Republic of the Philippines
SORSOGON STATE UNIVERSITY
Bulan Campus
Bulan, Sorsogon
MODULE 2 in Contemporary World
1ST SEM Sem 2024-2025
Week 4, 5 & 6
Prepared by : MONTISSO G. NAVARRO, MEEd
Instructor
Republic of the Philippines
SORSOGON STATE UNIVERSITY
Bulan Campus
Bulan, Sorsogon
CONTEMPORARY WORLD
Module 2
LEARNING OBJECTIVES :
• Explain the role of international financial institutions in the creation of a global
economy.
• To expand students’ knowledge concerning mutual benefits from sharing the
wealth each state produces so to maintain friendly relationships among countries.
• To be able to compare the local governance of one independent and state its
distinction with the global governance composed of different states.
• To widen student’s information for reasons as to the division of the North and the
South.
INTRODUCTION :
What Is Market Integration?
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.
When a market integration exists, the events occurring within two or more
markets are exerting effects that also prompt similar changes or shifts in other markets
that focus on related goods. For example, 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.
Market integration may occur with just about any type of related markets. With a
stock market integration, similar trends in trading prices for assets related to a given
industry may be found in two or more markets around the world. In like manner,
financial market integration may occur when lending rates in several different markets
begin to move in tandem with one another. In some cases, the integration within a
nation may involve the emergence of similar patterns within the capital, stock, and
financial markets, with those trends coming together to exert a profound influence on
the economy of that nation.
https://www.wisegeek.com/what-is-market-integration.htm
TYPES OF MARKET INTEGRATION
A. Vertical vs Horizontal Integration
Horizontal and vertical integration are tactics that are used by firms to expand
their business operations. A company may decide to acquire companies in the same
industry producing/providing the same product/service or acquire companies that
become part of the entire production process. The article that follows explains both
vertical and horizontal integration processes and explains how they are different to one
another.
What is Vertical Integration?
Vertical integration occurs when a company expands control over a specific
industry’s entire supply chain. There are three types of vertical integration; backwards,
forwards, and equal (both forward and backwards). Vertical integration can occur either
way; towards the customer or towards the raw materials that are used for production of
goods. For example, a producer of flour for bakeries can vertically integrate by going
backwards towards the raw materials, which is to start their own farming operations or
vertically integrate forwards towards the consumer by opening up their own bakery.
Vertical integration provides the company with greater control in all aspects of the
production process which also results in lower cost and better management of overall
production. Vertical integration also results in supplies and selling avenues being
secured for the firm. This means that, when a company supplies its own raw materials,
it can ensure that raw materials are available for production without having to rely on a
third-party supplier. Same goes with sales avenues, all that is produced can be sold in
the company’s own outlets instead of having to sell through an intermediary that may
have their own purchasing budgets. Selling directly to consumers can also result in
better margins; since there are no intermediaries the full sales amount will be available
to the firm.
Horizontal integration is when a company acquires or merges with another
company within the same industry that sells a similar product or provides a similar
service. Horizontal integration is aimed at increasing market share and eliminating
competition. An example of horizontal integration would be the flour producer acquiring
or merging with a number of flour producers within the area or producers that are
dispersed geographically. This will provide the flour producer greater control over the
flour industry which will result in greater market share and monopoly.
Horizontal integration will allow a firm to expand into new business with less
hassle and cost as they are buying an already established profitable business.
Horizontally integrated firms are larger and will, therefore, be able to enjoy economies of
scale. However, if the firm becomes too large, that may result in the enforcement of
anti- monopoly restrictions.
What is the difference between Vertical and Horizontal Integration?
Horizontal integration and vertical integration are both forms of expansion and
allow the company to gain better control, market share, economies of scale, etc. Vertical
integration occurs when a firm either goes forward and purchases the seller/distributor
or goes backwards and purchases the raw materials supplier. Horizontal integration, on
the other hand, is when a company acquires or merges with a similar firm in the same
industry. Vertical integration provides a greater level of control over the entire
production process and can, therefore, result in lower cost and wastage. Horizontal
integration, on the other hand, is aimed at gaining more market share, eliminating
competition and achieving economies of scale.
