INTERNATIONAL

GLOBALIZATION &

FINANCIAL CRISIS
GLOBALIZATION
• Is a summary of changes from three global
aspects: culture, economics and environment.
Globalization can be described as the deepening
relationship and broadening interdependence
among people from different parts of the world
and especially among different countries

(Daniels et al., 2007)

INTERNATIONALIZATION
• Process by which companies increase their influence
on international activities carried out in future while
they make transactions with companies in different
countries (Horská and Ubrežiová, 2001).
• It occurs when the firm expands its research and
development, production, selling and other business
activities into international markets (Hollensen, 2007).
• Globalization reflects the trend of firms buying, selling and distributing products and
services in most countries and regions of the world. On the other hand,
internationalization means doing business in many countries of the world, but often
limited to a certain region.
Internationalization and contributing associated processes may have
different faces, dimensions, horizons, perspectives and levels.
MAJOR INTERNATIONALIZATION MOTIVES
Proactive Motives Reactive Motives
– profit and growth goals – competitive pressures
– managerial urge – domestic market: small and saturated
– technology
– overproduction/excess capacity
competence/unique product
– foreign market opportunities / – unsolicited foreign orders
market information – extend sales of seasonal products –
– economies of scale proximity to international customers /
– tax benefits psychological distance
PRIMARY OBJECTIVE OF
GLOBALIZATION
• Deliver associations a viable prevalent position which brings
down to increase more noteworthy quantities of items,
customers and administrators.

CATEGORIES OF GLOBALIZATION
 POLITICAL GLOBALIZATION
• Refersto the growth of the worldwide political system,
both in size and complexity

CULTURAL GLOBALIZATION
• Refersto the transmission of ideas, meanings and values around
the world in such a way as to extend and intensify social relations

ECONOMIC GLOBALIZATION
• Refers to the increasing interdependence of world
economies as a result of the growing scale of cross-border
trade of commodities and services, flow of international
capital and wide and rapid spread of technologies.
What forces are driving globalization?

• Technological change
• Multilateral trade negotiations
• Continuing liberalization of trade and investment
• Widespread liberalization of investment
transactions
• Development of international financial markets
First Wave of Globalization: 1870–1914
• Decreases in tariff barriers & new technologies
• Declining transportation costs
• Shift from sail to steamships; Railways
• Driven by European and American businesses and
individuals
• Exports as a share of world income
• Nearly doubled to 8%
• Per capita incomes increased 1.3% per year
• Previous 50 years: 0.5% per year
• Countries that actively participated in globalization
• Became the richest countries in the world
• Brought to an end by World War I
Great Depression of the 1930s
• Governments – protectionism
• Tariffs on imports
• Try to shift demand into domestic markets
• Promote sales for domestic companies
• Promote jobs for domestic workers
• Exports as a share of national income
• Falls to 5%
Second Wave of Globalization: 1945–1980

• Horrors of the retreat into nationalism

• Falling transportation costs
• Decrease previously established trade barriers
• Trade liberalization – discrimination
• Which countries participated
• Which products were included
Trade liberalization – discrimination
• Developed countries, manufactured goods
• Largely freed of barriers
• Greatly increased the exchange of manufactured goods
• Raise the incomes of developed countries
• Developing countries
• Eliminate barriers only for those agricultural products
that did not compete with agriculture in developed
countries
• Manufactured goods - sizable barriers
Latest Wave of Globalization, began in 1980
• A large number of developing countries
• China, India, and Brazil
• Broke into the world markets for manufacturers
• Other developing countries
• Increasingly marginalized in the world economy
• Decreasing incomes
• Increasing poverty
• Significant international capital movements
• Some developing countries
• Competitive advantage in labor-intensive manufacturing
• Bangladesh, Malaysia, Turkey, Mexico, Hungary, Indonesia, Sri Lanka, Thailand, and the
Philippines
• Tariff cuts
• Lower barriers to foreign investment
• Technological progress in transportation and communications

• Protectionist policies in developed countries

• World
• More globalized - international trade, capital flows
• Less globalization - labor flows
• Foreign outsourcing
• Certain aspects of a product’s manufacture are performed in more than one
country
• Manufacturing - moved to wherever costs were the lowest
• Job losses for blue-collar workers
• Cries for the passage of laws to restrict outsourcing
• By the 2000s, foreign outsourcing of white-collar work
• Information Age - Digitization, Internet, and high-speed data
networks around the world
• Sending upscale jobs offshore - Accounting, chip design,
engineering, basic research, and financial analysis
• Foreign outsourcing
• Reduce costs of a given service: 30 to 50%
Free Trade Area
• A free trade area (FTA) is a group of countries that have agreed
to abolish all internal barriers to trade among themselves.
Countries that belong to a free trade area can and do trade
policies with third countries. A system of certificates of origin is
used to avoid trade diversion in favor of low tariff members.

