Globalizationand Economic Development — A look at theories and Market Trends
Globalizationis perhaps one of the widely discussed transformations that haveaccompanied the evolving world. Globalization is defined as theprocess of integration of communities across the globe, which ischaracterized by the interchange of ideas, culture, worldviews, andproducts. The process of globalization is powered various social andeconomic developments, including the growth information communicationtechnologies such as the internet that have created the allowance forpeople across the world to interact without limits. The role oftransport infrastructure has also been crucial, creating theallowance for people to travel to different places of the world byovercoming distance barriers, thereby facilitating interactions. Thesignificance of the process in development has been one of theinteresting areas of discussion in academia. The economic discussionsoriented have been interested in the place of globalization insupporting or subverting the order, and identifying the antecedentsof a positive outcome.
Indeed,as Grossman and Helpman (2015) note, the question of howglobalization affects the economy is perhaps the most critical, inwhich he asserts that modern literature on economic growth continuesto grapple with models and tools to help conceptualize and evenpredict the globalization-related economic development trends. Thispaper considers the question of whether globalization has anyimplication on the status quo of the trade theories, in particular,whether the conventional trade theories would now be relevant amidstthe globalizing world. Another issue that Grossman and Helpman (2015)highlight is that the ability for an economy to benefit from theglobalization depends on it background predisposition. The interestof this paper would be to identify the challenges that might impedemajor global economies from tapping the potential that underliesglobalization process, questioning the ability of world economies toexploit market opportunities. Grossman and Helpman (2015) alsohighlight what different economies from the globe could expect fromglobalized regulations. Therefore, part of the focus of the paperwill be to explore what globalization has to offer for the globaleconomy, focusing on Basel III.
Questioningthe Relevance of the Trade theories
Globalizationhas triggered a shift in paradigms for consistency concerning whattheories should account for the current trade developments. Indeed,various theories exist to explain the international trade trends, butthe question is whether the conventional approaches are consistentwith current world trade patterns, as well as whether the old tradetheories would also find a place in the contemporary economicsituation. To find answers to the question, this paper delves toreview studies exploring the relevance of these theories, focusing onHeckscher-Ohlin factor-proportion theory and Samuelson-Jones model.
Questionshave been centered on the role of general premises of competitiveadvantage in predicting trade between countries amid theglobalization. One of the popular theories that have been the subjectof focus is Heckscher-Ohlin factor-proportion theory, which positsthat international commerce functions to compensate the unevendistribution of resources within a geographical space (Dixit &Norman, 2012). This model is inclined to the fact that traderelations are governed by factors such as labor, land, and capital.As Arthur (2013) notes, the mode of exchange of goods and services inthe international setting can be perceived as assuming a fashion inwhich goods and services flow from areas of abundance to areas ofdeficit. In most circumstances, this phenomenon overshadows otherfactors such as price that affect trade exchanges.
Nevertheless,As far as the constant marginal capital productivity is concerned,one feature that correlates with the elastic labor demand is thegross domestic product aggregate. This point may be considered acritical element considering that the growth triggered by theaccumulation of capital is constrained by the falling capitalmarginal productivity. In the Heckscher-Ohlin model’s account for arelatively small-sized open economy, the potential reduction in thecapital marginal productivity is streamlined capital-intensiveproducts. On the other hand, in the closed economy, there are limitedshifts in the product mix, considering that every product has to besold internally. In this regard, growth is sustained with relativeease in the open economies, as opposed to closed economies (Spence,2012).
Anotherpopular model is Samuelson-Jones model, which concerns itself withthe dynamics of the income distribution. According to the model,trade is determined by income distribution in two ways (Shiozawa,2007). In one way, resources can never be transferred immediatelyfrom one firm to another without costs. Secondly, the industrialoperation is governed by an array of factors such that changes in theproduction mix may serve to improve or reduce demand. For example,countries endowed with sufficient capital but with limited land wouldbe expected to produce manufactured goods, rather than agriculturalgoods, regardless of price. On the other hand, the country endowedwith land reserves is expected to produce more agricultural goodsthan manufactured goods. If one of the elements in the capital,labor, and territory were to be kept constant, an increase in capitalwould result in an increment in the marginal productivity. On theother hand, an increment in the territorial offer would increaseagricultural production at the expense of the manufacturing(Marshall, 2012). When two countries are tied to trade partnership,they establish an economy whose total output equals the production ofproduction of the two nations. Although some elements in the theorieshave been approved, this has not been evidenced in all cases.
