Overview Of Globalization of Finance
Added on 2022-06-07
12 Pages2635 Words31 Views
FinanceEconomics
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Globalization of Finance
1. Introduction
Global connections through cross-border financial flows have become increasingly relevant
for emerging markets as all country's markets financially integrate with the rest of the world.
This report discusses financial globalization and its impact on different countries and their
economic and market behavior. According to the findings, financial globalization has been one
of the most debated topics at the global level over the past three decades. While most
economists have emphasized economic growth as a result of financial globalization, some
others have highlighted the potential risks arising from financial globalization. The paper
focuses on several benefits and issues related to whether financial globalization enhances the
growth performance of the integrating economy and supports its macroeconomic stability.
This report covers the literature review on financial globalization through the areas of related
financial globalization theories, how financial globalization affects the world economy, and
how financial globalization affects developing countries. Then discuss the practical application
of financial globalization and explain it using global examples. And report discusses the
success story of financial globalization using the example of Singapore. Finally, some of the
author's points of view regarding financial globalization are presented and the conclusion of
the study is drawn..
Word Count - 2021
1. Introduction
Global connections through cross-border financial flows have become increasingly relevant
for emerging markets as all country's markets financially integrate with the rest of the world.
This report discusses financial globalization and its impact on different countries and their
economic and market behavior. According to the findings, financial globalization has been one
of the most debated topics at the global level over the past three decades. While most
economists have emphasized economic growth as a result of financial globalization, some
others have highlighted the potential risks arising from financial globalization. The paper
focuses on several benefits and issues related to whether financial globalization enhances the
growth performance of the integrating economy and supports its macroeconomic stability.
This report covers the literature review on financial globalization through the areas of related
financial globalization theories, how financial globalization affects the world economy, and
how financial globalization affects developing countries. Then discuss the practical application
of financial globalization and explain it using global examples. And report discusses the
success story of financial globalization using the example of Singapore. Finally, some of the
author's points of view regarding financial globalization are presented and the conclusion of
the study is drawn..
Word Count - 2021
2. Literature Review
Financial globalization means that national governments have stepped up their elimination of
state capital control. This deletion created more and more opportunities for companies to invest
across borders and make more profits. However, this also caused the financial crisis. Financial
globalization has three main benefits such as better access to finance, developing good
investment opportunities and increasing liquidity. This globalization pattern was seen early on
and created in the 21st century (Calomiris & Neal, 2013).
Häusler (2002) found that financial globalization offers advantages for national economies,
investors and savers. However, it changes the market structure, creates new risks and will be a
challenge for market participants and policymakers.
As Hausler explained, four factors driving financial globalization were, first, advances in
information and computer technology - easy access to information to manage financial risk.
second, an advance in the globalization of economies – increased cross-border production,
consumption and physical investment. Multinational companies have grown through mergers
and acquisitions. Most countries allowed cross-border flows. Third, the liberalization of
national financial and capital markets – investments in technology increased rapidly and the
globalization of economies increased the movement of capital across borders. Finally,
competition among intermediation service providers has increased due to technological
advances – regulators are changing rules and financial intermediaries are enabling cross-border
financial services, and non-financial institutions are starting to offer bank-like services.
Growth and stability of economic growth through the global financial market. Financial
globalization can be seen as an important area for policy makers. The neoclassical theory is
simple, direct, logical and positive. The cross-border flow of capital from countries with excess
capital to countries with insufficient capital is a favorable outcome of financial globalization.
1
Financial globalization means that national governments have stepped up their elimination of
state capital control. This deletion created more and more opportunities for companies to invest
across borders and make more profits. However, this also caused the financial crisis. Financial
globalization has three main benefits such as better access to finance, developing good
investment opportunities and increasing liquidity. This globalization pattern was seen early on
and created in the 21st century (Calomiris & Neal, 2013).
Häusler (2002) found that financial globalization offers advantages for national economies,
investors and savers. However, it changes the market structure, creates new risks and will be a
challenge for market participants and policymakers.
As Hausler explained, four factors driving financial globalization were, first, advances in
information and computer technology - easy access to information to manage financial risk.
second, an advance in the globalization of economies – increased cross-border production,
consumption and physical investment. Multinational companies have grown through mergers
and acquisitions. Most countries allowed cross-border flows. Third, the liberalization of
national financial and capital markets – investments in technology increased rapidly and the
globalization of economies increased the movement of capital across borders. Finally,
competition among intermediation service providers has increased due to technological
advances – regulators are changing rules and financial intermediaries are enabling cross-border
financial services, and non-financial institutions are starting to offer bank-like services.
