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......hive. Yahoo! is not affiliated with the authors of this page or responsible for its content. Paradoxes of Financial Globalization Paradoxes of Financial Globalization Serhij Kozmenko * , Helen Chuyko ** Abstract. The article studies the process of financial globalization. The major objective is to study the main paradoxes of financial globalization the phenomenon of home bias and the paradox of
"Feldstein-Horioka". Assessment of the paradoxes of financial globalisation is especially important
during depression periods, which are taking place in the world economy, because their analysis makes it
possible to evaluate the stage of development of the globalisation process as well as its ability to develop
even under the conditions of economic depression. The study results in stating that international financial
crises of the 1990s did not affect the international investors' confidence in the perspectives of financial
globalization. It is proved by the growing mobility of international investment capital and also by the
investors' wish to diversify the portfolio of securities by purchasing securities issued in different
countries. Apparently, under such conditions financial crises can be considered an additional powerful
stimulus for financial globalization rather than a barrier for its development.
Key words: financial globalization, international investors, securities, mobility of capital, financial crisis. Origins and Essence of the Term Globalization The term globalization was introduced by . Levit in 1983. According to . Levit globalization is the merger of markets of certain goods manufactured by transnational corporations. The scholars of the
Harvard Business School gave a more substantial definition of the term. The leader of the research team
in the field of international financial markets . hmae in his book World without borders published in
1990 emphasized that the state of world economy depends on the triad consisting of the European Union,
the Unites States and Japan. In his view, the development of economic nationalism has no sense at all. Today globalization means formation of global transnational corporations, intensification of world trade, financial globalization, etc. The basis of globalization is the activity of transnational corporations. Financial globalization is the result of transnational corporations' international investments. The United Nations study on trade and
development published in 1997 notes that direct foreign investments continue to be a moving force in
the process of globalization. A big growth in direct foreign investments testifies to the important role that
transnational companies play in the developed and developing countries". At first, financial markets served the real sector of economy: they helped to ensure corporations against exchange risk, financed short-term transactions, etc. But gradually financial markets began to play
an independent role. They grew in number. Their capabilities regarding the maximization of profitability
and minimization of risk on the world financial markets increased considerably. Today it is possible to make a conclusion that it is not the real sector of economy that shapes the financial sphere on the international market, but financial markets determining the level of countries
development. Indeed, with only 10 % of daily currency transactions being in foreign trade, the exchange rate is influenced not so much by fundamental economic factors, but by the current situation on the financial
markets. This situation would be impossible if countries authorities did not support financial globalization on macroeconomic level. The movement towards the united market requires constant
stimulation, i.e. elimination of barriers for international investments and international financial
transactions. In other words, this movement requires liberalization of national economies. Paradoxes of Globalization Some economists are prone to doubt the existence of financial globalization. This view has some reasons behind it. The process of creation of common market has certain peculiarities. The most difficult
of them are the phenomenon of home bias, paradoxes of Feldstein-Horioka and some observations
showing that the level of pure international capital flows is not very high. In the world economic literature * Doctor of Sciences in Economics, Chair of Department of Management & Foreign Economic Relations, Ukrainian Academy of Banking of National Bank of Ukraine, Sumy, Ukraine. ** Senior lecturer, Chair of Management & Foreign Economic Relations, Ukrainian Academy of Banking of National Bank of Ukraine, Sumy, Ukraine. 2 these economic paradoxes which contradict the conception of financial globalization are known as
globalization puzzles. Let us look at some of these "puzzles". The phenomenon of home bias This phenomenon is widely debated in scientific circles. While considering that diversified investment portfolio results in possibilities obtaining higher profits at a fixed investment risk compared
with non-diversified portfolio, the international financial portfolio should become more diversified. Table 1 The distribution of shares of national and foreign corporations in portfolios of American, Japanese and British investors Share of stock in portfolios of international investors, % American Japanese British Country of issue 1991 1999 1991 1999 1991 1999 USA 93,80 95,00 1,31 6,18 5,90 8,14 Japan 3,10 2,02 98,11 92,94 4,80 3,10 United Kingdom 1,10 1,02 0,19 0,24 82,00 82,4 France 0,50 0,44 0,13 0,18 3,20 2,82 Germany 0,50 0,32 0,13 0,15 3,50 2,60 Canada 1,00 1,20 0,12 0,31 0,60 0,94
The existing portfolios of international investors are characterized by considerable shift towards national assets if compared to the optimal investment portfolio built with the help of the Capital Assets
Evaluation Model of W. Sharpe. Having compared the results of the study of . French and J. Poterba for the year 1991 with the similar results received by researchers of the Ukrainian Academy of Banking for the year 1999, the
conclusion can be made that the phenomenon of home bias is still taking place in the beginning of the