.
B. What is Backward Vertical Integration?
What Is Backward Integration?
Backward integration is a form of vertical integration in which a company expands its
role to fulfill tasks formerly completed by businesses up the supply chain. In other
words, backward integration is when a company buys another company that supplies
the products or services needed for production. For example, a company might buy
their supplier of inventory or raw materials. Companies often complete backward
integration by acquiring or merging with these other businesses, but they can also
establish their own subsidiary to accomplish the task. Complete vertical integration
occurs when a company owns every stage of the production process, from raw
materials to finished goods/services.
Key Takeaways
Backward integration is when a company expands its role to fulfill tasks formerly
completed by businesses up the supply chain.
Backward integration often involves is buying or merging with another company that
supplies its products.
Companies pursue backward integration when it is expected to result in improved
efficiency and cost savings.
Backward integration can be capital intensive, meaning it often requires large sums of
money to purchase part of the supply chain.
Backward integration is a strategy that uses vertical integration to boost efficiency.
Vertical integration is when a company encompasses multiple segments of the supply
chain with the goal of controlling a portion, or all, of their production process. Vertical
integration might lead a company to control its distributors that ship their product, the
retail locations that sell their product, or in the case of backward integration, their
suppliers of inventory and raw materials. In short, backward integration occurs when a
company initiates a vertical integration by moving backward in its industry's supply
chain.
An example of backward integration might be a bakery that purchases a wheat
processor or a wheat farm. In this scenario, a retail supplier is purchasing one of its
manufacturers, therefore cutting out the middleman, and hindering competition.
Advantages of Backward Integration
Companies pursue backward integration when it is expected to result in improved
efficiency and cost savings. For example, backward integration might cut transportation
costs, improve profit margins, and make the firm more competitive. Costs can be
controlled significantly from production through to the distribution process. Businesses
can also gain more control over their value chain, increasing efficiency, and gaining
direct access to the materials that they need. In addition, they can keep competitors at
bay by gaining access to certain markets and resources, including technology or
patents.
Disadvantages of Backward Integration
Backward integration can be capital intensive, meaning it often requires large sums of
money to purchase part of the supply chain. If a company needs to purchase a supplier
or production facility, it may need to take on large amounts of debt to accomplish
backward integration. Although the company might realize cost savings, the cost of the
additional debt might reduce any of the cost savings. Also, the added debt to the
company's balance sheet might prevent them from getting approved for additional credit
facilities from their bank in the future.
C. WHAT IS FORWARD VERTICAL INTEGRATION?
What Is Forward Integration?
Forward integration is a business strategy that involves a form of downstream vertical
integration whereby the company owns and controls business activities that are ahead
in the value chain of its industry, this might include among others direct distribution or
supply of the company's products. This type of vertical integration is conducted by a
company advancing along the supply chain.
A good example of forward integration would be a farmer who directly sells his crops at
a local grocery store rather than to a distribution center that controls the placement of
foodstuffs to various supermarkets. Or, a clothing label that opens up its own boutiques,
selling its designs directly to customers instead of or in addition to selling them through
department stores.
The rise of the internet has made forward integration both easier and a more popular
approach to business strategy. A manufacturer, for example, has the ability to set up an
online store and use digital marketing to sell its products. Previously, it had to use retail
companies and marketing firms to effectively sell the products.
The goal of forward integration is for a company to move forward in the supply chain,
increasing its overall ownership of the industry. Standard industries are made up of five
steps in the supply chain: raw materials, intermediate goods, manufacturing, marketing
and sales, and after-sale service. If a company wants to conduct a forward integration, it
must advance along the chain while still maintaining control of its current operations—its
original place in the chain, so to speak.
Key Takeaways
Forward integration is a business strategy that involves expanding a company's
activities to include the direct distribution of its products.
Forward integration is colloquially referred to as "cutting out the middleman."
