Evolution of Global Financial Environment - Essay Example

 Evolution of Global Financial Environment Globalization refers to the economic integration of goods, services and financial markets to offer opportunities and challenges for governments, businesses, and individuals (Suk, Seung and Kenneth 2006). Today, businesses do not only have operations in various countries of the world but need to have bases in them to be able to remain competitive. Integration has given way to opportunities for competition. As technologies break down communication and transportation barriers, countries of the world are finding exploiting the opportunities for expansion easier. Some of the drivers that positively influence globalization include the growth of industrialization in other countries of the world which reduces costs, tariff and working capital. Decreasing government trade barriers have increased foreign direct investments much faster than the world outputs (Suk, Seung and Kenneth 2006). For these reasons major corporations are engaged in expansionary activities to outsource their operations abroad. For example Ford is an American based company. It is one of the big three motor companies in the US and used to be the source of livelihood for a significant portion of the US population. However, with the increase in global financing opportunities, Ford has diversified its products to sell its motor vehicles in Europe and Asia. As Europe has opened its consumer markets to the world Ford has capitalized on the ready market to sell its completely assembled cars in collaboration with local companies. However, as the global finance environment in parts of Asia improved and opened up to Western investors, Ford has gradually shifted production of automobiles in low cost country like in China. Investment in China not only reduces cost of operations and productions Global financing has thus become an important source for world trade and incentive for foreign investment as it allows multinational companies to increase shareholder's wealth. However, there are risks associated with global investing. Unlike local investment, global investment is subject to political, financial and regulatory risks. In countries where political turmoil is apparent like those in France, India, China and Indonesia, investment in these countries pose great threats to exchange controls, confiscation of assets and changing corporate policies. Similarly, financial risks include the fluctuating exchange rates, tax laws, interest rates and inflation rates as well as balance of payments. Legal risks like differences in legal system, overlapping jurisdiction and restrictions on foreign companies hinder in corporate activities resulting in low returns for investments(Suk, Seung and Kenneth 2006). Other risks include conflict of interest and varying business environment where the company's mode of operation differ those of the local ones ("Unilever to Cut 25,000 Jobs Worldwide" 2000). Consequently, companies need to analyze these risks before considering investment in foreign countries. Apart from the financial aspects, global finance environment is also influenced by the cultural aspects and ethics prevalent in the region. There is no guarantee that countries of the world follow similar ethical code of conduct or familiar with the culture of the investing company. In fact, as observed by global companies like Coca-Cola, Nestle, Exxon and McDonald's realize the importance of cultural sensitivity and ethics in the global market. It is important to adapt to the local culture than to assert the culture of the parent company to the host country. Unawareness or negligence often result in conflict of interests and hinder business operations such as employment, production and decision making. Furthermore, unlike the parent company's culture, cultures of the world differ in their views in ethics especially when dealing with financial activities such as transfer of funds, imports, exports and profits decisions. In Latin countries for example it is the norm to accept gifts whereas in the US such practice is considered bribery. Consequently, when companies enter into a new environment it is not only the culture which influences the corporate practice but also the financial aspects. One expects the parent company to become fluent with the local culture and sensitive to its culture while making investment decisions. From the above discussion it is clear that the global financial environment is highly volatile due to its dynamic nature. The global financial market is not predictable. Even if a company does not invest in a foreign country, the likelihood of being impacted by the global financial market is high. According to NY Fed president Tim Geithner (2006) the global financial market has been responsible for the fluctuating financial climate within the US as well as those outside it. Many firms are greatly influenced by the fluctuating global financial market so much that their operations have to be based on the trends adopted by global firms. This only shows how important the global financial environment is to businesses. Offering financial services to individuals who do not reside in the country where the institution is located is the jest of offshore finance in its most basic form (Park and Essayyad, 1989). Such activity