XXI century. One should mention that though it has become less important for Japanese investors, it is
still important for British investors, and it has become more important for American ones. This can be explained from the economic point of view. The rates of the efficiency growth of American capital market by far outpace the rates of the efficiency growth of other worlds financial
markets. This makes American financial market very attractive both for domestic and international
investors. Moreover, high diversification of the US economy attracts more and more portfolio investors
from Europe and Japan, which do not enjoy such high growth rates of their own economies branch
diversification. This means that the pace of globalization is dictated by the US financial market. At first sight the deterioration of the crisis in the US economy in the beginning of 2001 should have had a profound influence on international investors investment decisions. But according to the data
given in Table 2, the role of the home bias phenomenon did not increase. Table 2 The distribution of shares of national and foreign corporations in portfolios of American, Japanese and British investors Share of stock in portfolios of international investors, % Country of issue American Japanese British USA 94,05 6,85 9,40 Japan 2,38 91,32 3,52 United Kingdom 1,11 0,79 76,34 France 0,40 0,24 3,90 Germany 0,44 0,19 3,95 Canada 1,62 0,61 2,89
Taking into consideration the data of Table 2, one can make a conclusion that international investors continue to increase the share of international assets in their securities portfolios. Special
attention should be paid to British investors. In 2001 their portfolios contained only 76,34 % of securities
issued in the United Kingdome. In 1991 this figure was 82 %. This shows that financial crises of the 90s 3 helped to reduce the role of the home bias phenomenon since international investors started to pay more
attention to the regional diversification of securities portfolio. Feldstein-Horioka paradox The Feldstein-Horioka paradox deals with the behavior of international investors that classical theory cannot explain. If financial markets were fully united, all savings would also be pooled.
Theoretically one can assume that residue savings should be transferred to the countries where financial
markets give the highest investment profit and where there are no correlations between domestic savings
and domestic investments. But in reality there exists close correlation between domestic savings and
investments. This shows that no process of integration of worlds financial markets is going on there. In
other words, the researchers of the Feldstein-Horioka paradox have come to the conclusion that rather
than trying to export the redundant capital, markets absorb the surplus of investments on the domestic
market. Interpretation of the Paradoxes of Globalization There is much evidence that shows that integration of world financial markets has no future. If we try to interpret the puzzle of globalization in a different way, the future of the process of globalization
will not look so dim as it did before. Many researchers believe that the effect of portfolio risks diversification is limited for the following reasons: there are goods that have no circulation on the market. Securities that have no circulation on the market can be of great value for national investors as they yield high profits in
comparison with international financial instruments; the distribution of risks is very sensitive to the peculiarities of theoretical models. The evaluation of potential advantages of international diversification of portfolio risks depends
on the specific elements of a particular model such as markets size, structure, technological
level of the countrys economy, behavior of economic agents, etc. That is why it is
practically impossible to make general conclusions because of the specific features of every
model; according to investment qualities foreign assets should not necessarily surpass national assets for the hedging of expenses from uncertainties with wages and salaries. The periods of
recession are inevitably accompanied by the falling of corporate profits while wages and
salaries change at insignificant rates and with some lagging. As a result, part of the expenses
of corporations on wages and salaries begins to grow. In this process the correlation between
expenses on human capital and financial assets becomes weak - this compensates the
attractiveness of foreign assets used for the hedging of uncertainty with wages and salaries. It should also be mentioned that apart from the drawbacks of the theory of international diversification of investment risks there are additional expenses and risks for international financial
transactions. The home bias phenomenon can be caused by the norms of state regulations, investment costs, low information efficiency and conservatism of managers. International investment requires huge
investments into human capital. If this investment is launched, the following expenses are considerably
reduced, which makes future investment easier. This reduction of expenses can be called the reduction of
premium for the risks in making innovative decisions. If such situation exists on the market, it is accompanied by increase of reinvestment opportunities for corporations as a result of reduction in dividend cash payments. In 1999 researchers of
Harvard University developed the theory according to which 100 % of corporations reinvestments of net
profits make it possible for them to use 100% of their own resources for the market growth. On the
microeconomic level this increases the efficiency of both financial markets and countries financial
systems. National borders can really be a barrier on the way to international capital movement, as the real advantages of international investment are not as big as they are supposed to be. At the same time, risks
and expenditures of international investment are so high that they nullify all attempts of international
investors to use the international diversification of portfolio risks. These expenditures and risks include
exchange market, market low information efficiency, risk of time difference, conservatism of managers,
state financial conservatism.