Thursday, June 30, 2005

Globalization of Finance - continuted

Originally uploaded by DCGaymer.
Globalization of finance industry will also promote consolidation of the industry, hence ending up only very large corporations can survive.

These large financial institutions enjoy informational economies of scale. These large corporations, due to their size, will have difficulties in controlling operation of branch offices. Due to the financial strength of these multinational large financial corporations the amount of money they manage will sometime exceed the money supply of a small economy which will affect the stability of the financial system globally.

These large corporations will also have sufficient bargaining power that may influence policy of World Bank, Asian Development Bank, IMF and the like. Poor and developing countries in many cases were forced to open up their market to international corporations before they are granted loans to help the economy and fight poverty.

Financial superpower also in some cases involves in politics and influence government polices which in many countries promote corruptions and expropriation of the general public (depositors or investors). Some of these large corporations, in order to gain political influence, have also involved in “black money” politics and lobbying using their financial strength.

(a) Globalization can bring about economics of scale for manufacturers with competitive markets, gains from international division of labour and brings new producers onto world markets.

(b) Globalization of finance suffers a principal/agent problem in that agent incentives are based on performance measures observable by their principal. This has promoted hedge funds and arbitrage at colossal volumes which has led to the collapse of Barings and LTCM etc.

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