What is Global Finance?

Global finance refers to the financial system consisting of regulators and various financial
institutions that conduct their business on an international level. Because of this definition,
global finance does not constitute any financial businesses or regulators that act on a national
or regional level.

The primary components of global finance are the enormous international institutions, such as
the bank for International Settlements or the International monetary Fund, as well as various
national agencies and government departments, such as various central banks, finance
ministries, and those private companies who act on a global scale.

Prominent International Institutions aligned with Global Finance:

The International Monetary Fund is a financial institution that is responsible for maintaining the
international balance of payments accounts of its member states. The International Monetary
Fund may also act as a lender (typically in last resort situations) for state members who are in
financial distress due to currency crises or struggles that revolve around meeting the balance of
payment when debt default is present.

Membership in the International Monetary Fund is based on quota or the amount of funding a
member state (country) provides to the fund. The evaluation of funding is based on a relative
investigation of the member state’s role in the international trading system and global finance
in general.

Another prominent member of global finance is the World Bank, which is an institution who
aims to offer funding for development projects that, for the most part, reside in developing
nations. The World Bank assumes the credit risk of these developing nations; the World Bank
will provide financing to projects that otherwise would not be able to access such funding.
The World Trade Organization is another principle player aligned with global finance. The World
Trade Organization is responsible for settling disputes and negotiating international trade
agreements with various international companies, institutions or government agencies.

Types of Private Participants in Global Finance:

To be considered a participant in global finance a company or organization must possess
international clients or conduct business transactions overseas.

The following types of institutions also play a prominent role within global finance:
 Commercial Banks
 Insurance Companies
 Sovereign Wealth Funds
 Mutual Funds
  Pension Funds
 Private Equity Firms and Hedge Funds

Global Financial System

The global financial system is the financial system consisting of institutions and regulators that
act on the international level, as opposed to those that act on a national or regional level. The
main players are the global institutions, such as International Monetary Fund and Bank for
International Settlements, national agencies and government departments, e.g., central banks
and finance ministries, private institutions acting on the global scale, e.g., banks and hedge
funds, and regional institutions, e.g., the Eurozone.

Capitalism in a Global Economy

LEARNING OBJECTIVE
Analyze the shift in the job market and increase in international trade due to an increase in
globalization

KEY POINTS
 The world economy generally refers to the economy based on the national economies
of all of the world's countries.
 Although international trade has been associated with the development
of capitalism for over five hundred years, some thinkers argue that a number of trends
associated with globalization have acted to increase the mobility of people and capital
since the last quarter of the 20th century.
 The global financial system is the financial system consisting of institutions and
regulators that act on the international level, as opposed to those that act on a national
or regional level.
 Globalization refers to the increasing global relationships of culture, people, and
economic activity.
 The establishment of the WTO in 1995 led to an anti-globalization movement that was
primarily concerned with the negative impact of globalization in developing countries.
 Critiques of economic globalization typically look at both the damage to the planet as
well as the human costs.

TERMS:

Globalization
A common term for processes of international integration arising from increasing human
connectivity and interchange of worldviews, products, ideas, and other cultural phenomena. In
particular, advances in transportation and telecommunications infrastructure, including the rise
of the Internet, represent major driving factors in globalization and precipitate the further
interdependence of economic and cultural activities.
WTO
The World Trade Organization (WTO) is an organization that intends to supervise and liberalize
international trade. It officially commenced on January 1, 1995 under the Marrakech
Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced
in 1948. It deals with regulation of trade between participating countries and provides a
framework for negotiating and formalizing trade agreements and for resolving disputes.

Global financial system

The global financial system is the financial system consisting of institutions and regulators that
act on the international level, as opposed to those that act on a national or regional level. The
main players are the global institutions, such as International Monetary Fund and Bank for
International Settlements, national agencies and government departments, e.g., central banks
and finance ministries, private institutions acting on the global scale, e.g., banks and hedge
funds, and regional institutions, e.g., the Eurozone.

EXAMPLE
Information, goods, ideas, and cultural norms are able to spread more quickly around the world
than ever before, largely due to innovations and price drops in the telecommunications
industry. For example, these innovations have allowed Coca Cola to spread its goods around the
world. This is an example of globalization.