Asfar as the contemporary trade pattern is concerned, various accountsdisapprove the conventional trade theory. According to Leontief’s(2012) statistics, the imports of United States in 1947 were capitalintensive compared to the exports. For quite some time, therelationship between the exports and the imports remained relativelyunchanged, and the model was widely criticized for inconsistency.Ideally, one would expect that since the US is a developed economy,it would import high labor-intensive goods, and export lowlabor-intensive products, which has not been the case. Moreover,Grubel and Lloyd (2012) were successful in examining the traderelations between developed economies. They established that thetrades between the already developed countries have been growing atthe rate that exceeds the output, negating the essence of sharedfactor endowments that Heckscher-Ohlin factor-proportion theoryasserts would discourage trade between the developed economies. Theauthor explains that if the theories of comparative advantage were tobe relevant, trade between developed and developing countries wouldhave been more dominant that the trade between developed countries.However, in the last twenty years, the trend has been on the reverse.Trade has been rising drastically between the advanced economies, aswell as between poor and lower wage economies (Grubel and Lloyd,2012).
Besides,Spence (2012) has further argued that the contemporary internationaltrade has continued to disapprove the Heckscher-Ohlin model. Inparticular, in the past, it was unusual to witness a trade betweentwo countries involving the exchange of similar goods, which hasoften been labeled as similar-similar trade. Traditionally, eachcountry would produce and export only commodities that were onlyconsidered surplus, while importing goods that it could not produceto satisfy the market demand. The authors assert that this haschanged, following the emergence of similar-similar commodityexchange between nations, nullifying the relevance of monopolisticmodel (Spence, 2012).
Accordingto Melitz (2003), the trade theory hinged on comparative advantagecould be challenged on various grounds. For instance, could it besubstantiated in practice that international trade between theneighbors only compensates uneven distribution of resource productionfactors within a geographical space? Does the association betweenfactor endowment and trade relationship apply for such circumstances,and if so, what is the exact causality? Besides, which type ofresources should be perceived as being immobile in the face ofinternational trade, and for what duration should this be? Is thelabor’s demand elastic in an open economy, as opposed to the closedeconomy? Does this also imply that the growth in open economies ismore sustainable than closed economies? According to the author,whereas some of the response to these crucial questions may validatethe new trade theories, others may not (Melitz, 2003).
However,Krugman (2013) asserts that comparative advantage continues to holdrelevance to a certain extent, as reflected by the differences incompensation per hour of workers in the countries that trade with theUnited States. In particular, the US tends to import highlabor-intensive goods from countries with low compensation per hour.Besides, although Krugman (2013) does not dismiss the fact that thetrade between countries with the same level of economic developmentis common in the current globalized world, he points out that, asfrom 2006, the trend has been changing and the United States is nowtrading with developing countries much more than developed countries.For example, the fact that US trades with Mexico and China, whichoffer 13 and 4 percent of US wage level respectively, are an exampleof comparative advantage in action (Krugman, 2013).
Inaddition, Dixit and Stiglitz (2012) have discussed that, followingthe liberalization of the international trade, industries shielded bycomparative advantage would be in the position to expand, while thosethat are limited by comparative disadvantage would shrink from themarket. The eventuality is that there would be an uneven spatialdistribution of similar business activities (Dixit & Stiglitz,2012). This view is agreeable because the growing trade globalliberalization has been accompanied by the competition so that theless competitive firms have been pushed to the edge. The resultantintra-industrial market share reallocations have become morepronounced than the inter-industrial reallocations that underpin thecomparative advantage-based theories.
