Impact of Globalization on the Financial Market of Developed and Developing Nations

Eshita Karan
A015
Bsc Economics TY
NMIMS

Subject: Geopolitics
Impact of Globalization on the financial market of developed and developing nations

Globalization

Globalization is a result of human innovation and technological process. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders. The movement can also be in terms of the movement of people (labour) and knowledge (technology) across international boundaries. Various other broad dimensions of globalization includes political, environmental and cultural. In 1980s the term “globalization” became famous reflecting the technological advancements that made the international transactions of both trade and financial flows easier, quicker and feasible for all.

A perpetual challenge faced by all the economies of the world, regardless of their level of economic development, is achieving economic growth, higher living standards and financial stability. The paths taken for achieving these objectives for every country will be different depending upon the political systems and the nature of the economies. The ingredients contributing to China's high growth rate over the past two decades have, for example, been very different from those that have contributed to high growth in countries as varied as Malaysia and Malta.

Developed and developing economies

Economic theory suggests that globalization has positively impacted the financial market of most of the nations. International asset trade plays a very prominent role in fostering the economic growth and economic efficiency especially when the assets are used to finance valuable projects or when the technology transfer takes place (example-FDI).
Also, it has made the flow of funds easier.
In addition, such trade may lead to enhanced international risk sharing—indeed, the sizable gross external stock positions of advanced countries seem indicative of large potential risk-sharing gains, while an enhanced ability of emerging market and developing countries to borrow abroad in cases of natural disaster or temporary recessions would seem likely to contribute to greater consumption-smoothing. Looking ahead, large potential risk-sharing gains are apparent for emerging market and developing countries in light of their relatively large economic fluctuations while, from the standpoint of advanced-country residents, the ability to invest in emerging market and developing countries would be especially welcome, given the low correlation of these countries’ economic fluctuations with the global economic cycle.

How globalization positively impact the financial market of a developed nation

1. Higher returns from investing in developing nations: INVESTMENTS can be popular or cheap, but rarely both. Developing economies today are one of the exceptions, in the view of many portfolio managers. The relatively large sums flowing into developing markets have helped them produce better returns than in larger ones. (Investing; In Developing Countries, Prices May Be Right By CONRAD DE AENLLE Published: July 13, 2003) 2. Dependency on developing nations: Even the developed nations are dependent on the developing nations for various aspects of the economy. For example, Indian-owned firms in U.S. are increasing rapidly hence contributing to U.S. jobs, exports and growth. India imports 4.9% (2012) of the total imports from the U.S. and exports 12.7% (2012) of the total exports from the U.S. Indian companies have aided the turnaround of struggling U.S. firms, saving jobs and improving company performance. They have also made important new investments, stimulating innovation and production in the American economy. (U.S.-India Economic and Trade Relationship: Indian Investment in the U.S.) 3. Diversification of risks: By investing in developing countries, the developed economies can diversify their risks and funds. 4. Safer avenues for investment: It is better for the developed economies to invest in the developing economies as they are safer avenues for investment.

How globalization positively impact the financial market of a developing nation 1. Fuels growth: When a developed country invests in a developing country then it is wrong to think that it is only the developed country which benefits. On the contrary, both the nations benefits.

In the mid 2000s, Kawasaki, Siemens and other European and Japanese companies invested in China and started producing high-speed trains. But the domestic companies adopted the technology & techniques of their foreign counterparts and now they (such as China South Locomotive & Rolling Stock Corp) are giving competition to the foreign companies by manufacturing trains with speeds of up to 236 miles per hour.

2. To maintain smooth functioning: For smooth functioning and harmony of the global economy it is important that all the countries cooperate and maintain good relations even if the returns are less. A developing nation needs to invest in a developed nation even if they are not willing to or not getting higher returns as spoiling their relations could harm them in future

3. Factor productivity and income growth: Most empirical studies conclude that FDI contributes to both factor productivity and income growth in host countries, beyond what domestic investment normally would trigger.

4. Human capital enhancement: The major impact of FDI on human capital in developing countries appears to be indirect, occurring not principally through the efforts of MNEs, but rather from government policies seeking to attract FDI via enhanced human capital. Once individuals are employed by MNE subsidiaries, their human capital may be enhanced further through training and on-the-job learning.

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[ 1 ]. (08/02 - May 2008 Globalization: A Brief Overview By IMF Staff)
[ 2 ]. (INTERNATIONAL MONETARY FUND, Reaping the Benefits of Financial Globalization, Prepared by the Research Department* Approved by Simon Johnson , June 2007)
[ 3 ]. Central Intelligence Agency