includes lending money to people or organizations operating in countries other than that where the liabilities of the financial institution lie and vice versa. Also included under the heading of international finance is the investment of proceeds from deposits into financial markets located in another place. In these types of transactions where monetary assets are being managed elsewhere, there is obvious considerable risk for the customer. It is believed that large portions of the money held in OFCs are in mutual funds and trusts (Monetary and Exchange Affairs Department, 2000). Though relatively incomplete and with some limitation, the statistics that are available relating to IFCs and OFCs disclose the fact of the matter that banking at such centers is a very substantial practice. The major source of information on banking activities of OFCs is reporting to the BIS, which is, however, incomplete. First, reporting is confined to the major OFCs. The smaller OFCs like Bermuda, Liberia, and Panama, for example, do not report for BIS purposes, but claims on the non-reporting OFCs are growing, whereas claims on the reporting OFCs are declining. Subsequently, the BIS does not gather information from the reporting OFCs specifics on the nationality of the borrowers from or depositors with banks, or by the nationality of the intermediating bank. Third, for both offshore and onshore centers, there is no reporting of business run off the balance sheet, which subjective information suggests can be quite a few times larger than on-balance sheet activity. Additionally, figures on the quantity of assets held by non-bank financial institutions, such as insurance companies, is not collected at all; nor is there any information on assets held by mutual funds as well as private trusts and companies whose beneficial owners are usually not obligated to report. By the end of the 1990s, the attractions of offshore banking seemed to be shifting to the financial institutions of industrial countries as reserve requirements, interest rate controls and capital controls weakened in value, while tax advantages remained powerful. Also, some financially powerful industrial countries began to make similar motivation available on their home territory. For instance, “the United States established in 1981, in major U.S. cities, the so-called International Banking Facilities (IBFs). Later, Japan allowed the creation of the Japanese Offshore Market (JOM) with similar characteristics” (Monetary and Exchange Affairs Department, 2000). At the same time, supervisory authorities, and, to a certain degree, tax authorities, were adopting the standard of consolidation which condensed the incentives for banks to carry on business outside their principal jurisdiction. As a result, the relative advantage of OFCs for conventional banking has become less eye-catching to industrial countries, although the tax advantages for asset management seem to have escalated in significance. In reality, “reported bank intermediation on the balance sheet in IFCs has declined over the period 1992-1999, thus contributing to the overall decline in the share of bank cross-border assets intermediated through OFCs from 56 percent of total bank cross-border assets in 1992 to about 50 percent of total bank cross-border assets at end-June 1999” (Monetary and Exchange Affairs Department, 2000). Amongst budding market economies, Asia's OFCs, like China and India, have noticeably and increasingly boosted their net cross-border liabilities, signifying that they have drawn in a large segment of capital flows into the area. The IMF estimates that “Asian OFCs' net cross-border liabilities as percent of assets, increased from about 15 percent in 1991 to about 53 percent in 1998, falling back to 38 percent at end-June 1999” (Monetary and Exchange Affairs Department, 2000). It is worth mentioning that banks in other OFCs and banks occupied in common cross-border banking maintained roughly squared net cross-border positions over the same period. Banking activity in OFCs is for the most part carried out by affiliates and branches of banks that are organizations of foreign banks in OFCs ranges. In some centers they may be initiated in and, in certain instances, financially support the business. But in other situations, they may have an extremely restricted physical presence and the business decisions may all be taken elsewhere. There has been a trend in the more thriving OFCs for the amount of local value added to grow, as these OFCs have attained the capacity to provide expert capabilities and skills (Gehrig, 1998). Offshore activities may also take place through what are referred to as parallel-owned banks, which are banks that are not subordinates, so to speak, of a bank that is located onshore, yet they have the same controllers or owners. Successful merged management is more complicated under such circumstances. Offshore banks take part in a broad range of transactions: foreign currency loans, syndicated loans, “and the taking of deposits, the issuance of securities, over-the counter (OTC) trading in derivatives for risk-management and speculative purposes, and the management of customers' financial assets” (Monetary and Exchange Affairs Department, 2000). MNC MNC usually take the route of setting up subsidiaries of its main company in the