the messengers of progress.
P a g e 14 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

II. A multinational corporation helps the technological growth of the country as well. They
bring new innovations and technological advancements to the host country. They
help modernize the industry in developing countries.
III. MNCs also reduce the host countries dependence on imports. Imports reduce
while exports from the country see a rise.
IV. All MNCs have enormous capital and resources at their disposal. A good portion of
such resources is invested in R&D. This can be very beneficial to the host countries
where they set up their R&D facilities.
V. Multinational corporations also promote maximum utilization of the country’s resources.
This, in turn, leads to economic development.

Merits of Multinational Companies in the Home Country

I. MNCs make their home countries (country of origin) very rich by their revenues.
The corporation will collect fees, royalties, profits, charges from all their host
countries and bring them back to the home country. This huge inflow of foreign
exchange is very beneficial to the home country.
II. MNCs provide a means of co-operation between developed countries and
developing or underdeveloped countries. This allows both to benefit from the
partnership.
III. And these multinational corporations also help promote bilateral trade relations between
countries. This is beneficial to both the countries and the global market and
economy.

Foreign Direct Investment

Foreign direct investments are prevalent within multinational corporations. The

investments occur when an investor or company from one country makes an investment outside
the country of operation.

Foreign investments most often occur when a foreign business is established or bought
outright. It can be distinguished from the purchase of an international portfolio that
only contains equities of the company, rather than purchasing more direct control.

Transnational Corporation (TNC)

A transnational corporation (TNC) is "any enterprise that undertakes foreign direct

investment, owns or controls income-gathering assets in more than one country, produces goods or
services outside its country of origin, or engages in international production" (Biersteker 1978, p.
xii). Variously termed multinational corporations (MNCs) and multinational enterprises (MNEs),
transnational corporations are formal business organizations that have spatially dispersed
operations in at least two countries. One of the most "transnational" major TNCs is Nestlé,
the Swiss food giant; 91 percent of its total assets, 98 percent of its sales, and 97 percent
of its workforce are foreign-based (UNCTAD 1998, p. 36)

P a g e 15 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Earlier in 1944 at the Monetary and Financial Conference in Bretton Woods,

New Hamsphire (US), the first- government- sponsored international financial institution
were established- the World Bank (WB) and the International Monetary Fund (IMF). There
are two types of international financial institutions: intergovernmental and private. The
WB is an intergovernmental institution. Its aim is to end extreme poverty and promote
shared prosperity in a sustainable way. There are five organizations that belong to the WB
Group, namely the International Bank for Reconstruction and Development, International
Development Association, International Financial Corporation, Multilateral Investment
Guarantee Agency, and International
P a g e 16 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Center for Settlement and Investment Disputes. These organizations facilitate the
granting of loans and financial assistance to developing countries. The IMF, also an
intergovernmental institution, works to foster global monetary cooperation, secure financial
stability, and facilitate international trade and more.

TYPES OF MARKET INTEGRATION

1) Horizontal integration - This occurs when a firm or agency gains control of

other firms or agencies performing similar marketing functions at the same level in the
marketing sequence.

 In this type of integration, some marketing agencies combine to form a union with
a view to reducing their effective number and the extent of actual competition in
the market.
 It is advantageous for the members who join the group.
 In most markets, there is a large number of agencies which do not effectively
compete with each other. This is indicative of some element of horizontal
integration.
 It leads to reduced cost of marketing. In this reduced competition possible.

Acquiring Acquired
Company Company

Porsche Volkswagen
Companies using horizontal integration
Kraft foods Cadbury

Microsoft Yahoo

Apple AuthenTec

Facebook WhatsApp

2) Vertical Integration - This occurs when a firm performs more than one
activity in the sequence of the marketing process.

 It is a linking together of two or more functions in the marketing process within

a single firm or under a single ownership.
 This type of integration makes it possible to exercise control over both quality
and quantity of the product from the beginning of the production process until
the product is ready for the consumer.
 It reduces the number of middle men in the marketing channel.

Example:

Meat industry buys all the functioning plants needed for running a meat industry.

P a g e 17 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

Types of Vertical Integration

a) Forward integration - If a firm assumes another function of marketing which

is closer to the consumption function, it is a case of forward integration.

b) Backward integration - This involves ownership or a combination of sources of

supply.

c) Balanced vertical integration - The third type of vertical integration is a

combination of the backward and the forward vertical integration.

3)Conglomeration - A combination of agencies or activities not directly related to

each other may, when it operates under a unified management, be termed a
conglomeration.

Reasons for Market Integration

• To remove transaction costs

• Foster competition
• Provide better signals for optimal generation and consumption decisions.
• Improve security of supply

P a g e 18 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])

 lOMoARcPSD|11406384

References:

 Lobo, J, Maliban, N, & Mesinas, M. (2019) The Contemporary World. Books

Atpb. Publishing
 Corp. Claudio, L & Abinales, P. (2018) The Contemporary World. C & E publishing, Inc.
 Brazalote, T & Leonardo, R. (2019) The Contemporary World. C & E publishing, Inc.
 Aldama, P. (2018). The Contemporary World. Rex Book Store Inc.
 Scribd. (n.d.). Module for the Contemporary World 2020 | Multinational
Corporation | Globalization. https://www.scribd.com/document/464294146/Module-
for-the- Contemporary-World-2020.
 State. (n.d.). U.S. Relations With the Philippines - United States Department
of State. https://www.state.gov/u-s-relations-with-the-philippines/.
 Polisci. (n.d.). International Relations – Department of Political Science –
UW– Madison. https://polisci.wisc.edu/international-relations/.
 https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133
 https://www.edology.com/blog/accounting-finance/how-does-global-economy-work/
 Researchleap. (n.d.). MNC | The Promises and Perils of Multinational Corporations.
https://researchleap.com/promises-perils-multinational-corporations-nigerian-
experience/.
 Toppr. (n.d.). Multinational Companies or Corporations (MNC) | List, Features.
https://www.toppr.com/guides/business-environment/scales-of-business/multinational-
corporations-mnc/.
 Encyclopedia. (n.d.). Transnational Corporations | Encyclopedia.com. https://www.encyclopedia.com/social-
sciences/encyclopedias-almanacs-transcripts-and-maps/transnational-corporations.

P a g e 19 | 19

UNIT II: THE STRUCTURES OF GLOBALIZATION

Downloaded by Ellen Grace P. Tadlas ([email protected])