International Business Environment

2 The Concept of Financial Globalisation Financial globalisation refers to the integration of the local financial system of a country with international institutions and financial markets. One of the major requirements of such integration is for the government to liberalise both the capital account, as well as the domestic financial sector; thus, the integration will be experienced immediately. The liberalised economies will begin to encounter cross-country capital movement increase, such as widespread international financial intermediaries use and local lenders and borrowers actively taking part in international markets (De la Torre et al., 2002, p. 335).

Middle income countries, such as Guidia, can still participate in financial globalisation despite the fact that the practice is still common among the developed countries. However, as Frankel (2000, p. 76) rightly points out, the global financial system is not about to realise perfect integration. Evidence of such incidences as home country bias, continuous capital market segmentation, and the correlation pitting investment, on the one hand, and domestic savings on the other, continues to shroud the entire concept. One important aspect that the Guidia government has to take note of is the fact that the potential benefit to the country’s overall economy could be realised in terms of a more complete, more stable, deeper, as well as a betterregulated financial market. Levine (2001, p. 688) notes that a financial system with additional credit and which is well functioning is important because it promotes economic growth.

However, the globalisation also comes with some feasible risks for Guidia. In particular, the country could face a higher likelihood of risk in the short term, just immediately after it opens up to the international integration. More often than not, globalisation tends to relate to financial crises. There are existing international examples, such as the Russian crisis of 19971998, Brazil in 1999, Ecuador in 2000, Turkey in 2001, as well as Argentina and Uruguay which