Growth and stability of economic growth through the global financial market. Financial
globalization can be seen as an important area for policy makers. The neoclassical theory is
simple, direct, logical and positive. The cross-border flow of capital from countries with excess
capital to countries with insufficient capital is a favorable outcome of financial globalization.
1
However, the link between financial globalization and economic growth and stability is not
direct but indirect. These indirect effects are that financial globalization creates favorable
growth and economic stabilization and can produce results through catalyzing growth
promoting areas and also through macroeconomic policy discipline. The indirect impact of
globalization finance does not take place unless there are certain complementary policies in
the areas of macroeconomics, institutional development and the financial system (Das, 2010).
2.1 Related Theories of Financial Globalization
2.1.1 Neoclassical Growth Theory
This theory states that a country's economic growth is based on three key factors and these
factors significantly affect the economy. These three factors are
1. Capital Availability
2.Work Availability
3. State of the art
This theory emphasizes the impotence of technology's role in economic growth. The theory
was introduced by Robert Solow and Trevor Swan in 1956. According to the theory, in order
to have steady growth, a country should have a proper balance of three factors. Despite the
impotence capital accumulated by countries, having technology and labor is crucial to achieve
steady and stable growth (Gordon, 2021).
2.1.2 Modern Portfolio Theory
This theory discusses the investment model based on market risk and expected return. The goal
is to maintain an appropriate diversification mix to minimize risk while enhancing returns. It
meant combining assets into a diverse portfolio (Gordon, 2021).
2
direct but indirect. These indirect effects are that financial globalization creates favorable
growth and economic stabilization and can produce results through catalyzing growth
promoting areas and also through macroeconomic policy discipline. The indirect impact of
globalization finance does not take place unless there are certain complementary policies in
the areas of macroeconomics, institutional development and the financial system (Das, 2010).
2.1 Related Theories of Financial Globalization
2.1.1 Neoclassical Growth Theory
This theory states that a country's economic growth is based on three key factors and these
factors significantly affect the economy. These three factors are
1. Capital Availability
2.Work Availability
3. State of the art
This theory emphasizes the impotence of technology's role in economic growth. The theory
was introduced by Robert Solow and Trevor Swan in 1956. According to the theory, in order
to have steady growth, a country should have a proper balance of three factors. Despite the
impotence capital accumulated by countries, having technology and labor is crucial to achieve
steady and stable growth (Gordon, 2021).
2.1.2 Modern Portfolio Theory
This theory discusses the investment model based on market risk and expected return. The goal
is to maintain an appropriate diversification mix to minimize risk while enhancing returns. It
meant combining assets into a diverse portfolio (Gordon, 2021).
2
2.1.3Market Imperfection Theory
This theory arises from the international market where perfect competition does not exist. At
least one of the assumptions of perfect competition is violated, resulting in an imperfect
market. A common situation in which market competition is disrupted is the impact of
monopolies and oligopolies (Gordon, 2021).
3. Practical Applications and Learnings.
3.1 Caucasus And Central Asia (CCA) And Their Financial Systems Are
Vulnerable to Volatile External Shocks.
Due to the significant reliance on commodity exports, remittances and tourism, CCA financial
systems become vulnerable to volatile external shocks. Figure 1 shows how CCA countries
have been affected by economic downturns and financial distress. The pandemic and the
Ukraine conflict also had an impact on the financial system. The global financial crisis and the
oil price shock of 2014-2015 have a strong impact on a sharp decline in credit and asset prices.
The pandemic and international sanctions against Russia also had a significant financial link
to the CCA countries (Al-Farah et al., 2022).
Figure 1 Regional Average Economic Growth and CCA Capital Adequacy Ratio
3
This theory arises from the international market where perfect competition does not exist. At
least one of the assumptions of perfect competition is violated, resulting in an imperfect
market. A common situation in which market competition is disrupted is the impact of
monopolies and oligopolies (Gordon, 2021).
3. Practical Applications and Learnings.
3.1 Caucasus And Central Asia (CCA) And Their Financial Systems Are
Vulnerable to Volatile External Shocks.
Due to the significant reliance on commodity exports, remittances and tourism, CCA financial
systems become vulnerable to volatile external shocks. Figure 1 shows how CCA countries
have been affected by economic downturns and financial distress. The pandemic and the
Ukraine conflict also had an impact on the financial system. The global financial crisis and the
oil price shock of 2014-2015 have a strong impact on a sharp decline in credit and asset prices.
The pandemic and international sanctions against Russia also had a significant financial link
to the CCA countries (Al-Farah et al., 2022).
Figure 1 Regional Average Economic Growth and CCA Capital Adequacy Ratio
3
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