The term "world economy" refers to the economic situation of all of the world's countries. It is
common to limit discussion of world economy exclusively to human economic activity. World
economy is typically judged in monetary terms, even in cases in which there is no efficient
market to help valuate certain goods or services, or in cases in which a lack of
independent research or government cooperation makes establishing figures difficult.

The global financial system is the financial system consisting of institutions and regulators that
act on the international level, as opposed to those that act on a national or regional level. The
main players are global institutions, such as International Monetary Fund, World Bank, and the
Bank for International Settlements; national agencies and government departments (e.g.,
central banks and finance ministries); private institutions acting on the global scale (e.g., banks,
hedge funds), and regional institutions such as the Eurozone.

Although international trade has always existed, some thinkers argue that a number of trends
associated with globalization have caused an increase in the mobility of people and capital since
the last quarter of the 20th century. Today, these trends have bolstered the argument that
capitalism should now be viewed as a true world system, given that all national economies
trade with capitalist states and are therefore influenced by capitalist policies.

Globalization refers to the increasing global relationships of culture, people, and economic
activity. It is generally used to refer to economic globalization: the global distribution of
the production of goods and services, through reduction of barriers to international trade such
as tariffs, export fees, and import quotas; and the reduction of restrictions on the movement of
capital and on investment. Globalization may contribute to economic growth in developed and
developing countries through increased specialization and the principle of comparative
advantage.

The International Monetary Structure

The international monetary structure involves international institutions, regional trading blocs,
private players, and national governments.

LEARNING OBJECTIVE
Explain the role played by the United States over the history of the international monetary
structure

KEY POINTS
The International Monetary Fund (IMF) is one of the most prominent institutions in the
international monetary structure. The IMF oversees the global financial system and offers
assistance to states.

Another international institution, the World Bank, is important in the global monetary structure
as it provides assistance and loans to developing nations.

The World Trade Organization is an international institution that helps settle trade disputes and
negotiate trade arrangements among states.
Other important institutions in the international monetary structure include private
participants (such as banks or insurance companies), regional trading blocs (such as the
Eurozone or NAFTA), and national governments.

Some argue that because of the U.S.' s economic power and global influence, the international
monetary structure has been created to match the U.S.' s preferences and national interests.
The U.S. helped establish the current structure of the international monetary system by leading
the creation of the Bretton Woods system in 1944.

TERMS:

Washington Consensus

A term that refers to a set of ten relatively specific economic policy prescriptions that constitute
the "standard" reform package promoted for crisis-wracked developing countries.

World Bank

A group of five financial organizations whose purpose is economic development and the
elimination of poverty.
International Monetary Fund

The international organization entrusted with overseeing the global financial system by
monitoring foreign exchange rates and balance of payments, as well as offering technical and
financial assistance when asked. Abbreviated as IMF.

Major Components of the International Monetary Structure

The main components in the international monetary structure are global institutions (such as
the International Monetary Fund and Bank for International Settlements), national agencies
and government departments (such as central banks and finance ministries), private institutions
acting on the global scale (such as banks and hedge funds), and regional institutions (like the
Eurozone or NAFTA).

International Institutions
The most prominent international institutions are the International Monetary Fund (IMF), the
World Bank, and the World Trade Organization (WTO). The IMF keeps account of the
international balance of payments accounts of member states, but also lends money as a last
resort for members in financial distress. Membership is based on the amount of money a
country provides to the fund relative to the size of its role in the international trading system.

The World Bank aims to provide funding, takes up credit risk, or offers favorable terms to
developing countries for development projects that could not be obtained by the private
sector.
The World Trade Organization settles trade disputes and negotiates international trade
agreements in its rounds of talks (currently the Doha Round).

Private Participants
Also important to the international monetary structure are private participants, such as players
active in the markets of stocks, bonds, foreign exchange, derivatives, and commodities, as well
as investment banking. This includes commercial banks, hedge funds and private equity,
pension funds, insurance companies, mutual funds, and sovereign wealth funds.

Regional Institutions
Certain regional institutions also play a role in the structure of the international monetary
system. For example, the Commonwealth of Independent States (CIS), the Eurozone, Mercosur,
and North American Free Trade Agreement (NAFTA) are all examples of regional trade blocs,
which are very important to the international monetary structure .

