History of Globalization - Coursework Example

?Globalization Globalization is a process that has evolved over the past few decades. It is a mechanism through which the connectivity and linkage between world’s markets and businesses increases (Investor Words). Thus, foreign exposure, communication and transportation have become easy. It is very cliched that the world has become a “global village.” Thus, there have been many factors that have caused this world to become global. These include the advances in technology, telecommunication, infrastructure and the massive use and development of internet services. This has not only increased international trade but has also nurtured human resource development. Thus, the globalization theories set perfect on the principles of “Ricardo’s Comparative Theory.” Although, globalization has revolutionized today’s world, there exist opponents of this trend. This includes aid organization such as Oxfam and the G77 countries (Investor Words). History of Globalization The Industrial Revolution seemed to sow the seeds of the globalization that was to come years later. The concept of globalization has gone through several ups and downs. The globalization came to an end after the World War 1 when more countries planned on practicing isolationism (Globalization, Encyclopedia of Business). There were several rules and regulations imposed regarding foreign trade and so treaties were signed that assured barriers to foreign trade in the form of duties and tariffs. The Smooth Hawley Tariffs of 1930 is a famous one (Globalization, Encyclopedia of Business). However, after World War II, Bretton Woods resulted in the formation of World Bank, International Monetary Fund and General Agreements on Tariffs and Trade (Globalization, Encyclopedia of Business). This was the beginning of a new phase of globalization. Later in 1995, GATT was replaced by World Trade Organization that has the main motive of globalization and inculcates in trade in goods, services with the added benefit of an efficient dispute settlement system (Globalization, Encyclopedia of Business). Other trade blocs such as EU, SAARC and agreements such as NAFTA have come into the scene. Financial Globalization and Innovation Over the past two decades some very pronounced changes in the world financial system have been witnessed. All the financial markets of the world have become a complex network woven in a well knitted canopy. The liberalization policy has increased opportunities and varieties all over the globe. Privatization has been on an increase. Additionally, new hedging tools such as derivative instruments have been introduced against markets and credit related risks (Chernobai, Rachev & Fabozzi , 2007). Securitization has been adopted as means of trading as well (Chernobai, Rachev & Fabozzi , 2007). The most prominent example of trade liberalization is the European Union. The adoption of a single currency Euro and the inter bloc tariff free trade has empowered the position of the bloc and the currency as well. Financial integration is a similar process by which a strong integrated complex network of financial markets is developed. However, the rule of one price should prevail in these kinds of market which means that the risk-adjusted real return should equalize (Gudmundsson, 2007). The manifestation of globalization is the elimination of concentration of a particular/own country and an increase in cross-border activities. This would include capital investment in cross border projects, investment in assets and liabilities as well as an increase in banking and FDI (Gudmundsson, 2007). There have been certain implications well. According to Gudmundsson (2007), the global integration of the financial markets has not provided insurance against idiosyncratic shocks. Moreover, it has been concluded that due to the volatile nature of the capital stock due to asymmetric information, it has been more a source of shock rather than smoothing. There remain many repercussions of these integrated markets. Due to this increased trend outsourcing, expansion of financial services and mergers and acquisitions has become very common. This has increased the operational risks for several organizations. For instance, more reliance on computer based banking services is susceptible to viruses, computer failures and credit card frauds (Chernobai, Rachev & Fabozzi , 