Integration of Financial Markets and Foreign Direct Investment

INTEGRATION OF FINANCIAL MARKETS AND FOREIGN DIRECT INVESTMENT 14

Integrationof Financial Markets and Foreign Direct Investment

InstitutionAffiliation

Integrationof Financial Markets and Foreign Direct Investment

Manypolicymakers believethatforeigndirectinvestment(FDI) has severalimportantbenefitsto thehostcountry.Itis upon thisbeliefthatmanycountriesare currently heavilyinvolvedin investingin foreigncountries.Thispaperseeksto investigateanddiscussthebenefits,processes,shortcomings,andotherissuesinvolvedin integratingfinancialmarketsandforeigndirectinvestment.Alotof researchhas alreadybeendonewhich linksthetwo fieldsandI believethatmy researchwill highlight moredetailsandmakeiteasierforpolicymakers to gettheir mindsaround theissue.

Accordingto Alfaro et al. (2004), thedecade of the90s sawan incrementin theroleplayedby foreigndirectinvestmentin totalcapitalflows.Of allprivatecapitalflowsin developingcountriesin 1998, halfof them resultedfrom foreigndirectinvestment.With thatin mind,one can seetheimportanceof studyingthistopic.Theincreasingroleof FDI in theeconomiesof manycountriesmakesitimportantto studyintegration of financial markets will affect it. Additionally, as aresultof theshift,policymakers in developingcountriesstartedamendingtheir policiesto attractmoreFDI. Thisbecamemoreimportantparticularlyafter thedebtcrisisof the80s andtherecentturmoilof 2008 in emergingeconomies(Alfaro et al., 2004).Someof thebenefitsof FDI to hosteconomiesincludetechnology transfers,productivitygains,newprocesses,managerial skills,employeetraining,accessto markets,internationalproductionnetworks,employeetraining,andgeneralknow-howin domesticmarkets.Inadditionto that,FDI has provento be importantinmodernizingnationaleconomyandpromotinggrowth.

However,eventhoughFDI has theoreticallyprovento be beneficialtohostandforeigneconomies,there is empiricalevidencethat saysthatthebenefitsatbothplantandnationallevel are ambiguous.Empiricalevidencein Venezuela has proventhattheeffectof FDI on productivityis quitesmall.

Ho(2009) defines financial integration as the process through whichfinancial markets within as economy become more tightly integratedwith financial markets in other economies or worldwide. According toHo (2009), such integration tends to increase capital flows into therecipient economy and increases prices and returns on tradedfinancial assets. Integration could be achieved by provision forconcerted or cooperative policy responses to financial disturbancesor through elimination of cross-border financial operations by theinvolved economies.

Integrationof financial markets has several advantages as well as disadvantagesto economies. Integration of financial markets also bears severaladvantages and disadvantages to FDI. In the 80s, Asian governmentsdid a lot of work to liberalize their financial markets to allowcapital inflow. Ho (2009) states that the liberalization andintegration of the financial markets led to a massive inflow of FDIinto the economies to a point that it culminated into the AsianFinancial Crisis. The work of Ho (2009) indicates that integration ofmarkets leads to increased foreign direct investment, which in turndeepens the integration itself. Financial openness of an economy islikely to attract more foreign direct investment from governments andindividuals from other nations.

Integrationof financial markets does not only cause an increase in FDI, it isalso likely to reduce it and hence retard an economy. A research doneby Boyd and Smith (1992) in Ho (2009), the two researchers arguedthat financial integration in economies that have weak institutionsand policies such as weak or unstable legal and financial systemswould induce capital outflows. Capital is likely to flow from thecapital-scarce economies into capital-abundant economies that havebetter institutions. That would cause a reduction in FDI. Thispaperwill investigatetheeffect on FDI of integration of financialmarkets.TheProblem

Themainresearchquestionthatthecurrentstudyseeksto findanswersto is “What is theeffect of integration of financialmarketson FDI?” Inadditionto themainresearchquestion,thepaperwill alsoseekanswersto thefollowingresearchsub-questions 1. What are the various methods of financialintegration?

2.How will integrationoffinancialmarketshelpgroweconomies?

3.How can the negative effects of integration of financial markets becorrected?