Government Institutions
Governments are also a part of the international monetary structure, primarily through their
finance ministries: they pass the laws and regulations for financial markets, and set the tax
burden for private players such as banks, funds, and exchanges. They also participate actively
through discretionary spending. They are closely tied to central banks that issue
government debt, set interest rates and deposit requirements, and intervene in the foreign
exchange market.

Perspectives on the International Monetary Structure

The liberal view of the international monetary structure holds that the exchange
of currencies should be determined not by state institutions but instead individual players at a
market level. This view has been labelled as the Washington Consensus. The social democratic
view challenges the liberal view, advocating for the tempering of market mechanisms and the
institution of economic safeguards in an attempt to ensure financial stability and redistribution.
Besides the liberal and social democratic views, neo-Marxists are highly critical of the modern
financial system in that it promotes inequality between state players, particularly holding the
view that the wealthier countries abuse the financial system to exercise control of developing
countries' economies.

U.S. Influence on the International Monetary Structure

The most important American contribution to the global financial system is perhaps the
introduction of the Bretton Woods system. The Bretton Woods system of monetary
management, created at a conference in 1944, established the rules for commercial and
financial relations among the world's major industrial states in the mid-20th century. The
Bretton Woods system was the first example of a fully negotiated monetary order intended to
govern monetary relations among independent nation-states. Setting up a system of rules,
institutions, and procedures to regulate the international monetary system, the planners at
Bretton Woods established the IMF and the International Bank for Reconstruction and
Development (IBRD), which today is part of the World Bank Group.

Besides the influence of the U.S. on the Bretton Woods system, it is often claimed that the
United States's transition to neoliberalism and global capitalism also led to a change in the
identity and functions of international financial institutions like the IMF. Because of the high
involvement and voting power of the United States, the global economic ideology could
effectively be transformed to match that of the U.S. This is consistent with the IMF's function
change during the 1970s after a change in President Nixon's policies (when the Nixon Shock
ended the Bretton Woods gold standard). Others also claim that, because of the
disproportionate economic power of the United States, allies of the United States are able to
receive bigger loans with fewer conditions.

The Role of the Financial System

A financial market or system is a market in which people and entities can trade financial
securities, commodities, and other fungible items.

LEARNING OBJECTIVE
Explain the importance of the financial system
KEY POINT
 An economy which relies primarily on interactions between buyers and sellers to
allocate resources is known as a market economy.
 Markets work by placing many interested buyers and sellers, including
households, firms, and government agencies, in one "place," thus making it easier for
them to find each other.
 Healthy financial systems are associated with the accelerated development of an
economy.

TERMS

Entrepreneurship
The art or science of innovation and risk-taking for profit in business.

Investment
A placement of capital in expectation of deriving income or profit from its use.

Saving
The act of storing for future use

Financial System
A financial market or system is a market in which people and entities can trade financial
securities, commodities, and other fungible items. Securities include stocks and bonds, and
commodities include precious metals or agricultural goods.

There are both general markets (where many commodities are traded) and specialized markets
(where only one commodity is traded). Markets work by placing many interested buyers and
sellers, including households, firms, and government agencies, in one place, thus making it
easier for them to find each other.

An economy that relies primarily on interactions between buyers and sellers to allocate
resources is known as a market economy, in contrast either to a command economy or to a
non-market economy such as a gift economy.

Role of the Financial System

Financial markets are associated with the accelerated growth of an economy.

A financial market helps to achieve the following non-comprehensive list of goals:

 Saving mobilization: Obtaining funds from the savers or surplus units such as household
individuals, business firms, public sector units, central government, state governments,
etc. is an important role played by financial markets. Borrowers (e.g. bond issuers) are
connected with lenders (e.g. bond buyers) in financial markets.
  Investment: Financial markets play a crucial role in arranging to invest funds. Both firms
and individuals can invest in companies through financial markets (e.g. by buying stock).
 National Growth: An important role played by financial market is that, they contribute
to a nation's growth by ensuring unfettered flow of surplus funds to deficit units. In
other words, financial markets help shift money from industry to industry or firm to firm
based on the supply and demand for their products.
 Entrepreneurship growth: Financial markets allow entrepreneurs (and established firms)
to access the funds needed to invest in projects or companies.

Consequences of Banking Crises

Banking crises have a range of short-term and long-term repercussions, domestically and
globally, that reduce economic output and growth.