Accordingto Fujita (2012), the fact that international trade continues toinvolve similar-similar commodity exchange does not negate therelevance of comparative advantage perspective. If only, technologyhas created the allowance for countries to have an edging competitiveadvantage for companies to increasingly specialize in the manufactureof varieties of products to meet the diverse demands of customers(Kortum & Eaton, 2012). For instance, it is not conclusive that acountry endowed with mobile phone manufacturing companies would onlyexport rather than import similar products. A wide range of mobilephone makes exist so that a single country may not meet the domesticmarket demands, and this calls upon the exports to suffice. A typicalexample is seen in the case in which the US exports its phones toChina while importing Chinese phones. This trade pattern is driven bythe fact that several US consumers prefer phones made in China, inthe same way, several Chinese consumers prefer the phones made in theUS. Therefore, it is still possible to explain the developments inthe inter-industry specialization based on the Heckscher-Ohlin model.In this regard, although it is assumed that developed countries havelimited comparative advantage among themselves, their trade hasbecome dominated by the intra-industry specialization that istriggered by the economies of scale, further giving birth to a newform of comparative advantage.
Moreover,comparative advantage remains one of the drivers for the creation oftrade agreements, which are aimed at securing potential markets forcountries to access international markets. Free trade agreementscontinue to play a crucial role in eliminating trade barriers betweencountries to support trade. There have been other views that globaltrade patterns can be effectively explained in terms of increasingreturns and comparative advantage. This view is founded on thepremise that an integrated economy is only the product of a wiselocation of each commodity relative to the economies of scale withina country. Such an approach integrates factors that affectcomparative advantage, as well as those that trigger specializationbecause of economies of scale. This view is asserted in theKrugman-Obsfeld Model, which holds that the international trade isgoverned by the global supply curve of production possibilities, andglobal demand curve of certain commodity preferences. The import andexchange rates are determined by the intersection of the globaldemand and supply curves. If one of the elements remains constant,the growth rate of the country will trigger improvement of thecountry’s welfare. However, such an approach is also inconsistent,considering that, under free trade agreements, some countries engagein trade even with limited income returns. An example of suchscenario is foreign directed investment trade, in which somecountries benefit at the expense of others.
Inlight of the competing positions, Beason and Weinstein (2012) adopt aliberal view, whereas the theory holds relevance, this is not for allcircumstances. For instance, whereas it is common to find countrieswith vast oil reserves importing crude oil, it is also not unusual tofind countries with limited land resources participate in exportingagricultural products. Additionally, although such countries may berich in terms of labor, they may still offer wages that correspond tothose provided by high paying and scarce labor countries. Yet, thenew trade theories, just as the old trade theories, have failed toaddress the ever-changing implications of the openings of trade,especially in terms of the growth of developing countries. The samescenario is experienced for differences in the innovations, increasein returns and technological progress.
Inthis regard, it is agreeable that the evolution of the world has beenaccompanied by various changes, which calls for a rethink of existenttrade paradigms. Even so, whereas the conventional theories may seemconsistent in explaining the world trade pattern, this does not holdfor all cases. For instance, the view that a typical developedcountry would only export capital-intensive commodity has beendisapproved. Even the trade between developed countries has beendeveloping at the rate that exceeds the output, disregarding the factthat even these countries share commonalities in terms of factorendowments. The view that international trade patterns can beeffectively explained in terms of increasing returns and comparativeadvantage has also been rendered inconsistent. On the other hand, thefact that international trade continues to involve similar-similarcommodity exchange does not negate the relevance of comparativeadvantage perspective. If only, technology has created the allowancefor companies to increasingly specialize in the manufacture ofproduct varieties to meet the customers’ diverse interests.Furthermore, comparative advantage remains the motive for theestablishment of free trade agreements.
CurrentChallenges in Foreign Investment Environment — a look at the CaseExamples of the UK, the US and Australia
Firmsare increasingly realizing the need to pursue investments across theborders. Even as firms become global, making investment choiceswisely while considering the associated economic risks is imperative.It is contended that foreign markets and economies operatedifferently. Indeed, Globalization introduces various constraintsthat foreign investors need to beware. Such a scenario calls uponeconomies to evaluate their internal conditions and chart ways toalign with the globalized market. However, a look at the case of theUS, the UK, and Australia reveals that countries have severalchallenges that they must address to be able to benefit from theglobalized market.
