Financial Globalization and Risk

Financial Globalization and Risk

Back in the halcyon pre-crisis days of the late 20th and early 21st centuries, it was taken as self evident that financial globalisation was a good thing. But the subprime crisis and eurozone dramas are shaking that belief. Never mind the fact that imbalances amid globalisation can stoke up bubbles; what is the bigger risk now—particularly in the eurozone—is that financial globalisation has created a system that is interconnected in some dangerous ways.

—“Crisis Fears Fuel Debate on Capital Controls,” Gillian Tett, The Financial Times, December 15, 2011.

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CHAPTER 1

3Current Multinational Challenges and the Global Economy CHAPTER 1

The theme dominating global financial markets today is the complexity of risks associated with financial globalization—far beyond whether it is simply good or bad, but how to lead and manage multinational firms in the rapidly moving marketplace.

! The international monetary system, an eclectic mix of floating and managed fixed exchange rates today, is under constant scrutiny. The rise of the Chinese renminbi is changing much of the world’s outlook for currency exchange, reserve currencies, and the roles of the dollar and the euro (see Chapter 3).

! Large fiscal deficits plague most of the major trading countries of the world, including the current eurozone crisis, complicating fiscal and monetary policies, and ultimately, interest rates and exchange rates (see Chapters 4 and 5).

! Many countries experience continuing balance of payments imbalances, and in some cases, dangerously large deficits and surpluses—whether it be the twin surpluses enjoyed by China, the current account surplus of Germany amidst a sea of eurozone deficits, or the continuing current account deficit of the United States, all will inevi- tably move exchange rates (see Chapters 4 and 5).

! Ownership, control, and governance changes radically across the world. The publicly traded company is not the dominant global business organization—the privately held or family-owned business is the prevalent structure—and their goals and measures of performance differ dramatically (see Chapter 2).

! Global capital markets that normally provide the means to lower a firm’s cost of capital, and even more critically increase the availability of capital, have in many ways shrunk in size, openness, and accessibility by many of the world’s organizations (see Chapters 1 and 5).

! Today’s emerging markets are confronted with a new dilemma: the problem of being the recipients of too much capital—sometimes. Financial globalization has resulted in the flow of massive quantities of capital into and out of many emerging markets, complicating financial management (Chapters 6 and 9).

These are but a sampling of the complexity of topics. The Mini-Case at the end of this chapter, Nine Dragons Paper and the 2009 Credit Crisis, highlights many of these MNE issues in emerging markets today. As described in Global Finance in Practice 1.1, the global credit crisis and its aftermath has damaged the world’s largest banks and reduced the rate of eco- nomic growth worldwide, leading to higher rates of unemployment and putting critical pres- sures on government budgets from Greece to Ireland to Portugal to Mexico.

The Global Financial Marketplace Business—domestic, international, global—involves the interaction of individuals and indi- vidual organizations for the exchange of products, services, and capital through markets. The global capital markets are critical for the conduct of this exchange. The global financial crisis of 2008–2009 served as an illustration and a warning of how tightly integrated and fragile this marketplace can be.

Assets, Institutions, and Linkages Exhibit 1.1 provides a map to the global capital markets. One way to characterize the global financial marketplace is through its assets, institutions, and linkages.

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