While forward integration can be a way to increase a company's control of its product
and profits, there can be a danger of diluting the core competencies and business.
Example of Forward Integration
For example, the company Intel supplies Dell with intermediate goods—its processors—
that are placed within Dell's hardware. If Intel wanted to move forward in the supply
chain, it could conduct a merger or acquisition of Dell in order to own the manufacturing
portion of the industry.
Additionally, if Dell wanted to engage in forward integration, it could seek to take control
of a marketing agency that the company previously used to market its end-product.
However, Dell cannot seek to take over Intel if it wants to integrate forward. Only a
backward integration allows a movement up the supply chain its case.
https://www.investopedia.com
D. CONGLOMERATE INTEGRATION
Conglomerate Merger
Meaning of Merger
Merger is a process in which two or more existing companies voluntarily combine
together to function as one new company. A new company comes into existence to gain
a competitive edge in the market, improve the financial and operational strength of both
the companies, expand the research and development program, expand the business
into new areas, etc. However, we must understand that merger is different from an
acquisition. Under the merger, two or more companies combine voluntarily while under
acquisition, the acquiring company purchases the business of the target company.
There are certain types of mergers and one of them is Conglomerate Merger.
Lateral / Conglomerate Integration
There are some notable businesses that have built up a large number of different
subsidiaries often with limited commercial relationships
Lateral integration happens when companies join together that produce similar but
related products.
Examples:
Google and You Tube
Proctor & Gamble acquiring Gillette
Microsoft's takeover of Skype (2011)
SSL International, the manufacturer of Durex condoms, taken over by
conglomerate Reckitt Benckiser (2010)
One of the main advantages of lateral integration is to exploit economies of scope
Conglomerates
A conglomerate has a large number of diversified businesses. Tata Group is one of the
world's most diversified businesses and a great example of a conglomerate. Another is
Samsung – the electronics giant also makes military hardware, apartments, ships and
Samsung also operates a Korean amusement park! Google is best described as a
digital conglomerate.
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THE GLOBAL INTERSTATE SYSTEM
Global Interstate System is an organized institution that governs international relations
foe mutual benefit.
Benefits of the United Nations brought to Globalization
The one who coined the of the United Nations was the former president of the United
States President Franklin Roosevelt that is now being used in the Declaration of the
United Nations.
There were only 26 nations representatives pledge their governments to :
1. Use its full resources, military or economic, against those members of the
Tripartite Pact and its adherence with which such government is at war.
2. Cooperate with the government signatory hereto and not to make a separate
armistice or peace with the enemies.
Selected Institutions Associated with World Trade
WORLD BANK is a financial institution that extends financial assistance through
loans to countries interested. It was founded by the United Nations Monetary and
Financial Conference or the BRETTON WOODS CONFERENCE
In order to facilitate connections among nation-states intergovernmental organizations
(IGOs) were established. Their aim is to foster strong economic, political, cultural,
educational and technical intergovernmental relationships. The Association of
Southeast Asian Nations (ASEAN), European Union (EU), and the World Trade
Organization (WTO) are examples.
Established in 1967, the Association of Southeast Asian Nations (ASEAN) now has
10 member states. Its aims are 1) to accelerate economic growth , social progress and
cultural development in the region; 2) promote regional progression; 3) advance peace
and sustainability; 4) promote active and beneficial cooperation and mutual assistance
on matters of common interest in the economic, technical, cultural and administrative
and scientific fields; 4) provide assistance to each other in the framework of training and
research installation in the educational, professional, technical and administrative
spheres; 5) work hand in hand for more effective and greater use of agricultural and
industries…
THE WORLD TRADE ORGANIZATION (WTO) has 164 member-states. It is the sole
IGO that caters to rules of trade on a global scale. Its objective is to ensure that trade
runs as smoothly, predictably, and freely as possible. It also encourages trade by
lowering trade barriers that may hinder how products and services flow from nation to
nation.