Forinstance, the fact that the United States is a strong economy makesits marketplace to be particularly competitive that is concernedabout rewarding efficiency, integrity, and productivity that mandatescompliance with stringent rules and regulations. As the United Statescontinues realizing economic development, the costs of conductingbusinesses are also expected to rise. This issue requires thatcorresponding foreign investment should be of higher level in orderto compete with domestic firms that are well established. The local,state and federal authorities’ regulations imply that foreigninvestors need to beware labor, tax, and commercial laws. Forexample, Fair Labor Standards Act outlines minimum wages for thehourly workers. The 2007 Fair Minimum Wage Act resulted in theamendments resulting in an increase of minimum wage increase to $7.25per hour (Neumark & William 2013). Many states with a minimumwage that is below the Federal minimum wage stipulations beencompelled to make the adjustments. There have been cases in whichcrackdowns have been conducted by the federal government regulators,resulting in a scrutiny on how privately owned business operate. Suchoperations fall under the mandate of the Sarbanes-Oxley Act of 2012,which required that registered public owned Securities and ExchangeCommission Companies disclose controls on financial disclosure. Thishas resulted in heightening standards of compliance while increasingthe costs associated with compliance (Rosenbaum & Pearl, 2013).
Moreover,even the foreign investment approval procedure seems complicated andtedious. In the United States, this is the responsibility ofCommittee on Foreign Investment in the United States (CFIUS).However, it appears the investment procedures may seem stringentdepending on the nature of investment and its implications in thecountry. For example, Chinese companies, in response to globalfinancial crises and associated developments, have looked to theUnited States as a target for foreign investment, seeking to makeacquisitions and mergers. Most of these Chinese companies specializein defense, telecommunication, and aviation sectors, and have facedCFIUS approval challenges. Huawei Technologies Company, which is oneof the leading global IT firms, has aborted several transactions onaccount of security concerns that are associated with the mergers andacquisitions. In July 2013, Huawei was compelled to withdraw from thepurchase of 3Leaf, a bankrupt US server technology company on accountof national security concerns (Milbank, Tweed, Hadley & McCloyLLP 2013).
Thereare other economic risks such as those associated with US investmentenvironment is the different reporting standards. Whereas there havebeen deliberate attempts to embrace international reportingstandards, various countries, such as the US, have been rigid inadopting them. It has been widely cited that this feature makes itdifficult for foreign businesses to operate efficiently in America(Krugman, 2013). Firms are required to prepare financial statementsbased on only the IFRS and other accepted principles. The worst ofdifficulties pertaining reporting standards is felt in the cases ofacquisitions and mergers integrations. This could provide a leewayfor some employees to capitalize on the opportunity to manipulate theresults and advance selfish motives (Straub, 2013).
Likethe US, the fact that the UK is a strong economy makes itsmarketplace to be particularly competitive that is concerned aboutrewarding efficiency, integrity, and productivity that mandatescompliance with stringent rules and regulations. This has alsoresulted in relatively high costs of running businesses. Uniqueregulatory features include prices, safety, protectionism, andintellectual property rights systems. While pursuing investments inthe foreign environments, investors often assume that stringentregulations are accompanied by investment and operation costs andoften try as hard to avoid (Bardens, 2013). However, the minimum wagein the United Kingdom has remained relatively low to the extent thatit has been considered to favor foreign investment, offering cheaplabor. The 1998 National Minimum Wage Act 1998 resulted in themandate for the government to set a minimum wage for all servantsacross the United Kingdom. Currently, the minimum wage is 6.19 Eurosper hour for workers above 21 years and 4.98 Euros per hour forWorkers between 18 and 20 years (Matt, 2013). Clearly, this is lowwhen compared to other developed countries such as the United Statesand Australia.