Severalresearchers haveputconsiderableeffortinto studyingtheeffects of integration of financial markets on an economy. Accordingto Loungani andRazin (2001), manyeconomistshavecometo preferfreeflowof capitalacross bordersof countriesbecauseitallowscapitalto seekout thehighestrateof return.Suchcapitalisalsoknownforreducingriskthatownersstandto faceby diversifyingtheir investmentandlending. Foreigndirectinvestmentleadsto a networkof marketsacrossmanycountries.Integrationof capitalmarketson a global scalecontributesto thespreadof bestpracticesin corporate governance, legaltraditions,andaccounting rules.IfenoughFDI ispumpedinto a country’sfinancialsector,itis likelyto createan environmentthat is moreattractiveto moreforeigninvestment.

The2008 financial crisis that began in the US due to poor incentives inthe house industry was able to spread to the rest of the world due tointegration of markets. The effects spiraled out of control within ashort period to markets in Western Europe and Asian markets that wereheavily integrated with US financial markets. An increase in FDI dueto integration of markets is known to cause over-involvement of FDIinto a country’sfinancialmarket.Likein thecaseof Estonia whereover 80% of allfinancialassets are under thecontrolof Swedish investors, Estonia is under a riskof financialcrisisin casea financial problemoccurs in Sweden (Lyutiy &amp Borovikova, 2013).Relationshipof This Research to Other Works

AsI havestatedabove,there are manyresearchers whohavedonepaperson integration of financial markets and the effects it has on foreigndirectinvestment.Accordingto theBank forInternational Settlement (2005), financialsectorforeigndirectinvestment(FDI) is veryusefulto economiesof developingcountries.Areportpublishedby thebankstatesthatthecompetitionandefficiencythat existsin hostcountries’financialsectorstricklesdown into thefinancialsectorof recipientcountries.Assuch,increased FDI due to market integration intensifiescompetitionandimprovesavailability, andqualityof bankingservices.Thebank’sreportarguesthatFDI resulting from integrationofdomesticfinancialmarketsimprovesefficiency.An exampleusedby thereportis theChilean economywhereincreasingforeignbankinvolvementwasassociatedwith a declinein cost/incomeratio.Anotherstudyin theCzech Republic indicatedthatentryof strongerbanksintroducedbetterriskmanagementthan domesticbanks.Initiativesthat supportthedevelopmentof a localcurrencyyield curvewereadoptedby foreignbanksthat offerFDI in East Europe, a movethat promotedthedevelopmentof financialmarkets.By this,thereportindicatesthatfinancialmarketswould onlybenefitto themaximumfrom FDI ifthetwo are integrated.Integrationis easierto doifcloseattentionispaidto thecaseof Ukraine in Lyutiy andBorovikova’s (2013) study.Ukraine achievedtheintegrationmuchfasterby allowingforeigninvestors to partakein its financialsectorwith littleornorestriction.Anotherstudydoneby Asafo-Adjei (2009) describestheroleof FDI totheSouth African economy.SouthAfrica as a recipientcountryhas benefitedincomparablyfrom FDI andasa resulthas beenableto growits economyto thelevel ithas achievednow.Significanceof This Paper

Althoughthere is a lotof researchdonein theareaof FDI inrelationtoeconomicgrowth,there is littledoneto relateintegration of financialmarketsand its effect on FDI.Lackof suchliteratureis a gapin researchthat should be addressedto allowpolicymakers andpoliticiansto makeinformeddecisionswhenattractingforeigninvestmentorwheninvestingin foreigncountries.It is also important for avoiding financial crises such the one of2008. The challenge (variable) that countries need to address is howto integrate financial markets while remaining independent enough toprevent financial crises in one economy from trickling into another.Even thoughcountriesmay wantto allowtheintegration,theymay not knowwhatwayis thebestto doit.By proposingthebestway/methodto adoptin ordertoachievetheintegrationwithout upsettingtheeconomy,countriescan reducetheriskthatintegrationmay bringabout.