2007). Moreover, agency problem, red-tapism and managerial diseconomies of scale may be encountered due to the expansion of an organization. RogerW. Ferguson, Vice Chairman of the Board of Governors of the Federal Reserve System, stated (Chernobai, Rachev & Fabozzi , 2007): ‘‘In an increasingly technologically driven banking system, operational risks have become an even larger share of total risk. Frankly, at some banks, they are probably the dominant risk”. Internationalization of Banks Over the past few years, there has been an increasing trend of cross-border banking. . According to the IMF's latest Global Financial Stability Report, the share of foreign controlled bank assets in total bank assets increased globally by 8 percentage points between 1995 and 2005, to reach 23%. However, this share grew much more strongly in Eastern Europe and Latin America, and it is currently significantly higher in these two regions than in other parts of the world (Gudmundsson, 2007). The major reason for the internationalization of banks correlates strongly to that of globalization. Economies of scale could be achieved by reducing transaction cost and maintaining branches in foreign countries and adding a sense of competition. This is especially true for developing countries such as India and Pakistan where the emergence of foreign banks create a competitive atmosphere. However, it is a fact that internationalization of banks is a complex procedure. Resources, local knowledge and crisis management and resolutions are all important factors (Gudmundsson, 2007). Moreover, liquidation would be a problem as well because the banks would be requiring foreign currencies which the Local authorities are unable to provide. Despite the complex nature of opening and operating banks in an international environment the last two decades have shown surprising result. The increase in technology: the massive use of internet has resulted in the increase in the internationalization of banks that is the operation of banks outside their home country. Introduction – Barclays Banks Barclays is one of the oldest banks that began its services in the Victorian era. In 2003, it stood as the world’s largest bank on a rank of 9for market capitalization. Over the period of 300 years, the bank has gained considerable success. It has been open to globalization and hence achieved a high world ranking. The concentration of the bank is in retail and investment banking. The bank operates as one of the largest banks in the world with 2,000 domestic branches and 850 international braches in more than 60 countries. The bank has a wide number of customers estimated to be about 4.5 million online bankers and 10.6 million customers in the U.K marker. The bank is divided into 7 distinct units which include Barclays Africa; Barclaycard; Barclays Capital; Barclays Global Investors; Barclays Private Clients; and UK Banking. Impact of Globalization – Mergers and Acquisitions The Barclays Bank was in strong position in the 1930s when the whole world was going through the spillover effects of the Great Depression. Later it started its activities in the British colonial areas such as Africa and the Caribbean and gained success. However, these economies were not very strong. Thus, the owners decided to start their operation in USA. In 1960s Barclays started its successful operation in the US market posing a competition for the local banks (Barclays Plc - Company Profile). Barclay’s tried to be in line with the recent developments in technology and for gaining competitive edge it acquired the Visa traveler’s check operation and became the third largest issuer in the world by providing 14% of the market (Barclays Plc - Company Profile). In 1986, Barclays entered into another merger. A new investment bank Barclays de Zoete Wedd (BZW) was opened by the merger of Barclays Merchant Bank Ltd. de Zoete and Bevan and Wedd Durlacher Morduant & Company (Barclays Plc - Company Profile). Later Barclays was exposed to the threat of competition from foreign banks which included American and Japanese commercial banks. National Westminster Bank was one great competitor. Barclays also invested about ?500 million on technological advances to introduce the first electronic debit card of UK (Barclays Plc - Company Profile). The 1980s did not provide benefitting results for Barclays as the African economy was in a turmoil. Moreover, the