Globalization
The international financial system, evolving from advances in information and communication technologies, has been a major factor in the marked increase in living standards for those countries that participate in it. Global economic integration facilitates the importation of capital and intermediate goods that may not be available in a country’s home market at comparable cost.
Similarly, global markets improve the efficient allocation of resources. Countries gain better access to financing, and the suppliers of capital — institutional investors or individual savers — receive better returns on their investments.
Finally, worldwide integration allows for the rapid transfer of ideas and technology — critical ingredients of today’s knowledge-based economies.
Technology has erased countries’ boundaries, vastly improving investor access to markets worldwide and enabling firms to finance projects anywhere almost instantaneously. The end of the Cold War, a decline in regulatory barriers, and increased global competition have deepened the interdependence of national economies tremendously.
Enterprises in free-market democracies and those in more state-oriented countries are turning to the use of equity finance at an unparalleled pace. The voracious global appetite for low-cost capital and the surge in the supply of equity have generated fundamental changes in the world’s capital markets.
Many non-U.S. companies need to tap a larger market for capital than what exists in their own country. The size of the deal may also be so big that it must be managed by an international underwriting syndicate. Global securities firms have the unique ability and expertise that companies need as they respond to customer demand and extend their reach across continents. Investors, too, are diversifying their portfolios to include stocks and bonds of foreign companies.
In 2000, foreign investors made record acquisitions of U.S. securities. Their holdings of U.S. stocks and bonds totaled more than $4 trillion, or four times 1990’s $1 trillion total. The internationalization of capital markets is also being driven by a massive shift in the holdings of U.S. investors to non-U.S. stocks and bonds. In 1990, U.S. holdings of foreign securities were only $313 billion. By 2000, U.S. investors held $2.5 trillion of foreign securities.