Global Finance Environment
Companies around the world are operating internationally. This has come about as a result of deregulation and advances in communications technologies. The recent financial crisis has shown the increased inter- connectedness of financial markets around the world. Investors, savers, and economies have significantly benefited from financial globalization. But globalization has also brought with itself new risks and challenges for financial markets.
A few decades ago, it would have been very difficult for a country to borrow funds in the global capital market but now a poor country like Nigeria or Sudan can borrow funds in the global capital market with the aim of spending more than its current national income level allows and repay these funds in the future when domestic income attains higher level. Rich countries on the other hand can lend funds through the global capital market with the aim of maintaining the same high level of consumption in the future.
Because of global finance countries have developed their financial sector and improved the quality of their institutions. Drivers of Financial Globalization Financial globalization did not occur suddenly. Rather there have been four main factors that have driven it. Following are the drivers of financial globalization: Technological change Since the
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These powerful computers have aided financial professionals in processing vast amount of information quickly. People can now easily manage the financial risk of their transactions. Without the aid of computer technology, it would have been difficult to deal with highly complex financial products. Financial institutions have gone global and it has resulted in huge accounting books spread across various countries. With the help of technological instruments, institutions have been able to effectively and efficiently manage these large books. Declining investment barriers
Governments around the world have eased the investment barriers. This has resulted in companies installing production facilities in different countries, serving consumers worldwide, and having physical investment around the world. Initially, there were national financial institutions and now we have international financial institutions. The liberalization of national financial and capital markets In the decade that ran from 1990 to 2000, global gross capital flows increased by 400% to $7. 5 trillion. In the same decade, net capital flows have more than doubled to $ 1. 2 trillion which stood at mere $500 billion in 1990.
This globalization of finance has occurred due to governments’ steps to curb trade barriers in financial services and its introduction of liberalized rules which have allowed foreign financial firms to operate in domestic markets. Competitive Environment Because of governments’ liberalized rule, competition has increased among the providers of intermediary services. In past, it were only banks who provided financial services but of late we have seen many nonbank firms providing financial services. Among the emergence of these institutions are investment banks, hedge funds, asset managers, mutual funds, and securities firms.
As the market is saturated by so many institutions, the competition has reached new heights that have provided people with more choices when selecting a firm for the provision of a particular financial service. Risks Associated with Global Investing Diversification of their portfolios is the main reason that drives people to invest globally. Today, investors have many global investment opportunities before them and these opportunities keep increasing by the day. The opening of Chinese economy to foreign investors has provided US investors with new opportunity to invest in China’s huge capital market.
Many financial advisors recommend their clients to invest as much as 20% of their investment in foreign capital markets to diversify their portfolios. But it is very important to note here that with global investing comes many risks like political and economic risk, currency risk, foreign taxation, and regulatory risk. Firstly, when an investor earns a return on his global investments, the return will be in a currency other than that of his own country. The exchange rate prevailing at that time will have a direct impact on the rate of return that he earns.
For any traveler to US, it will be a boon if dollar does not perform well in relation to other currencies. Travelers will be able to buy more with whatever currency they have. The opposite is true if dollar performs well in relation to other currencies. In situations when US dollar is weak, it can give a boost to US financial markets. For example, the dollar had reached its peak value in 2001 and 2002 but, in 2003, when it started falling, General Electric, Intel and other global companies did well on the stock market. This was because these companies benefited from the strong currencies of other countries.
While the weak dollar benefits US exporters because they receive higher value of their profits when converted into US dollars. Secondly, political instability can have a disastrous impact on the economy of any country and can decrease the valuation of investments on its markets. This is one of the reasons that many investors do not invest in emerging markets with investment potential. Many African markets are untapped because of political problems there. High level of debt may suggest bleak future for investors as that country can report default and economics crisis.
Thirdly, there exists a correlation between domestic and international markets. These correlations seem to increase during down markets and decrease during up markets. This is rather troubling since it would benefit investors if during a slump in domestic markets the international market performed differently. It can also be said that this trend is more prevalent in established markets than in emerging markets. Fourthly, global investing entails higher costs for investor. This is due to the higher cost of commissions, market impact costs etc. This will surely have an unfavorable impact on investor’s return on investment.
Despite all the risks associated with investing globally, it is beneficial to invest globally if one is to attain diversification and growth. Who knows that today’s emerging markets may be the economic powers of tomorrow. Ethics and Cultural Sensitivity in Global Finance We define ethics as what is morally acceptable and what is not. People who behave ethically are honest, truthful, respectful, fair and just. We have to abide by ethical codes in all walks of life including business and finance. Financial ethics comes under the umbrella of general ethics.
Ethics is a one of the most frequently talked about issues after the recent financial crisis. Many blame the unethical practices to be the main cause of financial crisis. The damage wrought by unethical practices in the US sub-prime mortgage market and in the related markets has given rise to the worst banking crisis since the 1930s. Apart from that, campaign financing, insider trading, and investment management are some of the unacceptable behaviors that occur most often in financial industry. To promote sound ethical practices, organizations introduce codes of ethics for their employees.
For financial markets, some governmental and self- regulatory agencies have established official ethical codes with purpose of ensuring ethical behavior amongst the participants of financial markets. These are organizations like Securities and Exchange Commission, Association of Security Dealers, and Institute of Chartered Financial Analysts etc. Dobson (1993) said that in financial markets, ethics has got very prominent place. What matters most is not the regulatory bodies but the integrity of professionals. All the finance professionals should seek to attain the virtues of honesty, truthfulness and justice.
It is the attainment of internal good that they should strive for. Conclusion In the process of globalization, the adaptability power of culture has come forth. We have seen that many cultures have adapted to the demands of global community. Globalization has made possible the integration of various cultures. The same is case with finance. The presence of any global financial firm means that people from various cultures are working there and this results in the emergence of a distinct culture in that organization consisting of elements from different cultures.
This goes on to show that local cultures have adapted to the demands of global community. References Dobson, John (1993). “The Role of Ethics in Finance” Financial Analysis Journal. November-December Hausler, Gerd (2002) “The Globalization of Finance. ” Development and Finance- A quarterly journal by IMF Plender, John (2008) The Ethical Deficit in Global Finance Reszat, Beate (2000) Culture and Finance in a Globalised World – An Uneasy Relation Rosensweig, Jeffrey The Global Portfolio http://www. enotes. com/business-finance-encyclopedia/ethics-finance