Hong Kong, Italian and the American ventures were persistently in a loss. Although, internationalizing was meant to add to the profits of the company but that did not happen in case of Barclays. As the bank was going through a downturn in the 1980s, it started providing easy credit without taking into account the credit worthiness which resulted in high debt ratios. Moreover, the American branches continued to bring about very low returns as compared to their investments. Thus, the subsidiary in California was sold to Wells Fargo in 1988. The only positive outcome for Barclays was the BZW’s positive performance. An Australian brokerage firm was bought and Barclays Bank S.A. in Geneva was established (Barclays Plc - Company Profile). The planning for 1990s was to expand the organization. But this could not happen in the wake of the ongoing recession. Barclays suffered huge losses due to bad loans which amounted to estimated pre-tax amount of ?244 million in 1992 (Barclays Plc - Company Profile). The strategy to overcome losses was to reduce its domestic and foreign activities and indulge in cost cutting activities. This plan was focused upon and there was extreme downsizing in UK. In the late 1990s, Barclays was again exposed to severe competition by the internationalization and globalization of different companies. These included the mergers of Morgan Stanley and Dean Witter and the merger of Salomon Brothers and Smith Barney (Barclays Plc - Company Profile). Once again, Barclays’ management went on restructuring of the company. Parts of BZW were sold off. Workers were laid off and the online banking was to be relied upon by cutting the cost of branches that operated in rural areas. Woolwich PLC was acquired (Barclays Plc - Company Profile). This step was applauded by the Wall Street Journal as it stated that it would help to increase the client base to increase from 13 million to 16 million (Barclays Plc - Company Profile). It was also to increase its position in the mortgage sector by 8%. In addition, the merger with this Internet Service Providers Company opened up room for further innovations and online banking ventures. Banco Zaragozano in Spain was acquired as a matter of extending services and to create a business base in Europe (Barclays Plc - Company Profile). SWOT Analysis Strengths Barclays is one of the leading financial institutions of the UK. The company ranks on one of the top positions for its market capitalization. It has a strong clientele base. As the most successful bank in UK, it has the honor of introducing online banking ventures and innovated steps to internationalize its services. Moreover, the bank has huge diversity and has expanded its operations in more than 60 countries (Barclays Bank PLC & Deutsche Bank PLC). The strategies adopted have been successful and several mergers and acquisitions have been carried over. Weaknesses The bank has focused upon restructuring and has been constantly acquiring other ventures or selling the pre- existing ones. This creates quite an uncertain atmosphere for the customers. Moreover, the concept of cost cutting has been applied extensively to the operations of the bank. These have mainly resulted in down-sizing and reducing the branches. This does not serve as positive signal as well. One of the major weaknesses was the management problem that exists within the company. The agency problem prevails and need to be tackled tactfully. Opportunities The company has many opportunities due to take advantage of due to its well established position and reputation. It has chance to advance it services in wealth management and private banking. Retail and Investment Banking both can be focused upon simultaneously. Additionally, it has more services to offer to its clients. These include the online system of banking and more technological innovations that have been invested in. Not only could this, but a wide variety of investment opportunities such as Pension Plans be offered to its customers (Barclays Bank PLC & Deutsche Bank PLC). Threats The globalized era has brought equal advantages in terms of technology to everyone. Thus, the bank that once operated as the only largest bank now faces a wide competition domestically as well as internationally. Clearing and mortgage banks also pose a threat of competition. The easy loans are another constant threat to financial institutions. In