Thispaperwill alsostudyseveralinstances in which integration of financial markets has been known tocause negative effects on FDI and how such effects can be eliminated.FDI as a variable in this study should remain the responsibility ofthe recipient government to ensure that it does not go beyond orbelow the required level. Theexampleswill includeadvantagesanddisadvantagesof integrationby presentingtheexperiencesof individualcountries.Forinstance,thecaseof Estonia whereFDI washeavilyintegratedinto thefinancialsectorendedup allocatingmorethan 80% of banking/financialassets to Swedish companiesandinvestors. Theresultant effectof such a situationis thatanyfinancialcrisisin Sweden can heavilyaffectEstonian economy.Another example is where the financial crisis of 2008 spiraled intoother economies very fast due to heavy integration. Lookingat suchexamples,policymakers can be wellinformedon thelevel of integrationtheyshould allowinto their financialmarkets.Therealbenefitsresultingfrom FDI havealsobeenquestioned,leadingto theneedforcarewhenmakingtheinvestments.The financial crisis of 2008 had varied effects on differentfinancial markets in different countries. African banks inherited theeffects due to integration in their markets, but have remainedresilient since then. However, new effects are emerging such asincrease in non-performing loans that result from slow-down ineconomic activity, decline in commodity prices, drop in equityprices, currency depreciation, and tightening of liquidity amongothers. Assuch,hostcountriesare alsoforcedto be carefulwhenmakingforeigndirectinvestmentsto avoidallocatingtoomanyresourcesthat may not attracttheexpectedbenefits.

Ibelievethattheaforementionedsectionsof thispaperwill makeoriginalcontributionto theextantpoolof researchin thisarea.MethodsandTechniques

Giventhe nature of this research, I will be using a mixed approach methodthat incorporates both the qualitative and quantitative methods. Thesignificance of this is that one covers the weaknesses in the other,making the research to be covered fully and moreefficiently.ResearchPhilosophy

Theresearchdesignof anygivenstudydescribesthemainapproachthata researcher utilizesto gettheanswersto their researchquestions(Parahoo, 2006). Aresearcher has to selectthemostappropriatesurveydesigninordertomeettheobjectivesandaimsof thestudyto meettheaimsandobjectivesof thestudy(Polit &amp Beck, 2010). Thequantitative approachcomesaboutfrom thebeliefthathumanphenomenaas wellvariables in their behaviorcan be studiedobjectively(Robson, 2007). Forthatreason,thequantitative approachhas beenpointedout as themostappropriateresearchmethodto beutilizedin thisstudy.Quantitativesurveyutilizesa fixeddesign,which arrangesin advancetheresearchquestionas wellas thedetailedmethodsof data collectionandanalysis(Parahoo, 2006). To overcomethelimitationspresentedby thequantitative approach,itis importantalsoto incorporateaspectsof qualitative studiesin aresearch.ResearchApproach

Inordertoaddresstheidentifiedresearchproblem,thestudywill employa mixedmethodapproachincorporatingboth qualitative andquantitative approaches.Aqualitative researchapproachisbasedon theuseof variousinterpretative techniques,which helpto describe,decode andinterpretresearchissuestoestablishmeaning(Merriam, 2009 Klenke, 2008). On theotherhand,aquantitative researchdesignfocusesonmeasurementof numericaldata andquantifying relationships(Muijs, 2010). As such, quantitative research will be useful inidentification of relationships between financial markets in variouseconomies and how the markets were affected by the 2008 financialcrisis. The effects of the crisis on FDI in various economies willalso be calculated numerically by the use of quantitative research.Since financial markets of an economy involves several players, it isimportant that the various parties be contacted for their opinion.That is the reason for issuing out questionnaires toindividuals.ResearchStrategy

Theintegrationof bothquantitative andqualitative approacheswill helpto providemoreaccurateandin-depth data than ifeachapproachwasusedsingle-handedly. Itwill alsohelpreducethelimitationspresentedby eachof themethods.Thequantitative approachis objective,structured andreliable.However,ithas two mainlimitations,which are missingout on thevalidityandbeingoversystematic.Quantitative researchinvolvessurveying of largegroupsof peopleandutilization of structured questionnaires.Quantitativesurveyutilizesa fixeddesign,which arrangesin advancetheresearchquestionas wellas thedetailedmethodsof data collectionandanalysis(Robson, 2007).

