Chapter 3: Market Integration Study Guide

Core Concepts of Economic Systems and Integration

Economy as a Social Institution: - The economy is the social institution with the most significant impact on society. - While typically conceptualized in numerical terms—such as unemployment figures, Gross Domestic Product ( $GDP$ ), or daily stock market performance—the economy is fundamentally composed of people. - It serves as the social institution that organizes society’s production, consumption, and the trade of goods.
Impact of Economic Systems: - There are various methods for making, exchanging, and utilizing products. - Major systems include Capitalism and Socialism. - These economic systems, along with the historical economic revolutions that established them, dictate the way individuals live their lives.
Definition of Market Integration: - This refers to a phenomenon where the prices of related goods and services within a specific geographical location begin to move in similar patterns. - In an integrated market, the food supply adjusts spatially to meet shifting demands. - Example: The price and supply dynamics of soda (soft drinks).

Learning Objectives

Narrate the short history of global market integration during the twentieth century.
Identify the specific attributes of global corporations.
Explain the critical role international financial institutions play in the creation and maintenance of a global economy.

Historical Development of Global Market Integration

The 19th Century and technological Foundations: - Global market integration became a reality in the 19th century due to advanced technological developments. - Key innovations included the steam engine, the expansion of railroads, and the development of ports, which facilitated a faster worldwide transport network.
The Peak and Decline: - Market integration reached its first peak in $1913$ , a period characterized by unfettered markets. - Integration declined over the following $60$ years as nations faced the Great Depression and began to shun international capital markets.
Post-World War II Resurgence: - Integration began to rise again as large American companies emerged after the Second World War. - Major entities like International Telegraph acquired various businesses, including Avis car rental, Sheraton hotels, and interests in continental banking. - This trend was subsequently followed by companies from Japan and Europe.
Case Study: Avis Car Rental, LLC: - Headquartered in Parsippany, New Jersey. - It is a unit of the Avis Budget Group, which also includes Budget Rent a Car, Budget Truck Rental, and Zipcar. - The Avis Budget Group operates the brand in North America, South America, South Africa, India, Australia, and New Zealand.
Case Study: Hotel Sheraton: - Managed by Sheraton Hotels and Resorts, an international chain owned by Marriott International. - As of June $30$ , $2020$ , Sheraton operated $446$ hotels with $155,617$ rooms globally. - Locations include North America, Africa, Asia Pacific, Central and South America, Europe, the Middle East, and the Caribbean. - At that time, there were an additional $84$ hotels with $23,092$ rooms in the development pipeline.
Primary Historical Revolutions: - The Agricultural Revolution: A series of cultural transformations that allowed humans to shift from a hunting and gathering subsistence lifestyle to one based on agriculture and the domestication of animals. - The Industrial Revolution: Transformed economies based on agriculture and handicrafts into those based on large-scale industry, mechanized manufacturing, and the factory system. New power sources and machines increased productivity and efficiency.

Global Market Integration and Trade Policy

Definition and Indicators: - Integration refers to the degree to which distinct markets in different nations or regions operate as a single market. - Key indicators include price similarity and high volumes of cross-border transactions. - It is a critical aspect of globalization, involving the removal of trade barriers and the free flow of goods, services, and capital.
Philippine Customs and Tariffs (CMTA - RA 10863): - All goods imported into the Philippines are generally subject to duty and tax. - This includes goods previously exported from the Philippines, except where provided for by the Customs Modernization and Tariff Act (CMTA – RA 10863). - The Philippines applies specific duty rates to protect local producers; manufactured imports competing with local goods typically face higher tariffs.
Tariff Statistics (2022): - The Philippines implemented the $2017$ version of the ASEAN Harmonized Tariff Nomenclature (AHTN). - The simple average Most Favored Nation (MFN) applied tariff rate was $6.1\%$ . - MFN rate for agricultural products: $9.8\%$ . - MFN rate for non-agricultural products: $5.5\%$ .
Trade Agreements: - ASEAN Free Trade Area (AFTA): The Philippines eliminated tariffs on approximately $99\%$ of all goods from ASEAN partners. - Regional Comprehensive Economic Partnership (RCEP): Retained zero tariff rates or existing MFN rates for $98.1\%$ of all goods from China, Japan, South Korea, New Zealand, Australia, and ASEAN partners.
Prohibited Goods (Section 118 of CMTA): - (a) Written or printed goods advocating treason, rebellion, insurrection, or sedition against the Philippine government, or those containing threats to life. - (b) Instruments, drugs, or substances designed for producing unlawful abortion. - (c) Obscene or immoral representations (engravings, films, photographs, etc.). - (d) Goods made of gold, silver, or precious metals that do not indicate actual fineness or quality through a stamp/brand. - (e) Adulterated or misbranded food or drugs for human consumption. - (f) Infringing goods as defined by the Intellectual Property Code.