LEARNING OBJECTIVE
Explain consequences of banking crises on the broader economy

KEY POINTS
 Banks play a critical role in economic growth, primarily through investment and lending.
 After a banking crisis, investment suffers. When banks lack liquidity to invest, growing
business depending upon loans struggle to raise the capital required to execute upon
their operations.
 The fall in liquidity and investment, in turn, drives up unemployment, drives down
governmental tax revenues and reduces investor and consumer confidence.
 Imports and exports play an increasingly large role in the health of most developed
economies, and as a result, the relative well-being of trade partners plays an
increasingly critical role in the success of domestic economies.

TERMS

Liquidity
The degree to which an asset can be easily converted into cash.

Economic crisis
A period of economic slowdown characterized by declining productivity and devaluing of
financial institutions often due to reckless and unsustainable money lending.

Banking crises have a dramatic negative effect on the overall economy, often resulting in an
eventual financial and economic crisis in a given economic system. Banking crises have a range
of short-term and long-term repercussions, domestically and globally, that underline the severe
repercussions of irresponsible banking practices, poor governmental regulation, and bank runs.

The most useful way to frame the consequences of bank crises is by observing the critical role
banks play in economic growth, primarily through investment and lending.
Domestic Consequences
Within a given system, banking failures create a range of negative repercussions from an
economic perspective. Banks coordinate and economy's savings and investment: the act
of pooling money to capture higher returns for everyone while simultaneously funding business
dependent upon leveraging debt and equity. With this in mind, banking crises can have a
variety of averse individual and economic consequences within the system.

First, investment suffers. When banks lack liquidity to invest, businesses that depend upon
loans struggle to raise the capital required to execute upon their operations. When these
businesses cannot produce the capital required to operate optimally, sales decline
and prices rise. The overall economic performance of any debt-dependent industries becomes
less dependable, driving down consumer and investor confidence while reduce
overall economic output. Banks also perform more poorly, because they have less capital to
invest and returns to acquire.

This drives down the overall economic system, both in the short term and the long term, as
companies struggle to succeed. The fall in liquidity and investment drives up unemployment,
drives down governmental tax revenues and reduces investor and consumer confidence
(damaging equity markets, which in turn limits businesses access to capital). There is a
distinctive cyclical nature to these adverse effects, as each are interconnected in a way that
creates a domino effect across the domestic economic system.

Global Consequences
While these domestic consequences are expected and, in many ways, intuitive, the global
dependency upon foreign trade in modern markets has exacerbated these effects. Imports and
exports play an increasingly large role in the health of most developed economies, and as a
result, the relative well-being of trade partners plays an increasingly critical role in the success
of domestic economies.

A good example of this is to look at the way in which the U.S. (and to some extent, European)
banking disasters in 2008 and 2009 led to a complete global financial meltdown, destroying
economies not involved in the irresponsible investing practices executed by banks in these
specific regions. identifies the critical importance of economic well-being in trading partners, as
the U.S. banking and financial crises spread rapidly (within the course of just one year) across a
substantial portion of the globe (though there are certainly other factors that contributed to
the financial crisis and its consequences). The domestic reduction of capital for businesses,
income for consumers and tax revenue for governments ultimately results in a reduction of
trade and economic activity for other economies.

The Challenge of Globalization

Globalization is the international integration of intercultural ideas, perspectives,
products/services, culture, and technology.
LEARNING OBJECTIVE
Assess the evolution of globalization in the business world and the challenges this has created

KEY POINTS
 Globalization is an influential modern topic that highlights the growing interdependence
between different countries worldwide, necessitating managers to appropriately
incorporate this trend within their strategies.
 The speed of modern globalization is often attributed to
technological developments in communication and transportation, tasking managers
with appropriately leveraging these technologies internally.
 Multinational companies cumulatively employ nearly half of the world's population,
creating a need for managers with a strong international awareness.
 Managers must understand that some processes can be performed universally and
internationally, while others must be done in a localized fashion to adhere to each
specific region's tastes and customs.
 Critics of globalization cite the way in which it motivates an international culture over
established domestic ones, as well as the negative environmental effects that result
from business expansion.
 Being mindful of the potential opportunities in a global economy, along with knowledge
of how to localize and sidestep the negatives in an international marketplace, can
capture large value for effective managers.

