Running head: GLOBALIZATION OF FINANCIAL MARKETS 1

Impact of the Globalization of Financial Markets on Nations and Companies

Author

Institution
GLOBALIZATION OF FINANCIAL MARKETS 2

Introduction

The modern world has experienced a surge in the interconnection between financial,

economic, trade, and communication through the globalization concept popularized since the

mid-1980s (A, 2018). Globalization, however, experienced a sudden decline during the financial

crisis of 2007 with financial institutions reducing the amount of foreign lending and gross cross-

border cash flows (Lund et al., 2017). The impact of globalization on nations and financial

institutions, therefore, varied considerably since the popularization of the concept. According to

the report by the McKinsey Global Institute (MGI) (2017), the impact of the 2007 global

financial crisis on globalization and international financial relationships was far-reaching with

new financial players such as China and India taking center stage. By the writing of the report,

gross cross-border financial flows had dropped by 65 percent in absolute terms since 2007, and

by four times the global GDP (Lund et al., 2017). Despite these fluctuations, financial

globalization remains stable and has become more inclusive than in previous years. This paper

discusses the impact of financial globalization on nations and businesses after the shifts that took

place following the financial crisis in 2007.

Literature Review

The financial crisis of 2007 saw the decline of cross-border lending. This concept had

been on the rise since the advent of financial globalization in the 1980s, with Euro banks leading

the way in reducing the amount of foreign lending (Lund et al., 2017). The integration of world

economies had been proliferating in the late nineteenth century and the early twentieth century

before the economic crash of 2007 (Sacko, 2019). By 2017, foreign lending by Euro banks had

declined by 7.3 trillion dollars since 2007, representing a 45 percent decline (Lund et al., 2017).

The reduction in foreign lending was focused mostly on inter-bank and intra-Eurozone lending
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with some Swiss and United Kingdom (UK) banks substantially reducing international business

(Lund et al., 2017). This decline was the result of unstable business practices in previous years

that led to the development of the financial crisis in 2007.

Financial globalization in the form of foreign investment underwent a radical shift with

developing countries such as China and Canada playing a more significant role and more

countries participating (Lund et al., 2017). As a concept, globalization reorganizes the financial

systems at an international, national, and regional level (Yolshin, Bezverkhniy, & Zhukova,

2017). The most affected sectors of the economy by financial globalization include production,

integration of financial markets, and international trade. Since the financial crisis in 2007, the

rate of foreign direct investment (FDI) became the most stable form of international economic

integration between different nations overtaking foreign lending and inter-bank lending (Lund et

al., 2017). This shift in global financial interactions favored developing economies with

increasing integration between financial institutions and governments in these countries.

The new era of financial globalization has seen increasing stability in foreign economic

interactions where less volatile FDI and equity flows command the highest share of the financial

markets globally (Lund et al., 2017). The modern financial markets make it impossible to

distinguish between commercial activities that take place inside the country and those that occur

on a global scale (Djelic & Quack, 2018). The integration of financial activities between

businesses, nations, and regions connect the economic activities of one commercial entity to all

other financial stakeholders in the different areas and countries. As a result, these activities

reverberate throughout the globe shifting the operations and business plans in all other nations.

The financial crisis of 2007 demonstrated that a more stable financial system is necessary in the
GLOBALIZATION OF FINANCIAL MARKETS 4

globalized economic world to avoid a repeat of the factors that almost led to a global financial

collapse.

The most volatile aspects of financial globalization include foreign lending and other

international capital flows that rely on volatile foreign exchange rates in different regions of the

world (Lund et al., 2017). New shifts in public views about globalization increase the volatility

in exchange rates across the globe. Recent movements such as the BREXIT movement in the UK

force financial institutions and governments to reconsider their approach to financial

globalization (Rosso, 2019). MGI reported that over 60 percent of countries experience large

surges, falls, and varied fluctuations in foreign lending each year, further increasing the volatility

in exchange rates (Lund et al., 2017). Valuations in equity markets also vary depending on the

fluctuating in the global financial markets, further increasing the volatility in exchange rates

between countries. These fluctuations affect businesses and FDIs in the affected countries

significantly.

Emerging technologies have also increased the rate of financial globalization bringing

more businesses and individuals to the center stage of global financial transactions (Lund et al.,

2017). During this age of globalization, the doors are open for the free flow of financial and

business ideas, people, goods, and capital, allowing companies to thrive more than ever before

on a global scale (Rosso, 2019). National and institutional boundaries become blurred with the

advent of the internet, and the financial crisis of 2007 barely affected the global trade taking

place on the internet. The internet, however, does not erase the national and regional boundaries

but increases the interplay between the different stakeholders and public sectors involved in the

financial activities (Djelic & Quack, 2018). Emerging technologies such as blockchain also

increase the security in commercial transactions across the globe, increasing the stability in these
GLOBALIZATION OF FINANCIAL MARKETS 5

transactions and eliminating the need for centralized banking systems. Traditional banking

systems are, therefore, facing steep competition from these technologies in an increasingly

globalized financial order.

