Factors that Induced Globalization of the Financial Markets in the Last 40 Years - Literature review Example

The paper 'Factors that Induced Globalization of the Financial Markets in the Last 40 Years" is a perfect example of a finance and accounting literature review. Although globalisation became a common-use term as recent as the 1980s, its effect, especially in the financial markets, has been felt in the world financial markets since international trade began. This paper will, however, concentrate on addressing factors that induced globalisation in the financial markets since the 1970s. In the last 40 years, globalisation has been linked with technological advances, which have made international transactions much easier and faster, hence improving the flow of trade. According to Kahveci and Sayilgan (2006, p. 87), globalisation is the “historical process, the result of human innovation and technological progress, which refers to increasing integration of economies around the world through trade and financial flows”. Kumar et al. (2007, p. 5) have a much simpler definition of globalisation, terming it as the “increasing trade and financial openness”.

Among the factors cited by Kahveci and Sayilgan (2006, p. 87) include government policies and technological processes that have encouraged privatisation and deregulation of financial markets. In particular, government policies have resulted in a more liberal international financial environment, where fewer trade barriers and reduced tariffs encourage more integration of the global financial markets. Technological improvements, on the other hand, have enhanced the financial working environment, whereby, financial information is exchanged more efficiently and at lower costs, thus enhancing efficient operations in the globalised financial markets.

Deregulated financial markets

According to Buch (2004, p. 10), the changes that led to the deregulation of the financial markets in the past decades have led to the eventual elimination of financial controls that governed regional markets. In addition, the liberal financial markets had freer capital requirements, which extended to the banking powers. A case in point is the capital controls abolishment in the European countries in the 1980s, which was enforced in the 1990s after most of the European member countries had signed the 1986 Single European Act, thus liberalising capital flows within the signatory countries. In the agreement, the EU member countries agreed to not only abolish the capital controls but also create a single EU market and adopt the Euro as their common currency (Buch, 2004, p. 11). According to Issing (2000), the Euro financial zone is now the second-largest financial zone in the entire world, riding on lower risk made possible by the integration of the credit and money markets. Lane and Milesi-Ferretti (2008, p.3) further observe that the introduction of the Euro signified an elimination of currency-related risk, which meant that countries within the Eurozone now enjoy higher substitutability between foreign securities and their domestic securities. This has translated into a significant reduction of home-biased trade, thus increasing financial transactions within the Eurozone.

Like every good thing, the deregulation of the financial markets has its advantages and disadvantages. Notably, the smooth opportunity that deregulation provides to individuals, such that they are able to consume, borrow and diversify their financial interests beyond regional borders is one of the key benefits (Obstfeld, 1994, p. 1). It is also noteworthy that the deregulation of financial markets allows people to invest in the most productive economic opportunities, and even presents them with more flexible ways of financing account deficits or recycling account surpluses (Issing, 2000). With the availability of insightful financial market information, both lenders and borrowers are also able to gauge the levels of risk best suited for them at different times.