TERMS:

Localizing
The act of altering a product or service to better acclimate to a local environment.

Multinational Enterprises
Businesses that operate in more than one country.

Intercultural
Representative of many different cultures simultaneously.

EXAMPLE
The 2008 financial collapse is a wonderful yet terrifying example of exactly what can go wrong
and why corporate governance and ethics is of such importance to both a business and the
society in which it operates. Leading up to the mortgage-backed security fallout of 2008, banks
and investors began to move down the path of profitability over ethical concern. Banks
eliminated certain rules and regulations (though the government did as well), allowing
employees to sell mortgages that were unlikely to be repaid. Following this,
upper management deemed it fit to package these risky securities into bundles and sell them as
safe investments, in order to capture yet more value. Though only a simplified and
small analysis of a complicated issue, this oversight in corporate management saw each echelon
of leadership ignore the core responsibility of ensuring ethical standards in lieu of capital gains.
Management is at fault for this oversight; it was a failure in corporate governance.

Globalization is a hot topic in the business world today, garnering enormous attention as
imports and exports continue to rise with companies expanding across the global marketplace.
Understanding the basic overview of the global economy underlines highly relevant managerial
and business level applications that provide useful insights to modern-day managers.
In general, terms, globalization is the international integration of intercultural ideas,
perspectives, products/services, culture, and technology. This has resulted in large-scale
interdependence between countries, as specialization (arguably the root cause of globalization)
allows specific regions to leverage their natural resources and abilities to efficiently produce
specific products/services with which to trade for another country's specialization. This allows
for a higher standard of living across the globe through higher efficiency, lower costs,
better quality, and a more innovative and dynamic workforce.

Growth of Globalization
The ease of modern globalization is often attributed to rapid technological developments in
transportation and communication. These form the central system of international exchange,
allowing businesses to create meaningful relationships worldwide with minimal time
investment and costs. Management is tasked with ensuring these resources are available to
employees and properly leveraged to optimize the geographic reach of a business's operations.
This has led to the existence of many multinational enterprises (MNEs), who argue that survival
in the newly globalized economy requires sourcing of raw materials, services, production, and
labor.

From a managerial perspective, the global workplace implies an enormous amount

of diversity management. Estimates of the world labor pool in 2005 noted that multinational
companies employed a stunning 3 billion workers cumulatively, which is nearly half of the
entire world population. As a manager, this means developing a globally aware perspective that
lends itself well to the specific geographic needs, values, and customs in which the business
operates. Developing this global skill set is a powerful managerial skill.

Challenges of Globalization
Managers should also be aware of the best way to approach global demographics from a
business to consumer perspective, taking an international product or service and localizing it
successfully. This is a significant challenge, necessitating consideration for different tastes
and branding strategies during the implementation process. This chart illustrates the process of
moving from an international product to a localized product gradually, making note of the
element of production that can be universally applied compared to those that need a localized
touch.
Managers must also be particularly aware of the current criticisms of a highly global society,
particularly as it pertains to ethical and environmental considerations. A global economy is, in
many ways, enforcing a global culture. This global culture is often criticized for taking the place
of previously established domestic cultures (and motivating consumerism).

Globalization Process
This chart illustrates the complementary localizing and internationalizing responsibilities of a globalizing
organization. The organization must place an international focus on product design, development, and QA to
ensure its broad relevance while also localizing marketing to tailor its appeal to individual markets.

As a result, managers should carefully consider how to best localize products to

retain cultural identity in the regions they operate. Environmental concerns are of large
importance as well, as the constant energy utilization required for this interchange pollutes
the environment and uses high quantities of valuable energy-creating resources. Minimizing the
damage done to the environment, and offsetting it as best as possible through philanthropic
giving, is not only a wise marketing move but also a critical ethical consideration.

Conclusion
Combining these points, the globalized society presents enormous opportunity for businesses. Intercultural
marketplaces allow for differing demographics, larger market potential, a more diverse customer base (and
therefore more diverse product offering) and a highly valuable human resource potential. On the other end of the
bargain, managers are tasked with localizing products and services effectively in a way that minimizes the adverse
cultural and environmental effects caused by this rapid global expansion to maintain an ethical operation.