Some other examples of IGOs are the International Criminal Court (ICC), North
Atlantic Treaty Organization (NATO) and Organization of Petroleum Exporting Countries
(OPEC). All IGOs serve purposes based on the common interest of their member -
states that is deemed beneficial to all parties involved.
The intensification of relations among nation-states gave birth to the idea of
internationalism and globalism. The former is the theory and practice of
interdependent collaboration while the latter is an attitude. Internationalism is basically
anchored on the opinion that nationalism should be outrun because links that bind
people of different countries are more powerful than those that disconnect them.
Moreover, in order to avert wars, Immanuel Kant ( 1795) stated that agreements among
nations must be reached. He conceptualized the idea of liberal internationalism which
proposes that nations must give up their freedom and submit to a large system of laws
that is embodied by common international principles. He believed that a form of global
government is needed to create and enforce these laws. Socialist internationalism,
on the other hand contradict liberal internationalism. This form of internationalism is
based on the view that capitalism is a global system and that the working class must
unite as global class to forward the struggle against capitalism.
On the other hand, globalism emerged as an attitude that seeks to understand
all the interconnections of the modern world and to highlight patterns that underlie them.
Overall, global interstate system is a facet of contemporary political globalization that
seeks to form collaboration among nation-states through the establishment of
intergovernmental organizations (IGOs)
A World of Regions
Global Divides: The North and the South (focus on Latin America)
Overseas Filipino workers (OFW) in Europe, Australia and America tend to see
the big difference between the ways of living in the Philippines and in Western
countries. Some of them come home as “ one day millionaires” giving out present to
their families, relatives, neighbors and friends. Although their incomes are relatively
higher than if they work in the Philippines, they realize that life is still tough despite the
remittances they send to their families and the taxes that the country gains from these.
Furthermore, they cannot escape the reality that their occasional vacations in the
Philippines are temporary because they would need to go back to work in order to
continue making a living in another country. This is a reflection of the global divide
between north and south as experience by these Filipinos.
The term "Global South" emerged in the 1950s but Carl Oglesby became the first
person to give it a contemporary political use when he commented on the US’s
dominance over the global south. The founding members of the Non-Aligned Movement
(NAM) also used the term politically. To better understand the term, one needs to know
the social, economic, and political meaning of the north-south divide. The north-south
divide does not mean a division along the equator, but the line dividing the richest and
the poorest countries on this planet. Global north, therefore, are the developed
countries of North America, Europe, Asia, and Oceania (The West, the First World,
and parts of the Second World). The Global South, therefore, includes countries in
Africa, Latin America, and developing parts of Asia and the Middle East. Alternative
terms for the Global South are the Less-Developed World, Developing Countries,
Majority World, Non-Western World, Poor World, the South, Third World, and the
Undeveloped World.
One can say that the terms Global south and Third world are conceptually the
same. They both refer to conditions usually found in developing countries. But the term
THIRD WORLD is the antecedent of Global south. Arguably, the term Third world
ceased to exist when the cod war ended. Historically, the world was once categorized
based on the economic ideology of Western capitalism against the Soviet Union’s
socialism. As formal economies, capitalism sustains consumer choice, private
property, and economic freedom while socialism is characterized by state control,
means own by the government, of the means of production, distribution and exchange.
Capitalist economies were considered First world and socialist economies were referred
to a Second World. Those that did not belong to either types of formal economies
belong to the third world. The term Third World was initially used to refer to the former
colonies of European countries. To illustrate, India was considered a Third World
country for it was a colony of the United Kingdom. According to this categorization, the
Philippines was classified as Third World. Later the category was used to refer to
countries that were neither capitalist nor socialist. The term was also used to refer to the
poor world. These countries were considered to be non-industrialized and newly
industrialized. They lacked the standard systems in banking, finance and trade.
END OF MODULE 2
Prepared by
Name: MONTISSO G. NAVARRO, MEEd
Position/Rank: Instructor III
Institution: Sorsogon State University – Bulan Campus
Institution’s Address: Zone 8, Bulan, Sorsogon
Personal e-mail address: orravan58@gmail.com
