Globalisation In The Financial Sector Economics Essay

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The aim of this paper is to establish the factors which led to the globalisation of the financial sector. This aim is achieved by examining three main drivers, namely cost drivers, technology drivers and government drivers, which have all contributed to the globalisation of this sector. The rest of the paper is organised as follows. Section two provides a definition of globalisation to include all the key factors that underline the concept of globalisation. Section three discusses three main drivers (cost, market and government) of globalisation in the financial sector, and a personal reflection on the role of globalisation will be covered in section four of this paper. Section five then provides a conclusion to the whole paper.

2. Definition of Globalisation

The term globalisation is an intriguing and complex one which has drawn contributions and arguments from several authors in which some have referred to it as another form of a global business, while some have viewed globalisation from different perspectives such as economically, technologically and politically. Over the years, from the twentieth century in particular, the trend was for more freedom in business, covering different regions, markets and communities. This evolution led to the term 'globalisation' which to date has been defined using various perspectives. Generally speaking, globalisation refers to the integration of businesses, activities, resources, industries and communities across the globe. This can be described as a result of an improvement in technology, cash flow increases and changing customer needs as well as the interactions among governments of different countries across the world. Levitt (1983) defines globalisation as the "process enabling financial and investment markets to operate internationally, largely as a result of deregulation and improved communications". Scholte (2000) on the other hand purports that globalisation is a dynamic and multidisciplinary process which can be characterised into four main sections: the economic standpoint; sociological perspective; cultural perspective; and international relations perspective. He suggests that in terms of the economic standpoint, globalisation comprises the internationalisation and spread of capitalist market relations; from a sociological perspective, globalisation refers to the development of the world as one common society and the increasing capacity of worldwide social densities; the cultural perspective depicts globalisation as a standardisation of worldwide cultures and global communications; while the international relations perspective sees globalisation as the increasing density in inter-state relations, as well as the development of global politics.

3. Drivers of Globalisation in the Financial Services Industry

a) Cost Driver

Cost drivers of globalisation constitute the availability of lower manufacturing and production costs, lower labour costs achieved by the presence of accelerated technological innovation and improved transportation which have led to economies of scale (Yip, 1992).

Over the past decade, many organisations have relocated their plants and business units to different parts of the world where the costs of production of their goods are relatively lower such that they can benefit from a relatively higher margin. The financial sector has also been affected with such decisions to move so as to absorb the gains associated with the lower costs of employing staff in certain regions of the world to provide their services. An example where cost has been a driver of globalisation can be seen in developing countries where staff as well qualified as those in the developed countries are willing to take up the same duties in financial services for lower wages than those in the developed countries. Therefore the companies in the financial sector like banks and insurance companies have all established their branches and other brands in the less developed countries where operating costs are significantly lower. The costs drivers have been made possible due to improvements in technology. For instance, most banking operations are carried out with the computer using a variety of software which is cheaper for the bank than if these operations had to be completed manually. The utilisation of computers also helps reduce the operating risks of fraud and error.

b) Market Drivers:

The market drivers refer to those factors that affect the level of consumer demand for a product. Globalisation has brought about increasing levels of per capita income worldwide. This has resulted in greater purchasing power and an increased demand for goods worldwide, as well as a change in lifestyles, tastes, aspirations and expectations of consumers. The facility to travel globally has also created a new class of global consumers. The changing patterns of consumers have contributed to the globalisation of financial services and because many more individuals are inclined to operate businesses they will therefore require the services of financial institutions be it to obtain capital, expertise or information on savings or investments options. Increasing levels of per capita income into some economies globally have all attracted the need for financial services to establish in those areas where the investments are made so as to provide the support for these businesses (Arndt and Kierzkowski, 2001).

c) Government Drivers

Governments play an important role in the globalisation of financial services through deregulating the industry. By deregulating industries, government bodies in different countries facilitate competition amongst banks, financial and non-financial organisations. Generally speaking, in the developed countries in particular, over the past two decades there have been significant changes in the regulation of financial services because the governments of these countries have been trying to lift restrictions placed on capital flows and banking activities (Boone et al., 2001). The financial service sector in the developed countries was liberalised between the 1970s and 1980s, when Organisation for Economic Co-operation and Development (OECD) member countries eliminated interest rate ceilings, foreign exchange controls and international capital controls (Blundell-Wignall and Browne, 1991) and the governments of these countries abolished regulations influencing a wide range of financial activities (Blundell-Wignall and Browne, 1991). Boone et al. (2001) observe that the deregulation took place almost at the same time and followed almost the same sequence of events. In the United States the government abolished regulation Q which signified that the thrift requirements for portfolio investments in the USA were abolished. The French government reduced the requirements necessary for bank specialisation in 1984; it subsequently eliminated credit controls in 1987 and later, in 1991, introduced securitisation. Similarly the United Kingdom government eliminated credit control in 1980 and subsequently abolished the Bank of England minimum lending rate; as such banks were allowed to compete with building societies for having finance after 1981; after 1986, building societies were allowed to expand their business; guidelines on mortgage lending were withdrawn in 1986, securitisation was introduced in 1987 and the Second Banking Directive (89/646/EEC) was promulgated into national law in 1993. At the same time in Canada, the deregulation began with the elimination of interest rate ceilings on bank loans in 1967, restrictions on bank involvement in mortgage financing were abolished in 1967, banks were allowed to have mortgage loan subsidies in 1980 and securitisation was introduced in 1987 (Boone et al., 2001). The deregulation of the financial services industry led to an improvement in efficiency in the financial system as well as an improvement in business cycles and transmission of monetary and fiscal policies to the rest of the economy (Boone et al., 2001; Shaw, 1973; McKinnon 1973; Fry, 1997).

