GLOBALIZATION AND BUSINESS INVESTMENT

Globalization and Business Investment



Globalization and Business Investment

Introduction

Since years we are reading that our planet has become a global village. Every business has a full opportunity to step in the global market and out reach the targets. These things seem very fascinating and worthy to be tried but there are many drawbacks of this phenomenon that are needed to be discussed and understand. In global market the effect is always huge and it affects every small business that falls in that sector regardless of that business's performance.

In current global financial crises the mistake committed by few tycoons resulted in a down fall for all. This kind of incidents makes your financial forecasting on question. The financial crises hit every business and incurred high losses and these looses made the businesses reluctant while investing in international market.

Discussion

The success of globalisation in generating global growth and rising incomes led to a dangerous complacency in economic orthodoxy and a failure to recognise the warning signs. In a global environment characterised by rapidly opening markets, increasing connectivity, population expansion, and seemingly limitless computing power, government's and their economic advisors felt confident that their policy recommendations would facilitate further growth.

In the US, successive economic liberalisation statues, in 1980 and again in 1982, substantially deregulated loan products. In 1991 the banking industry succeeded in repealing the 1933 Glass-Steagall Act, which had sectioned off the financial industry into discrete sectors with independent balance sheets and risk exposure.

Breathtaking capital expansion and financial innovation ensued. Commercial lenders entered into investment banking activities, such as underwriting and collateralising mortgages and debt obligations (Adnett, 2005).

Between 1998 and 2007 (the so-called 'Golden Decade'), the global over-the-counter derivatives market ballooned from $100trn to $600trn; a sum 16 times global equity market capitalisation and 10 times global GDP. New and increasingly complex financial instruments - such as credit default swaps, collateralised debt obligations and capital resale markets for sub-prime assets - enjoyed explosive growth. Sub-prime lending, which in 1998 accounted for just 5% of all mortgage lending in the US, swelled to a 30% share over the next ten years.

As the size and complexity of transactions multiplied, so too did the gulf between regulatory overseers and market innovators. Three international institutions are responsible for global financial stability: the IMF, the Bank for International Settlements (BIS), and (ever since the 1997 Asian financial crisis) the Financial Stability Forum. None of these institutions put forth globally binding international standards for reporting, transparency, or accountability. The BIS's Basel 2 regulations, which sought to set an international standard for how much capital banks need to put aside to cover potential losses, failed to prevent banks limiting their risk exposure and proved highly vulnerable to their own flawed value-at-risk models (Agell, 2009).

Once capital reserve ratios were set, smart bankers developed credit default swaps to innovate around them, violating the spirit if not the letter of the risk-management rules. Gross exposures in the banks escalated in a manner that bore no resemblance to net exposures, and ...