wake of competition the bank may lend to customers that are not credit worthy and then bear the consequences of high debt ratios. Analysis of Financial Statements As at 31st December 2010 ?m 2009 ?m 2008 ?m 2007 ?m 2006 ?m Assets         Cash, balances at central banks and items in the course of collection 99,014 83,076 31,714 7,637 9,753 Trading portfolio assets 168,867 151,344 185,637 193,691 177,867 Financial assets designated at fair value 41,485 42,568 121,199 147,480 114,597 Derivative financial instruments 420,319 416,815 984,802 248,088 138,353 Loans and advances to banks 37,799 41,135 47,707 40,120 30,926 Loans and advances to customers 427,942 420,224 461,815 345,398 282,300 Reverse repurchase agreements and other similar secured lending 205,772 143,431 130,354 183,075 174,090 Available for sale financial investments 65,110 56,483 64,976 43,072 51,703 Other assets 23,337 23,853 24,776 18,800 17,198 Total assets 1,489,645 1,378,929 2,052,980 1,227,361 996,787 This reflects that in spite of the recessionary phase, the overall assets of the company have been increasing. Two assets are the most interesting and refer to the case of globalization, the “Trading portfolio assets” and the “Derivative financial instruments.” It is worth noting that both these assets follow the same trend. In 2007 the trading portfolio investments increased but then continued to fall until 2010 where they can be seen on an upward trend again. Derivative Instruments kept increasing until 2008 that is the peak of the recessionary phase. However, after declining in 2009 they are again on an upward trend in 2010. Liabilities           Deposits and items in the course of collection due to banks 79,296 77,912 116,545 92,338 81,783 Customer accounts 345,788 322,429 335,505 294,987 256,754 Repurchase agreements and other similar secured borrowing 225,534 198,781 182,285 169,429 136,956 Trading portfolio liabilities 72,693 51,252 59,474 65,402 71,874 Financial liabilities designated at fair value 97,729 87,881 146,075 167,128 138,624 Derivative financial instruments 405,516 403,416 968,072 248,288 140,697 Debt securities in issue 156,623 135,902 149,567 120,228 111,137 Subordinated liabilities 28,499 25,816 29,842 18,150 13,786 Other liabilities 15,705 17,062 18,204 18,935 17,786 Total liabilities 1,427,383 1,320,451 2,005,569 1,194,885 969,397 The liability section shows a decrease in 2009 but in 2010 the liabilities are increasing again. Similar to the assets, Trading portfolio liabilities and derivative financial instrument liabilities are of interest. Both have been rising in 2010. However, it is worth noticing that the increased trend of globalization has added towards the trading of non-cash and intangible assets. The appearance of these in both liability and assets is an indication how liberalization and globalization have affected the world trade. Net profit for the year 4,549 10,288 5,287 5,095 5,195 2009 has experienced a high net profit which is 10,288 million of pound. 2010 experiences the lowest Net Profit in comparison to the five years being compared. Basic earnings per share 30.4p 86.2p 59.3p 68.9p 71.9p Basic earnings per share from continuing operations 30.4p 24.1p 51.4p 60.6p 66.6p Diluted earnings per share 28.5p 81.6p 57.5p 66.9p 69.8p Dividends per ordinary share 5.5p 2.5p 11.5p 34.0p 31.0p Dividend payout ratio 18.1% 2.9% 19.4% 49.3% 43.1% Profit attributable to the equity holders of the Parent as a percentage of:           - average shareholders’ equity 7.2% 23.8% 16.5% 20.3% 24.7% - average total assets 0.2% 0.5% 0.2% 0.3% 0.4% Core Tier 1 ratio 10.8% 10.0% 5.6% 4.7% n/a Tier 1 ratio 13.5% 13.0% 8.6% 7.6% 7.7% Risk asset ratio 16.9% 16.6% 13.6% 11.2% 11.7% The trends followed by Barclays have been dynamic. There have been very rapid changes due to the internationalization process of the bank. The financial ratios have had a significant impact as regards to the changing conditions. Basic earnings per share were low during 2008, when the recessionary pressure was indeed a very dominant force. This improved in 2009 but 2010 witnessed a steep decline. This may be due to the low profitability of the business, one of the main reasons being the increased competition. Moreover, the openings of branches in countries like Pakistan where the market have bleak prospects have resulted in complete loss for the bank. The dividend per share has improved