Followingthe global financial crises, the options available for infrastructurefunding have been particularly curtailed. Principally, banks remainmost flexible funding source, which is often useful in theconstruction phases in the cases that financial requirement timing isuncertain. However, banks have been marred with liquidity and capitalissues, including solvency (Fic & Portes, 2013). The eventualityis that banks have become averse to the risks and have resolved toshedding assets while restraining the growth of credits over longmaturities. It has become relatively difficult for the banks todivert the risks of credit from their balance sheets. There have beenconcerns that Basel III regulations are likely to worsen this form ofconservatism. Banks that were initially perceived to be active, suchas Espirito Santo, Depfa, Mizuho and Commerzbank, have retreated. Thebanking difficulties have also been transferred to the public-privatepartnerships, leaving the risks of projects to be shared across theprivate and public-private partnership. The government offersspecification to the quality and quantity of services that needs fromthe private partners. These later coalesce into a consortium thatoffers varying equity and debt recourse (Inderst,Della & Croce,2013).
Oneof the problems associated with foreign investment in Australia isthe problem of weak disclosure. It has been argued that a number ofemerging markets with capitalization falling below 50 million dollarswill struggle in implementing the ASX principles and stipulationsregarding financial reporting. Whereas only a limited number of firmshave been reviewed by the audit committee, a substantial numberfailed to meet ASX recommendations (Jagger, 2013). Despite the factthat the Australian banking system is well capitalized, has a highlevel of exposure to the housing and domestic economy, which areconsidered overvalued. A decline in the prices and increase in theunemployment, as well as the decrease in the income results in theexposure of the financial system to underlying vulnerabilities. Therehave been the attempts that have been made to stabilize thesituation, but these have not been met with satisfactory success.Some banks, such as Reserve Bank of Australia and Australia CentralBank, have sought to low the rates of interest to as low as 2.5percent to boost consumption and housing activities, as well ascounter the dollar value. Currently, even the reduced rates have notsignificantly affected the growth of credit, housing, employment,consumer confidence and consumption. The cost structure of Australiais also high and this situation has been worsened by high currencyrates. For instance, the minimum wage is about 16 Australian dollarsper hour. This is high, compared to other countries such as US andchina that have a minimum wage of 8 and 2 dollars respectively(Straub, 2013).
Basedon professionalism, the cost of hiring an Australian Engineer isabout 170 dollars per hour, which is still high compared to US andJapan, where the costs of hiring engineers are 129 and 77 dollarsrespectively. The cash costs within the mining industry have beenincreasing rapidly by as significant as 250 percent within the lastdecade. Despite the recent falls, there has been vehement oppositionto attempts of devaluing the firms (Neumark & William 2013).Major economies are pursuing quantitative programs to ease thecurrency. Considering Australia imports manufactured products, lowcurrency rates are expected to increase process while reducing thepurchasing powers and consumption rates.
Indeed,it is widely acknowledged that companies that are interested inreaching great heights of success should be willing to take risks.However, such firms should beware the inherent risks in order tostrategize effectively. Globalization introduces various constraintsthat international and foreign businesses have to beware, whichrevolve around the legal systems, international reporting standards,and economic conditions. Each of the three countries has theireconomic risks that foreign investors will need to identify andaddress distinctly.
TheGlobal Regulation Challenge
Severalregulations have been introduced to assure harmony in the globalenvironment. In general, these regulations have presented themselvesas significant challenges to market operations, as much as they havebeen objective. A typical example is the Basel III framework.
Theevents following the 2008- 2009 financial crisis prompted the BaselCommittee of Banking to adopt a program that would streamline thecapital guidelines. This would serve as a precautionary measure toavert recurrence of capital inadequacies. The committee adopted aframework dubbed “Basel III”, and his was followed by the G20endorsement in the 2010 Seoul Summit. It has been widely argued thatthere are various areas pertaining to Basel III that need to bedeveloped and improved, accounting for the inevitability of theworldwide lobbying and debates. It is avowed that while theprinciples of the framework would be well acceded, the processes ofimplementation and related challenges would be varied acrossjurisdictions. Nevertheless, despite the fact that the transitionperiod is relatively long, the 2019 deadline for full implementationof the Basel III framework has not served as any distraction toinstitutions from demonstrating the resilience of capital, as well astheir liquidity, striving to beat the deadline. Thus, the coreframework of the Basel III is now being adopted by nationaljurisdictions, and the focus has been directed to issues pertainingto its implementation. In particular, this has included seeking todetermine the impact of the Base III framework on business andadopting compliance plans. The literature on implications of BaselIII implementation on firms is documented and shows severalchallenges to anticipate from the globalization process.