Customs Union
• Require that the members to have a uniform tariff on
trade with nonmembers; is like a single nation, not
only in internal trade, but also in presenting a united
front to the rest of the world with its common
external tariff.
FINANCIAL CRISIS
• In the 19th and 20th centuries, many financial crises were
associated with banking panics and many recessions
coincided with these panics.
• Other situations that are often called financial crisis
include stock market crashes and the bursting of other
financial bubbles, currency crises and sovereign defaults
• Financial crisis often result in a loss of paper wealth but do
not necessarily result in significant changes in the real
economy.
Financial Crisis Types

• Banking Crisis
• Currency Crisis
• Speculative Bubbles and crashes
• International financial crisis
• Wider economic crisis
Causes and consequences
• STRATEGIC COMPLEMENTARIES IN FINANCIAL MARKETS
- incentive to mimic the strategy of others
- It has been argued that if people or firms have a sufficiently
strong incentive to do the same thing they expect others to do, then
self-fulfilling prophecies may occur. For example, if investors expect
the value of the yen to rise, this may cause its value to rise; if
depositors expect a bank to fail this may cause it to fail. Therefore,
financial crises are sometimes viewed as a vicious circle in which
investors shun some institution or asset because they expect others
to do so.
Leverage
• When a financial institution (or an individual) only invests
its own money, it can, in the very worst case, lose its own
money. But when it borrows in order to invest more, it can
potentially earn more from its investment, but it can also
lose more than all it has. Therefore, leverage magnifies
the potential returns from investment, but also creates a
risk of bankruptcy. Since bankruptcy means that a firm
fails to honor all its promised payments to other firms, it
may spread financial troubles from one firm to another
Asset-liability mismatch
• a situation in which the risks associated with an institution's
debts and assets are not appropriately aligned. For
example, commercial banks offer deposit accounts which
can be withdrawn at any time and they use the proceeds to
make long-term loans to businesses and homeowners. The
mismatch between the banks' short-term liabilities (its
deposits) and its long-term assets (its loans) is seen as one
of the reasons bank runs occur (when depositors panic and
decide to withdraw their funds more quickly than the bank
can get back the proceeds of its loans).
 Uncertainty and herd behavior
• Many analyses of financial crises emphasize the role of investment
mistakes caused by lack of knowledge or the imperfections of human
reasoning.
• Historians, notably Charles P. Kindleberger, have pointed out that
crises often follow soon after major financial or technical innovations
that present investors with new types of financial opportunities, which
he called "displacements" of investors' expectations.
• Early examples include the South Sea Bubble and Mississippi Bubble of
1720, which occurred when the notion of investment in shares of
company stock was itself new and unfamiliar,[
Regulatory failures
• Some financial crises have been blamed on insufficient
regulation, and have led to changes in regulation in order
to avoid a repeat. For example, the former Managing
Director of the International Monetary Fund, 
Dominique Strauss-Kahn, has blamed the 
financial crisis of 2007–2008 on 'regulatory failure to
guard against excessive risk-taking in the financial
system, especially in the US'. Likewise, the New York
Times singled out the deregulation of credit default swaps
 as a cause of the crisis.
Contagion
• Contagion refers to the idea that financial crises may
spread from one institution to another, as when a
bank run spreads from a few banks to many others, or
from one country to another, as when currency crises,
sovereign defaults, or stock market crashes spread
across countries. When the failure of one particular
financial institution threatens the stability of many
other institutions, this is called systemic risk.
Recessionary effects
• Some financial crises have little effect outside of the financial
sector, like the Wall Street crash of 1987, but other crises are
believed to have played a role in decreasing growth in the rest of
the economy. There are many theories why a financial crisis
could have a recessionary effect on the rest of the economy.
These theoretical ideas include the 'financial accelerator', '
flight to quality' and 'flight to liquidity', and the Kiyotaki
-Moore model. Some 'third generation' models of currency crises
 explore how currency crises and banking crises together can
cause recessions.
The Global Recession of 2007 – 2009
• Immediate cause of the global economic crisis
• Collapse of the U.S. housing market
• Resulting surge in mortgage loan defaults
• Undermined the financial institutions that originated
and invested in them
• Creditors and uninsured depositors
• Pulled their funds and cashed out of securities issued by
risky institutions
• Invested in U.S. Treasury securities
• Many institutions failed, others struggled to
survive
• Banks - fearful about making loans
• The credit spigot closed
• The global economy withered
• Global stock investors dumped their holdings
• Self-reinforcing adverse economic downturn
• Crisis in confidence
• Roots of the problem
• Lack of fear - booming housing market of 2006
• Mortgage-backed securities
• Booming housing market
• Government pressured banks to serve poor
borrowers and poor regions of the country
• Community Reinvestment Act
• Default mortgages
• The crisis goes global
• Europe
• Exposure to defaulted mortgages in the U.S.
• Emerging economies
• Lacked resources
• Extremely poor countries
• Decrease in foreign aid
• China - depressed its export markets
• Crisis in confidence
•Combating a crisis in confidence
• Pump liquidity into troubled financial institutions
• Provide increased or unlimited deposit insurance
• Central banks
• Coordinated interest-rate reductions
• Purchased commercial paper & money market instruments
• Governments
• Large fiscal stimulus packages
• Tax cuts
• Increased government spending
• International Monetary Fund
• Financial aid to emerging countries
Globalization and crisis
• International capital flows provide fuel for the fire of
credit booms (cf. subprime, reserve accumulation)
• International lending booms can set domestic leverage
cycles in motion • Global financial intermediaries transmit
and amplify crises
• Globalization can spread financial contagion and magnify
financial vulnerabilities • Crises and their after-effects can
trigger political turns that threaten an open international
order.