from 2009 but it is still very low as compared to the previous years. The risk asset ratio is also the highest in 2010 which may be attributed towards the inclusion of derivatives and portfolio investment assets in the balance sheet. However, overall the company accounts do not give a very profitable picture. In spite of the rapid globalization and international ventures the company is not enjoying considerable profits. One of the major reasons contributing to this is the recessionary phase that is going on. Moreover, with the increased competition and the informed and fully aware customer of today it has become very difficult to survive in the market. http://www.barclaysannualreports.com/ar2010/files/Annual_Review_2010.pdf In spite of all this, the Barclays bank enjoys high credit ratings from well-known companies. Thus, it is still in a strong position and a prominent market player. Dominant Trend for Future Globalization is indeed the need of the hour today. However, in the wake of increasing competition Barclays needs to maintain its costs and work upon innovative strategies. These include investing in markets where there is high potential for the bank. The prior example of Pakistan is the most prominent one. Therefore, an extensive knowledge of the market needs to be possessed to carry out any new venture in any new country. Before starting any venture some very important factors need to be maintained. The company should adopt cost effective measures and work upon gaining economies of scale due to its global nature. Not only has this but x-factor in the form of novel concepts in the field of finance and investments needed to be brought up. Profit making should be the goal but with the added advantage of the community. The company should focus upon betterment of the environment and add goodwill to its name. Conclusion In light of all the facts that have been mentioned, Barclays is indeed a very dynamic organization. However, the strategies adopted have been flawed at some time. It is indeed a fact that globalization is an added benefit to any business but in the case of Barclays it seems to be inappropriate. The primary reason for this is the expansion process which does not follow a proper plan. This give rises to managerial diseconomies of scale which seems to be happening in case of Barclays. Managerial problems have been evident. Moreover, downsizing is not a positive signal for the organization. However, despite all the conditions which include the Depression of 1930s, the recession of 1970s and 1990s and the current recession, Barclays have emerged as a prominent player. Due to its strong roots, it is still being managed despite the losses it has incurred. Therefore, for Barclays to thrive globalization and expansion of foreign markets need to be administered but under a proper set of plan and goals. References Globalization Investor Words, Available: http://www.investorwords.com/2182/globalization.html last accessed: 25th April, 2011 Globalization Encyclopedia of Business, Available: http://www.referenceforbusiness.com/management/Ex-Gov/Globalization.html Last accessed: 25th April, 2011 Chernobai, A Rachev, S & Fabozzi, F (2007) Operational Risk. New Jersey: John Wiley & Sons, Inc. Gudmundsson, (2007) Financial globalisation and challenges for prudential policies and macroeconomic management Bank of International Settlements, Available: http://www.bis.org/speeches/sp070525.htm Last accessed 25th April, 2011 Barclays Bank PLC & Deutsche Bank PLC. Available: http://www.ukessays.com/essays/management/barclays-bank.php Last accessed: 26th April, 2011 Barclays Plc - Company Profile, Information, Business Description, History, Background Information on Barclays Plc Available: http://www.referenceforbusiness.com/history2/55/Barclays-Plc.html Last accessed: 26th April, 2011 The New New Look: Barclays Bank, Economist, December 12, 1992, p. 86. Bailey, Martin, Barclays and South Africa, Birmingham: Haslemere Group, 1975. "Barclays Set for Expansion," Herald, August 6, 1999, p. 24. Bray, Nicholas, "Barclays Pursues Shrinkage to Achieve Solid Returns: Round-the-World Presence Barclays Annual Reports (2009) Barclays, Available: http://www.barclaysannualreport.com/ar2009/index.asp?pageid=127 Last accessed: 26th April, 2011 Barclays PLC Annual Review 2010 (2010) Barclays, Available: http://www.barclaysannualreports.com/ar2010/files/Annual_Review_2010.pdf