Theimpact of Basel III banks has been described based on theory. Forinstance, KPMG (2012) theorizes that banks hence, SMEs would beaffected in different ways. First is that relatively weak banks wouldbe crowded out. This follows that under adverse economic conditions,accompanied by stringent regulations, relatively weak banks wouldfind it prohibitive to raise required funding and capital. This wouldlimit their business models and make them uncompetitive. Second isthat Basel III would impart a lot of pressure on their profitability.The increase requirements of capital, as well as increased fundingcosts and the need to align with the new regulatory requirements willmount pressure on firms operating and marginal capacities. Thissituation would result in decreasing investment returns. Third isthat Basel III would trigger a change in demand for funding, makinglong-term funding to be preferred to short-term funding. This pointfollows that introducing two-liquidity ratio as a remedy forlong-term and short-term liquidity and funding nature will discouragefirms from seeking short-term funding, driving them to opt forlong-term funding which has favorable and achievable funding andpricing margins. Fourthly is that Basel III would stir reorganizationof legal entities. This is in reference to the fact that the increaseproprietary trading supervisory focus, in correspondence with thefinancial institution and minority funding, would encourage firmreorganization, which could be characterized by portfolio disposaland mergers and acquisitions. At the same time, the impact of BaselIII on financial systems would include reducing the risks of thesystematic crises of banking, reducing the capacity of lending,reducing the investor demand for bank equities and debts and lack ofconsistency in the implementation of Basel III across jurisdictions.It is expected that the liquidity and capital buffers that have beenenhanced by Basel III, including focuses on enhanced standards ofmanagement of risks, would reduce the risks of failure of banks.Despite the fact that implementation time is long to allow firms tomitigate the implementation challenges, this would shortly constrainlending capacities. Investors would not be attracted to bank debts,considering reduced dividends aimed at enabling firms to rebuild thevases of capital. The profitability of firms is also likely toreduce. The fact that there would be many inconsistencies in theimplementation of the Basel III, as evidenced in the implementationof Base I and Basel II, implies that the financial system would besignificantly disrupted. KPMG (2012) recommends that it is importantfor firms to ensure that they start engaging themselves in Basel IIIas soon as possible to ensure that they acclimatize to new regulatorylandscape and be in a position to mitigate further crises.
Theimplications of Basel III have also been examined based on empiricalstudies, examining different areas of banking activities. Forinstance, Repullo and Saurina (2012) assess the countercyclicalbuffers. They focus their assessment on the differences betweenaggregate credit-to-GDP ratio and the Credit-to-GDP gap trend. Theyarrive at the results that credit-to-GDP gap and the growth of GDPare correlated negatively. They explain that the implication of thisshould be that credit-to-GDP gaps may serve as the signal forreducing capital requirements, in the cases of high GDP growth, andfor increasing the capital requirements in the cases of low GDPgrowth. In this regard, the countercyclical capital buffers are acontradiction of the stipulations of the Basel III, which requirefinancial institutions to adopt buffers during profitable seasons toexploit at the time of deteriorated conditions. Micro-orientedsupervisory regulations aimed at reducing failure of banks could bemisplaced and could worsen credit supply during financial downturns.It is worth acknowledging that banks could exploit the flexibilitythat comes with buffers of capital conservation, which could alsoserve as additional common equity requirement for about 2.5 percentof assets, based on risk weighting. Even so, banks could preferreducing the extensions of credit, instead of limiting themselves tocapital distributions, such as shares and dividends, especially whenthey cannot meet the additional requirements of capital. Repullo andSaurina (2012) are concerned that Basel III document fails atdampening excess cyclicality of capital minimum requirements, as wellas promoting forward-oriented provisions.