Therefore, the government in many countries has played an important role in promoting the globalisation of financial services by deregulating the financial services. The main factor that has led to the globalisation of banks has been the removal of restrictions on capital flows and the elimination of foreign exchange controls by most national governments.

4. Personal Reflection on how Globalisation Has Affected Me

Globalisation has had an impact on the business environment, communities, society and as well on individual lives. On an individual basis, globalisation has affected me in a number of different ways. Globalisation has brought about a change in technology with the internet being a product of this change. The effects have led to a change in the way I live my life. Firstly, globalisation has facilitated my personal life and business activities, in that I am able to operate my business from home over the internet. This is done by using the internet to advertise and sell my products from home and making money in the process. In the same way, I am able to view and buy items of interest on the net from different parts of the world, using shopping sites like e-bay or online shopping from department stores in ways which could not have been done before the advent of globalisation. This is particularly of benefit in that I save time I can use to do other things instead of going to shop physically from these stores as the goods are brought to my doorstep. Globalisation has improved my social life in that I have been able to make more friends especially from across the globe. This has been helped by socialising through internet social networks such as MySpace, Facebook and Bebo. I have also met the need to obtain professional studies online due to the existence of globalisation. For instance I have recently completed some studies online whereby I have though the internet followed classes taught in different countries in my programme which have assisted me to pass my exams. I have been able to access and download course materials which have facilitated my learning process. Globalisation has also affected the way I do things generally: I am more aware of many things that happen around me, in my community and country as well as in the world at large. This is because there is more and more information available through various media such as television and the internet. I am able to respect the cultures of other people worldwide. My holiday travels are made easier and more fruitful as I have tended to comprehend and apprehend something of the cultures of the countries I visit. Generally speaking, globalisation has had a huge and positive impact on my life; however some aspects haven't been so gracious. This is so because more and more businesses have been able to have access in today's markets, which has led to competition and on a personal level the difficulty of choosing between products when I shop. I sometimes tend to spend much more time buying day to day items which I would not have done pre-globalisation where only a limited range of items were available and it was easy to make a choice of what to buy.

5. Conclusions

This essay has discussed globalisation and the three main drivers that have caused globalisation in the financial castor. Based on the discussions and the analysis above one can fairly conclude that reduction in costs, deregulation and favourable market trends have hugely influenced the globalisation of financial services. The presence of these drivers helped create new and innovative ideas which have been used in the banking industry. Globalisation has led to the internationalisation of retail services worldwide. The trend has become apparent throughout Europe and the USA from where companies have spread to the Asian and African continent. Banking institutions such as the Barclays group whose headquarters are in the UK can now be seen operating in regions beyond the UK such as in Ghana, Africa. Generally speaking, globalisation of financial services has improved the way other business sectors operate. This can be explained because most businesses rely on financial services in order to start or operate their businesses. Nevertheless, the globalisation of financial services has previously been blamed for the global financial crisis which swept the world in 2008, and was blamed for the severe crisis suffered by the East Asian economies in 1998. This can be explained by the fact that as a result of the liberalisation of financial services, the East Asian Economies liberalised their financial systems and opened their economies to the whole world with the hope of benefiting from the positives of globalisation. This resulted in large amounts of capital inflows from investors and multinational companies to the East Asian economies during this period (Hufbauer, 2000). However, with time came inefficiencies and the economy became less productive. When this became evident, investors ranging from individuals, institutional investors and multinational companies withdrew their funds. This led to the disastrous crisis suffered by East Asian economies (Radelet and Sachs, 1999). As well as the East Asian economic crisis, globalisation was blamed for the most recent global financial crisis. This can be explained by the fact that, despite the origin of the crisis being traced to defaults on sub prime mortgages issued in the United States, the globalised nature of financial services propagated a spread of the crisis, such that every economy in the globe suffered the effects of this default. To conclude, it is fair to say that although globalisation has had positive impacts on the activities of businesses, the community and society at large, some economies, usually the poorer ones, tend to suffer because multinational companies' and investors' main goal is profit making and they sometimes do not care how they go about making it.