Last accessed: 26th April, 2011 Appendix 1 Consolidated summary income statement For the year ended 31st December 2010 ?m 2009 ?m 2008 ?m 2007 ?m 2006 ?m Continuing operations Net interest income 12,523 11,918 11,469 9,598 9,133 Non-interest income 19,681 18,036 9,967 11,938 11,372 Net claims and benefits incurred on insurance contracts (764) (831) (237) (492) (575) Total income net of insurance claims 31,440 29,123 21,199 21,044 19,930 Impairment charges and other credit provisions (5,672) (8,071) (5,419) (2,795) (2,154) Operating expenses (19,971) (16,715) (13,391) (12,096) (11,723) Share of post-tax results of associates and joint ventures 58 34 14 42 46 Profit on disposals and gain on acquisitions 210 214 2,733 28 323 Profit before tax 6,065 4,585 5,136 6,223 6,422 Tax (1,516) (1,074) (453) (1,699) (1,611) Profit after tax from continuing operations 4,549 3,511 4,683 4,524 4,811 Profit for the year from discontinued operations, including gain on disposal - 6,777 604 571 384 Net profit for the year 4,549 10,288 5,287 5,095 5,195 Profit attributable to equity holders of the Parent 3,564 9,393 4,382 4,417 4,571 Profit attributable to non-controlling interests 985 895 905 678 624 4,549 10,288 5,287 5,095 5,195 Selected financial statistics Basic earnings per share 30.4p 86.2p 59.3p 68.9p 71.9p Basic earnings per share from continuing operations 30.4p 24.1p 51.4p 60.6p 66.6p Diluted earnings per share 28.5p 81.6p 57.5p 66.9p 69.8p Dividends per ordinary share 5.5p 2.5p 11.5p 34.0p 31.0p Dividend payout ratio 18.1% 2.9% 19.4% 49.3% 43.1% Profit attributable to the equity holders of the Parent as a percentage of: - average shareholders’ equity 7.2% 23.8% 16.5% 20.3% 24.7% - average total assets 0.2% 0.5% 0.2% 0.3% 0.4% Average United States Dollar exchange ratea 1.55 1.57 1.86 2.00 1.84 Average Euro exchange ratea 1.17 1.12 1.26 1.46 1.47 Average Rand exchange ratea 11.31 13.14 15.17 14.11 12.47 Appendix 2 As at 31st December 2010 ?m 2009 ?m 2008 ?m 2007 ?m 2006 ?m Assets Cash, balances at central banks and items in the course of collection 99,014 83,076 31,714 7,637 9,753 Trading portfolio assets 168,867 151,344 185,637 193,691 177,867 Financial assets designated at fair value 41,485 42,568 121,199 147,480 114,597 Derivative financial instruments 420,319 416,815 984,802 248,088 138,353 Loans and advances to banks 37,799 41,135 47,707 40,120 30,926 Loans and advances to customers 427,942 420,224 461,815 345,398 282,300 Reverse repurchase agreements and other similar secured lending 205,772 143,431 130,354 183,075 174,090 Available for sale financial investments 65,110 56,483 64,976 43,072 51,703 Other assets 23,337 23,853 24,776 18,800 17,198 Total assets 1,489,645 1,378,929 2,052,980 1,227,361 996,787 Liabilities Deposits and items in the course of collection due to banks 79,296 77,912 116,545 92,338 81,783 Customer accounts 345,788 322,429 335,505 294,987 256,754 Repurchase agreements and other similar secured borrowing 225,534 198,781 182,285 169,429 136,956 Trading portfolio liabilities 72,693 51,252 59,474 65,402 71,874 Financial liabilities designated at fair value 97,729 87,881 146,075 167,128 138,624 Derivative financial instruments 405,516 403,416 968,072 248,288 140,697 Debt securities in issue 156,623 135,902 149,567 120,228 111,137 Subordinated liabilities 28,499 25,816 29,842 18,150 13,786 Other liabilities 15,705 17,062 18,204 18,935 17,786 Total liabilities 1,427,383 1,320,451 2,005,569 1,194,885 969,397 Shareholders’ equity Shareholders’ equity excluding non-controlling interests 50,858 47,277 36,618 23,291 19,799 Non-controlling interests 11,404 11,201 10,793 9,185 7,591 Total shareholders’ equity 62,262 58,478 47,411 32,476 27,390 Total liabilities and shareholders’ equity 1,489,645 1,378,929 2,052,980 1,227,361 996,787 Risk weighted assets and capital ratiosa Risk weighted assets 398,031 382,653 433,302 353,878 297,833 Core Tier 1 ratio 10.8% 10.0% 5.6% 4.7% n/a Tier 1 ratio 13.5% 13.0% 8.6% 7.6% 7.7% Risk asset ratio 16.9% 16.6% 13.6% 11.2% 11.7% Selected financial statistics Net asset value per ordinary share 417p 414p 437p 353p 303p Number of ordinary shares of Barclays PLC (in millions) 12,182 11,412 8,372 6,601 6,535 Year-end United States Dollar exchange rate 1.55 1.62 1.46 2.00 1.96 Year-end Euro exchange rate 1.16 1.12 1.04 1.36 1.49 Year-end Rand exchange rate 10.26 11.97 13.74 13.64 13.71 Read More