given state. The race to the bottom is the belief that promoting competition between states will attract investors and businesses; however as critics argue this is done through de-regulation of social and labour policies, i.e. to promote true competition there needs to be as little involvement from the state as possible. The basic premise is that when opening up the race to the bottom is that competition will become truly unrestricted and fair, leaving a freehand for companies to achieve their economic goals, because through FDI revenue is created for the state which gives the MNC great influence over the state’s government and policies, which greatly advantages MNCs but disadvantages social policies . This is the most distinct advantage of FDI by MNCs which maximizes profits and minimizes costs; as well as giving power within the state which accumulates to great economic and political power internationally. It has also been suggested that that this opening of markets is not necessary and the race to the bottom through competition between states, rather those markets which allow a freer hand in the states are those that companies choose to invest in, i.e. regime shopping. Therefore the promotion of competition between states is not necessary, rather having the market that a race to the bottom dictates is. The problem that is created here is that the competition goals that are promoted are not necessarily anything about promoting competition between states, but the deregulation of labour and social policies so that companies can exploit the resources of the country they have invested in at the cheapest price: [The] possibility of "shopping around" for suitable legislation is often said to be most influential since the other elements depend on the controversial aim of deepening European integration. It is possible that the United States situation may be a precedent. In the United States individuals are free to incorporate under the laws of any state since the location of the company is not relevant. This regime shopping approach and investing in states via FDI is a distinct advantage to the MNC’s because it makes it easier to set up their businesses and subsidiaries in the states that have the weakest labour laws. This allows the state to minimize their costs, whilst maximizing their profits. In many developing and even developed countries governments will create incentives for FDI and ignore the costs to the certain sectors of the population. This has been reported in the EU through the degradation of social policies, in Nigeria through the discrimination against certain tribal communities, in Russia with the disbandment of a governmental environmental agency and in various other nations the abuse and misuse of child labour. However there is definitely a distinct economic advantage of FDI because in many cases the demands and wishes of the MNC are satisfied, which increases the economic profits of the company. Therefore the main advantage of MNCs through FDI is power and influence at a state, regional and global level, which increases revenues by maximizing profits whilst minimizing costs. This power is very important factor in determining states where FDI should be placed because it reduces red tape and laws that some states may use to protect social and environmental policies may be eliminated in favour of the influence of the MNC . Although this raises many moral and ethical issues it is definitely a persuasive argument for the MNC to use FDI. Bibliography: Irma Adelman, 2001, Fallacies in Development Theory and their Implications for Policy, from Ed. Gerald M. Meier & Joseph E. Stiglitz Future of Development Politics: The Future in Perspective, The World Bank & Oxford University Press Bagheri, 2004, Competition and Integration among Stock Exchanges: The Dilemma of Conflicting Regulatory Objectives and Strategies, OLJS 24(69) Bananalink, Banana Trade Wars can be found at: http://www.usleap.org/Banana/bananatempnew.htm#tradewars Catherine Barnard, 2000, Social Dumping And The Race To The Bottom: Some Lessons For The European Union From Delaware E.L. Rev. 200025(1), 57-7 IMF, 2000, Jordan Letter of Intent – Memorandum on Economic and Financial Policies 2000, can be found at: http://www.imf.org/external/np/loi/2000/jor/01/index.htm Erika Rosenthal, 2002, Conflicts Over Transnational Oil and Gas Development Off Sakhalin Island in the Russian Far East: A David and Goliath Tale, Lyuba Zarsky, Human Rights and the Environment: Conflicts and Norms in a Globalizing World, Earthscan Kristin Shrader-Frechette 2002 Native Peoples and the Problem of Paternalism, Environmental Justice: Creating Equality, Reclaiming Democracy, Oxford University Press, Siems, 2003, Convergence, Competition, Centros and Conflicts Of Law: European Company Law In The 21st Century, E.L. Rev. 2002, 27(1), 47-59 Syrpis, 2001, Smoke without Fire: The Social Policy Agenda and the Internal Market, ILJ 2001(30) Source: Financial Stability Forum's Working Group on Offshore Financial Centers Report (April 2000). Works Cited Choi, Sang Rim, Adrian E. 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Geithner: Monetary Policy in the Global Financial Environment. Economist View. Online accessed on 23 April 2007 from: http://economistsview.typepad.com/economistsview/2006/03/geithner_moneta.html Read More