Discussion

One of the most significant changes over the last few decades is the globalization of

emerging financial economies where emerging economies increasingly take part in global

financial decisions (Touny, Qamar, Abed, Sayed, & Abed, 2019). Financial markets around the

world remain significantly interconnected despite the reduction in foreign lending by Eurozone

banks since 2007. Recent trends in global financial investments and exchanges indicate that

foreign investment compared to the worldwide GDP remained stable following the financial

crisis (Lund et al., 2017). Emerging economies such as China and Canada are now at the

forefront of the global economic integration efforts, encouraging other developing nations to take

part in the financial globalization efforts. This shift is in sharp contrast with the anti-

globalization movements experienced in recent years among European countries such as the UK.

The surge in FDIs by these emerging economies has, however, stabilized the financial

globalization process with these developing countries doing most of the work in encouraging

other developing nations to take a more active role.

According to the MGI report, the most affected businesses by the financial globalization

process are the banks (Lund et al., 2017). Eurozone banks, in particular, experienced wide

fluctuations in income and commercial activities following the global financial crisis in 2007,

leading to a reduction in foreign lending and inter-bank lending. The banks also retreated

significantly from international trade, following doubts about the financial health of other

financial institutions in the trading zone (Lund et al., 2017). Increasing government regulations
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and oversight across national and international boundaries have, however, ensured that financial

globalization remains stable despite the activities from these banks (Djelic & Quack, 2018).

Some researchers have noted that shifts in the psychology of investors across the globe influence

the rate at which financial globalization takes place (Touny, Qamar, Abed, Sayed, & Abed,

2019).

Emerging technologies such as artificial intelligence and blockchain are the most recent

innovations affecting financial globalization and the businesses that significantly influence this

process (Lund et al., 2017). These technologies have ensured that global financial players remain

active despite the volatility in foreign exchange. Blockchain technology provides a decentralized

global economic system that makes banking institutions almost redundant in most financial

transactions in the modern world. Despite the increasing role played by emerging economies in

financial globalization in recent years, these technologies ensure that large economies such as the

USA remain highly integrated into the global financial system (Lund et al., 2017). These

countries rely on their large stock of foreign investments and their deep domestic financial

markets that can absorb shocks from the volatile international markets.

Conclusion

Financial globalization is an evolving concept that became popular in the mid-1980s and

continues to grow and stabilize despite different shocks and impediments on a global scale.

Although the financial crisis of 2007 resulted in the reduction of foreign lending, especially

among Eurozone banks, financial globalization remained stable. The stability persisted due to the

increasing involvement of emerging economies and the global stock in international investments

that cushioned them against the volatile global financial markets. Stable domestic markets in

these countries alongside emerging technologies such as blockchain and artificial intelligence
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also increased the rate at which financial globalization expanded. This growth was motivated by

the increasing involvement by developing countries led by China, Japan, India, Brazil, and

Canada. The most affected institutions by this growth are the banking companies, which see

varied incentives to invest in foreign markets depending on the highly interconnected financial

exchange rates between nations. Banking institutions and regulators, therefore, need to take

advantage of emerging technologies to keep pace with the rapidly evolving global economic

situation.
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References

Djelic, M. L., & Quack, S. (2018). Globalization and business regulation. Annual Review of

Sociology.

Lund, S., Windhagen, E., Manyika, J., Härle, P., Woetzel, J., & Goldshtein, D. (2017). The new

dynamics of financial globalization. McKinsey Global Institute. August.

Rosso, C. M. (2019). GLOBALIZATION & THE RISE OF POPULISM. WORLD

ECONOMICS.

Sacko, D. (2019). Impact of Social Globalization on the Economy and FDI of

Mali. International Journal of Business and Social Science, 10(6).

Surendran, A. (2018). Globalization of Financial Institutions in India. Int J Econ Manag

Sci, 7(551), 2.

Touny, M. A., Qamar, K. A., Abed, E. L. A., Sayed, M. N., & Abed, A. L. A. (2019). Recent

Trends in Financial Globalization and Psychology of Investment in Financial

Markets. International Journal of Applied Engineering Research, 14(24), 4548-4551.

Yolshin, S., Bezverkhniy, j. & Zhukova T. (2017). The Impact of Globalization on Developed

Countries.