Role of Financial Globalization
1. ROLE OF FINANCIAL GLOBALIZATION
The role of Financial and industrial globalization is increasing substantially. Its aim is to increase economic growth and aid in welfare of the country through an exchange of skills and technology, creating new opportunities for both industrialised and developing countries. The largest impact has been on developing countries, who now are able to attract foreign investors and foreign capital.
Two channels through which globalization benefits countries:
Direct channel The benefits on development through financial globalization could in principle, help to raise the growth rate of developing countries through two channels, direct and indirect channels. Under the direct channel, the first role of globalization is the augmentation of direct savings; this foreign capital flow in principle benefits both groups, as they allow for increased investment in developing countries, while they provide a higher return on capital than is available in developed countries. This effectively reduces the risk free rate in developing countries.
Secondly globalization helps lower the cost of capital due to better risk allocation. The international asset pricing models show that stock market liberalization improves the allocation of risk, which helps diversifying risk through international spread. In turn it encourages firms and more potential investors to take on additional investment thereby increasing growth and developing the respective countries.
Thirdly developing countries benefit from the transfer of technological and managerial expertise. Where the country is more financially integrated, larger proportions of Foreign Direct Investment (FDI) inflows are attracted, which bring in advanced technology. These spillages have the channel for passing on better management practices.
Lastly, the benefits from stimulation of the domestic financial sector are increased foreign ownership of domestic banks, access to international markets and most
The role of Financial and industrial globalization is increasing substantially. Its aim is to increase economic growth and aid in welfare of the country through an exchange of skills and technology, creating new opportunities for both industrialised and developing countries. The largest impact has been on developing countries, who now are able to attract foreign investors and foreign capital.
Two channels through which globalization benefits countries:
Direct channel The benefits on development through financial globalization could in principle, help to raise the growth rate of developing countries through two channels, direct and indirect channels. Under the direct channel, the first role of globalization is the augmentation of direct savings; this foreign capital flow in principle benefits both groups, as they allow for increased investment in developing countries, while they provide a higher return on capital than is available in developed countries. This effectively reduces the risk free rate in developing countries.
Secondly globalization helps lower the cost of capital due to better risk allocation. The international asset pricing models show that stock market liberalization improves the allocation of risk, which helps diversifying risk through international spread. In turn it encourages firms and more potential investors to take on additional investment thereby increasing growth and developing the respective countries.
Thirdly developing countries benefit from the transfer of technological and managerial expertise. Where the country is more financially integrated, larger proportions of Foreign Direct Investment (FDI) inflows are attracted, which bring in advanced technology. These spillages have the channel for passing on better management practices.
Lastly, the benefits from stimulation of the domestic financial sector are increased foreign ownership of domestic banks, access to international markets and most