Internationalization of Financial Markets - Essay Example

Internationalization of Financial Markets It is natural that people attract towards highly profitable investments and they always want something big and extraordinary from their money; this was the main thought behind internationalization. When people did not find enough returns in their own country, they started looking for external sources and became successful in that. This is the reason that many multinational corporations produce a variety of products and operate in different countries rather than only one. This is the reason there are many branches of a bank rather than one. This is the reason that people invest in many shares rather than few. People adopt all these strategies to reduce the risk and allocate the resources in a strategic manner. During the last 20 years, internationalization of financial markets has developed at a very swift pace. This took place due to amalgamation of goods market leading to the presence of multinational corporations. Imports and exports volumes have increased largely leading to increase in international transactions. All these elements have increased their presence internationally but the growth of internationalization of financial markets has gone beyond the adjustment of trade. Along with this growth, banks’ existence has also increased internationally with many new branches in new countries to satisfy the needs of customers working for multinational organizations (Horne, 1990). The reason that banks have different packages for different countries is that people have different needs and trends. Some countries might have the trend of saving more and some might have investment trend depending on the current situation of the country. If there is inflation in the country, demand is high but supply is very low because the purchasing power of consumers has increased but output has not increased as the same pace. Government will increase the interest rate so that instead of spending the money people save the money and do not demand much (Welch & Liostarinen, 1993). During this period, foreigners will start saving their money in those countries’ banks. Similarly, when there is deflation in any country government will decrease the rate of interest so that people invest more to stimulate the production and prices. Moreover, different countries confront different kind of natural calamities and other destructions. Insurance companies have great significance in these kinds of countries, they collect premium from people periodically and invest this money in different projects. Insurance companies invest this return in other projects profitable for them (Creighton, Gower & Richards, 2007). One of the factors that derived people to start internationalization of financial market is the rate of return on any investment that is opportunity cost of the capital. If a person possesses a certain amount of money, he would definitely go for an investment that gives him a higher rate of return than any other project (Andersson, 2000). This struggle for higher profits made people look for the most profitable investment whether it is in their country or abroad. If people find that they would get a higher rate of interest on their money, they would save their money in foreign banks rather than domestic banks. Similarly, the depreciation of domestic currency and appreciation of foreign currency also contributed in encouraging internationalization of financial markets (Bollen & Inder, 2002). The development of stock markets has also taken place in global markets. Many firms have cross-list on international stock exchange with depository receipts as an element to access international financial markets. Great development has occurred but people are expecting more enhancements with improvement in technology and accounting techniques. Presently, people are getting more inclined towards international financial markets because in many countries the domestic markets are not performing well comparing to international markets. Moreover, there are number of countries where domestic markets are performing well as compared to the international markets, which attract the attention of many foreign investors. As discussed above, if people find more profitable returns in foreign markets they would go there, similarly if investors find more opportunities and more demand in foreign markets than domestic ones, they would like to invest theirs (Bollen & Inder, 2002). Another process that takes place is even if firms belong to developed country and possess good financial environment, they go to poor foreign countries to give access to rich investors. Many surveys show that market capitalization that is the current total value of a firm is usually high for the high-income countries as the listing of companies on stock exchange of these countries also increases. One can calculate this value by multiplying the total outstanding shares with market price per share. However, for the low and middle-income countries, market capitalization is not very significant (Taylor & Francis. 1996). Another factor is capital rising in domestic country and capital rising in foreign country. For middle-income countries, the capital raised in abroad is very high where as for low-income countries it is very low. For that of high-income countries, it is less than the low-income countries because they already have many opportunities in their domestic country. Countries with higher income levels, lower fiscal deficit, economic stability, peaceful law and order situation and more financial opportunities give rise to both the development of domestic stock market and internationalization of other financial markets (Taylor & Francis. 1996). The factors that affect the development of domestic financial market also contribute in internationalization of financial markets. Better fundamentals help in development of the domestic markets and they help in building the reputation of the country making easier for it to raise capital trade in foreign exchange. Hence, it shows that the factors that help countries in developing their domestic financial markets also contribute in having more access to international financial markets. Internationalization might have adverse effects on domestic stock market development as opportunities for domestic markets decrease. If a countries’ larger share of investors is investing in abroad it will be difficult for domestic companies to raise new funds for its upcoming activities. Large-scale internationalization may therefore make it complex to maintain grown-up domestic stock exchanges. This might not affect the larger corporations, which are actually the drivers of internationalization. However, a large chunk of medium-sized firms may not have enough resources to go abroad for collecting equity financing hence, deteriorating the progress of domestic firms. This phenomenon would have major implications for such firms. Internationalization has both positive and negative impacts, for individuals it has become a source of getting profitable returns where as for country as a whole it has some negative implications too because its major investors do not invest in their own country rather abroad. Therefore, internalization should take place but with few regulations so that it does not affect the domestic market adversely. References Andersson, S. (2000). “The Internationalization of the Firm from an Entrepreneurial Perspective.” International Studies of Management & Organization, pp. 63-92. Bollen, B., & Inder, B. (2002). “Estimating Daily Volatility in Financial Markets Utilizing Intraday Data.” Journal of Empirical Finance, pp. 551-562. Creighton, A., Gower, L., & Richards, A. J. (2007). “The Impact of Rating Changes in Australian Ffinancial Markets.” Pacific-Basin Finance Journal, pp. 1-17. Horne, J. V. (1990). Financial Management & Policy in Australia. Prentice Hall. Taylor, & Francis. (1996).” In What Sense a Region's Problem? The Place of Redistribution in Australia's Internationalization Strategy.” Regional Studies, pp. 401-411. Welch, L. S., & Luostarinen, R. K. (1993). “Inward-Outward Connections in Internationalization.” Journal of International Marketing, pp. 44-56. Read More