Financial Globalization: Causes and Consequences

Introduction

The financial globalization is growing nowadays and it is important to know what its causes are and how they influence the world’s economics or one of the separate countries.

The main area of globalization is the international economic system (economics), i.e. global industry; the exchange and consumption done by the enterprises in their national economies and in the world market. As a result of the globalization, the financial capital gained the considerable mobility, seeking for the most attractive and profitable opportunities. Financial globalization has increased the influence of international markets on the operations of lending and borrowing by the residents of different countries. This process has led to the growth of the international network of financial institutions and corporations, and to fundamental changes in their systems of organization of flows of funds management. At the same time, the financial globalization seriously affects different countries, as the competition of national economies for credit resources, which are freely reallocated on the scale of the new global world economy, becomes tougher in new conditions.

Financial globalization compels these countries to seek for the new ways to increase the investment attractiveness of the national economies. That is why this issue is urgent and it is important to investigate the causes and possible outcomes of the financial globalization, its influence on the national economies. There is no evidence that every process which is caused by the global financial flows and the interference of highly developed countries in the economics of the poor states ends successfully. The global financial crisis increases, and the leading economists, rich countries cannot do anything about it. At the same time the countries that do not let much interference in their economics (like China, for example), continue to gradually develop in such conditions when previously very rich states like France now have to live more frugally, as their budget is much effected by crisis.

Theoretical framework

Financial globalization and integration of financial markets became one of the most popular discussion topics in the expert (financial) community. The reason for that lies in those rapid changes which have taken place in the global economy over the past decades. The ongoing global economic crisis is the downside of financial globalization; that is why it forces to pay close attention to this phenomenon. Despite the fact that financial globalization is generally accepted, there are still a lot of divergences of opinion in the definition of this phenomenon.

Although there is a lot of empirical literature on the topic of financial globalization, some questions still remain unanswered. Most scientists consider that globalization has a significant positive role in the development of every separate country, but there is no evidence about the way the country should organize its pace and move in global market. The aim of the research is to define the causes and the results of financial globalization, support or reject the idea about its positive impact on the economics. The study can be used for compiling the recommendations for the plan of participation of the country in international exchange of financial resources, i.e. in financial globalization.

Financial globalization operates on the principle of flows of the capital from the countries with rich economies to those with poor ones, and later, the returns to capital of rich countries should be higher. Kose M. Ayhan, Prasad Eswar, Rogoff Kenneth, and Wei Shang-Jin claim that there exist some indirect channels which help the financial globalization to intensify its growth. These scientists also admit that financial globalization is developed by financial integration. Poor countries are invested by rich to develop their economies by diversifying the industry, because they depend mainly on their natural resources and agriculture.  Such investments are intended to reduce the volatility in the macroeconomics. But if the countries are more developed, this sort of financial integration and trade sometimes may have negative effects. That is why the theory of integration is quite unreliable if not to consider all conditions. 

Financial globalization is a subject of interest for many experts, because it has rather interesting policy relevance and at the same time it has different approaches and techniques for each country. Some scientists consider that free capital flows serve as a serious obstacle on the way to gain global financial stability (Rodrik, Bhagwati, and Stiglitz). That is the reason why they insist on controlling the flow of capital. Other economists (Fisher, Summers) argue that the openness of capital flows helps those countries which try to enter the higher stage of development as well as raises the stability among highly developed countries.

Most experts in this sphere admit that despite its unknown effects on output volatility, financial integration, as a crucial principle of financial globalization, promotes its development and will reduce the relative volatility of consumption.

Globalization has caused the intensification of the international competition. Competition and the expansion of the market lead to greater specialization and the international division of labor which promote, in turn, the growth of not only national, but global production as well.

Proposed methods

In order to effectively conduct a survey and make it relevant and useful, there must be proper methods used. For this topic there is a need to carry out an investigation at all three levels – empirical, empirical and theoretical, and theoretical itself. At the empirical level of investigation the following methods are used:

1)  Observation – to choose a few processes which take place in the world or in the country as a result of financial integration, identify the causes of these processes, notify the peculiarities of their development, predict possible outcomes or analyze them if the chosen process does not take place anymore. Collecting the sufficient data is really necessary at this point, in will be easier to make the practical part of the research if there is a good theoretical basis. This method is important in all types of the research.

2)  Comparison – to compare the causes of the chosen process in one country with those in another; the same should be done with the results and consequences. At this stage of investigation it is also necessary to establish the “cause and effect” connection between the capital flows in the world and in the country, financial integration of a rich country to the poor one, and the outcomes of these flows and integration. This method is needed in order to continue conducting the research, as it will be easier to make some assumptions and conclusions. Comparison will be used later as well, mostly to compare the theoretical data with practical information which was obtained after making the thorough analysis of the chosen global financial processes and of those which took place on a narrower scale.

At the empirical and theoretical level of investigation such methods can be used:

1)   Analysis and synthesis – to analyze and structure the collected data about the processes; classify the causes and the results; identify the things that influenced the course of these processes. This method is rather similar to comparison, but at this stage of the research more specific assumptions and conclusions are made.

2)   Deduction and induction are used here to make predictions about the effect of financial globalization on the whole world or on one separate country. If we know something about the process of financial integration and capital flows caused by financial globalization, it is possible to make a supposition about the causes and consequences of these factors about many countries or the whole world, by using induction. If there are result about the effects and causes in the whole world, the supposition can be made about one specific state. In this case, the method of deduction is used.

At the theoretical level of the research we use the following methods:

1)  Description – we describe the results of analysis of the financial processes which took place, classify their causes and effects. At this stage of investigation the results of the research should be supplemented with sufficient theoretical data. Now the method of comparison is used again.

2)   Statistical methods should be used to supply theoretical conclusions with practical ones. At this stage the necessary calculations are made and compared to the suppositions. 

Reflections

There can be some difficulties while conducting the research. First of all, on the practical level it is hard to observe and analyze the process caused by capital flows or any other factor that financial globalization includes, because usually it takes more time than the research. That is the reason why some part of the investigation should be made on the materials of earlier researches, and because of this the relevance of the research may be a bit doubtful and insufficient. Another problem that may appear lies in the ability to observe the process caused by financial globalization, if it takes place in another country; there will not be as many information available in the country where the research is being conducted, as in that one where the process occurs.

There can be other practical difficulties as well. At the stage of calculation there could be no information about processes in companies which are chosen to be analyzed as there is no information of this type available for public use, because it is usually confidential. In such conditions the employees will not be allowed to answer the questions in questionnaire if one is used for conducting the research. This problem is ethically difficult to tackle, because it is necessary to maintain the privacy of the questioned and secrecy of information. At the same time there should be enough practical evidence in the research for it to be useful and relevant.

Another difficulty concerns literature. It is possible that there are not enough recent resources in the library of the region and they are not available for free on the Internet.

One more practical difficulty concerns the foreign companies. If there is a process which deals with financial globalization in the cooperation between two companies in different countries, the policies of both companies should be analyzed in order to get more accurate results.

There could be ethical issues which may cause difficulties as well. First of all, most companies demand their names and the names of people questioned with the help of questionnaire not to be mentioned. In order to solve this problem, the confidentiality must be guaranteed. The administration of the company or firm may doubt if the information in the research is true. In such a case, all information about the organization included in the research should be checked and given to the companies which were mentioned there.

As a researcher I must be interested in the topic and be objective at the same time, conduct the research in such the way that it could be practically and theoretically useful. The ethical problems will probably be the most difficult to solve while making the investigation, because as a researcher I am interested in giving the specific dates and names in the dissertation, but as an interviewer I am not allowed to do so.