International Business Essay Example | Topics and Well Written Essays - 1750 words - 5

International Business - Essay Example Not all promises of financial market globalization have been fulfilled. Theoretically, one of the principal advantages of globalization is the enhancement of efficient international risk sharing, a theory tested by Kose, Prasad, and Terrones (2009). However, despite using different statistical tests, the study could only find evidence of a moderate level of international risk sharing, nowhere similar to the degree anticipated by the theory. Empirical proof points to the fact that only industrial countries improve their risk sharing outcomes in financial market globalization. Developing countries and emerging markets which, in the course of globalization, have lowered capital controls, despite witnessing large increases in cross-border capital flows, have hardly improved in risk-sharing, being instead exposed to contagion shocks and extreme volatility caused by the substantial inflow and outflow of portfolio funds. Another major concern is the financial contagion that wreaks periodic havoc on our capital markets. A phenomenon of emerging markets is the Sudden Stop, characterized by (1) sudden reversals of capital inflows and current account deficits; (2) collapses in output and private absorption; and (3) large relative price corrections in domestic good prices and asset prices. The occurrence of Sudden Stops highlights the peculiar risks assumed by capital from abroad, particularly developed markets, that get invested in an emerging market. This spawned a theory by Calvo (2002) dubbed the â€Å"globalization hazard†.