Degrees and Types of Market Integration

Classifications of Integration: - Ownership Integration: Occurs when all decisions and assets of one firm are assumed by another (e.g., a processing firm buying a wholesale firm). - Contract Integration: An agreement between two firms regarding certain decisions (e.g., a company tying up with traders for grain supply).
The Three Basic Types of Market Integration: - 1. Horizontal Integration: - Occurs when a firm gains control of other agencies performing similar marketing functions at the same level of the marketing sequence. - Purpose: To grow in size/revenue, expand into new markets, diversify offerings, and reduce competition. - Examples: Walt Disney Company’s acquisition of $21$ st Century Fox; Marriott International’s acquisition of Starwood Hotels & Resorts; Meta’s (Facebook) acquisition of Instagram. - Monopoly Context: If a company owns every part of a production process, it is a horizontal monopoly (e.g., John D. Rockefeller’s Standard Oil). - Forms of Horizontal Integration: - Mergers: Joining two similar-sized independent companies (e.g., BPI and Far East Bank in $2000$ ; BDO and Equitable PCI in $2007$ ; PNB and Allied Banking Corp in $2012$ ). - Acquisitions: The purchase of another company (e.g., Jollibee Food Corporation buying Mang Inasal for $P3$ billion, with $30\%$ retained by original owners). - Internal Expansions: Organic growth through innovation and leveraging core strengths without merging. - 2. Vertical Integration: - A business arrangement where a company controls different stages along the supply chain in-house rather than relying on external suppliers. - Examples: Apple (manufactures chipsets and cases), McDonald’s, and Amazon. - Philippine Context: Jollibee is cited as the epitome of vertical integration, controlling manufacturing, logistics, and retail sales. - Attributes: Costly and complex but confers control, reduced costs, and increased profitability. - 3. Conglomeration: - A multi-industry company consisting of several unrelated business entities operating in various industries under one corporate group. - Purpose: Diversify revenue, reduce market risk, and avoid takeovers by leaning on combined resources. - Global Examples: Berkshire Hathaway, Alphabet, Meta, Procter & Gamble (P&G), Unilever, Diageo, Johnson & Johnson, and Warner Media. - Philippine Examples: Ayala Corporation (real estate, banking, water, telco, power), San Miguel Corporation, SM Investments, BDO, PLDT, and Aboitiz.

Impacts and Institutions of the Global Economy

Impact of Integration: - Increased economic efficiency and efficient resource allocation. - Allows countries to specialize based on comparative advantage. - Leads to synchronization in price movements and a wider range of suppliers.
International Financial Institutions (IFIs): - Institutions established by more than one country and subject to international law. - Roles: Advising, funding, and assisting in development projects to reduce global poverty. - The World Bank: Lends money to poorer member governments to improve economies and standards of living; serves as a major research center. - International Monetary Fund (IMF): Promotes global macroeconomic and financial stability; provides policy advice and capacity development. - International Finance Corporation (IFC) in the Philippines: - Mobilizes capital for private investments in renewable energy, water, and agriculture. - Attracts investors for infrastructure and helps small farms access credit and reach profitable markets.
Global Corporations: - Companies that do business all over the world, introducing products and the brand to foreign countries. - Attributes (Neubauer, 2014): 1. Agent of desired economic development. 2. Economic prominence. 3. Powerful entity capable of creating a crisis. - Operational Traits: Use global standardization for products, focus on global consumer satisfaction, lack a dominant headquarters, and are governed by the laws of the country where they are incorporated.

Summary of Market Integration Benefits

Efficiency: Allows for specialization and better allocation of resources.
Lower Prices: Increased competition often results in lower prices for consumers.
Standard of Living: Integration enables ordinary people to afford more goods and services, improving overall quality of life.