Similarly,Bayoumi and Melander (2013) suggest that Basel III, which isaccompanied by strengthened regulations on banks, could increase theprivate sector funding costs. Consequently, this would reduce theavailability of credit, affecting the economy negatively. The casesof tightened regulations are accompanied by reduced bankprofitability, which is orchestrated by the increased funding costs,as well as by the increased investments in assets with low yield.Banks are expected to pass these low yields to the private sectors byincreasing the rates of lending, which would derail the privatesector’s funding environments. One questions what would beparticularly the case of troubled banks.
Anotherstudy by BCBS (2010) sought to conduct a quantitative impact study ofBasel III, focusing on their impacts on banks. The study sampled 263banks from their 27 member countries. The study revealed that BaselIII capital requirements would have a profound impact on the banks.The study inferred that upon full-scale implementation of the capitalrequirements, the common equity tier ratio for banks holding at least3 billion Euros (Groups 1) would decrease significantly. This changeis attributed to incremental adjustments that are deducted tocapital. Upon making the deductions, the Common Equity tier 1 amountswould reduce by as significant as 40 percent. To satisfy the 10percent of the requirements, this group of banks would need assignificant as 600 billion Euros. This is about 3 times higher whenrelated to total after-tax income. On the other hand, banks holdingless than 3 billion Euros (Group 2 banks) would not be significantlyaffected by associated high capital requirements. Under the cover ofBasel III requirements, the Common Equity Tier 1 ratio was found tobe 7.8 percent. An examination of the ratios of leverage revealedthat group 1 banks exhibited 2.8 percent average ratio, and 42percent of the banks that participated posted leverage ratio thatfell below the average requirement of 3 percent. The account of thisfollows that Group 1 banks are largely exposed to securitized loansand other forms of securities and their derivatives. On the otherhand, Group 2 banks posted a high leverage ratio by about 3.8percent, yet only 20 percent posted rates below the standardrequirement of 3 percent. Based on the liquidity ratios, all group 1banks failed to meet the minimum requirement of 100 percent, postingLCR and NSFR (Net Stable Funding Ratio) of 83 and 93 percentrespectively. On the other hand, Group 2 banks posted LCR and NetStable Funding Ratio of 98 percent and 104 respectively. By the endof 2009, banks would have needed about 7 trillion Euros, in terms ofliquid assets, and this would enable them to achieve the standardLCR. Banks would also have need 2.9 trillion Euros to meet the NSFRthreshold standard. Of particular intrigue is whether these could bereflected in the case of firms across the world (BCBS, 2010).
Indisputably,Basel III framework resulted in the shift of paradigms pertaining tostandards of capital and liquidity. However, there may be a number ofelements that need to be cleared even as deadline of implementationgoes down. Better still, competition and market pressure amidglobalization are already imparting many changes in a number oforganizations and business entities. The examined literature allconcur that introduction of Basel III framework should affect firms,but in different ways, which are still contested. In this regard,there is the need to conduct a study to understand the implicationsof adoption of Basel III amidst the globalized world.
Inconclusion, this paper has explored the question of whetherglobalization has any implication on the status quo of world tradeorder, in particular, whether the conventional trade theories wouldare relevant amidst the globalization process, whether the firms arepositioned to exploit the market opportunities, and the role ofglobal financial regulations in supporting the market harmony. It hasbeen noted that that, indeed, globalizationhas been accompanied by various changes, which have prompted a changein paradigms. As far as global trade pattern is concerned,globalization has given birth to new economic environment thatchallenges some conventional trade theories, although some remainrelevant in accounting for the differences. Besides, it has beennoted that countries are yet to be well positioned to be able toexploit the opportunities that come with globalization. Globalizationintroduces various constrains that international and foreignbusinesses have to beware, which revolve around the legal systems,international reporting standards and economic conditions. Each ofthe three examined countries has their economic risks that foreigninvestors will need to identify and address distinctly.Lastly,the discussion of the aspect of regulation significance hasessentially focused on Basel III framework. It has been establishedthat while the regulations are objective, they can be subversive tothe order of the market. This point is exemplified by the currentmarket struggles that firms have to content as they seek to embracethe Basel III framework.
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