Inthisstudy,quantitative data would be importantin identifyinggeneralissues involved in the integration of FDI and financial markets in aneconomy. On theotherhand,qualitative data will be necessaryforevaluatingthefindingsfrom previousstudies.Thisapproachwill alsoenabletheanalysisandevaluation otherissuesthat affecttheir decisionswhenitcomesto integration.Bothprimaryandsecondarydata will beusedin theresearch.DataCollection Instruments

Contentanalysiswill be usedto collectsecondarydata. Itinvolvesreviewingvariousliteraturesourcesinordertocollectdata that will be usedto answertheidentifiedresearchquestions.Itinvolvesstudyingthecontent of variousrelevantpiecesof literatureandempiricaldocumentation in a bidto findinformation.Contentanalysisis a widelyusedqualitative researchmethodthat largelyinvolvesdrawingout andinterpretingmeaningfrom thecontextof bothtextandnumericaldata (Hsieh &amp Shannon 2005). Inthisstudy,theuseof content analysisas themainmethodof data collectionwill generallyinvolvereviewingliteraturesourcessuchas books,journals,officialreportsandwebsites in orderto collectdata that discusshowintegration of FDI and financial markets can benefit and economy.Someof thebenefitsassociatedwith theuseof thismethodincludethefactthatitis cost-effective since itinvolvescollectingdata from previouslypublishedresearchwork.Inadditionto that,contentanalysisprovidesan in-depth andextensivescopeof informationthat one can referto soas to addresstheidentifiedresearchobjectives(Vogt, Gardner, Haeffele, 2012). Asa researchmethod,content analysisis an objectiveandsystematicapproachofdescribingandquantifyingphenomenon.Itallowsa researcher to testtheoreticalissuesinordertoenhanceunderstandingof data (Elo &amp Kyngas, 2007).

Structuredquestionnaireswill be utilizedto collectprimarydata. Apartfrom beinginexpensive,theyare lessintrusive,easyto analyzeandmakesitpossibleforresearchers to avoidbias.Thequestionnairewill bedividedinto two partswith thefirstpartrequiringparticipantsto fillin their personaldetails,namelyage,genderandareaof residence.Thesecondpartof thequestionnairewill presenttheparticipantswith close-ended questions.Thequestionnairewill takean averageof 10 minutesto completeandwill not limitanyrespondent based on timeandwill come with all thenecessaryinstructionsto therespondents.Participantsin the study will be selected using purposeful sampling. Thisinvolves selecting research participants according to the researchthe objectives, aims as well as requirements. Participants who meetthe inclusion criteria will be informed by the researcher about theirinclusion. They will be allowed to think over whether they will ableto participate in the study or not. A written informed consent willbe obtained for the participants who will agree to be part of thestudy.

ExampleQuestions

  1. How can integration of markets be done effectively without risking the trickling effect like the one experienced in the 2008 financial crisis?

  2. What is the importance of integrating markets?

  3. Do you think integration of markets causes positive or negative impacts on FDI?

  4. What are the effects of integration of markets on FDI?

DATAANALYSIS

Dataanalysis will be done using a quantitative framework. The reason forthis is that qualitative framework will allow for results from asample to be generalized to find out patterns and present facts abouta population and the phenomenon. SPSS software will be used toanalyze primary data collected from various financial institutions.Some of the variables involved in the study include foreign directinvestment, level of development of an economy, government efforts,level of integration of financial markets, and difference in economicdevelopment between economies of integrated markets. Theidentified variables will be analysed using mean scores, frequencies,descriptive statistics as well as standard deviation. Analysis ofcorrelation between the identified variables will be done using thet-test analysis. Sum variables mean differences in backgroundvariables will be revealed using one-way analysis of variance.

Thematicanalysis will be used to evaluate qualitative data. Thematic analysisoffersa theoretically flexible and accessible way of analyzing qualitativedata. Data will be identified, analyzed and reported in relation tothe main patterns. When utilizing thematic analysis, a number ofchoices that need to be discussed and explicitly considered have tobe made (Berger and Luckmann 2012, p. 56). The different themes inthis analysis capture the importance of the data with regard to theresearch question. Thecorrelation between different variables would be identified using thebivariate analysis while the univariate analysis would aid theresearcher in identifying trends, variations and the description ofthe variable

ProvisionalTimetable

Jul-Dec, 15

Jan-June, 16

Jul-Dec, 16

Jan-June, 17

Jul-Dec, 17

Writing chapter 1

Writing chapter 2

Writing chapter 3

Writing chapter 4

Writing chapter 5

Editing, proofreading, and presenting the thesis

PossibleChallenges

Thepaper requires the researcher to consult a lot of literature andsources, some of which are likely to require payment andauthorization. The expenses are likely to raise the cost of researchbesides being time consuming and mind-blowing. Dealing with peopleduring consultation will also require the research to develop peopleskills to go through with the assignment. Dealing with differentpeople is likely to be a problem especially if the parties beingconsulted are stubborn or not willing.

Toovercome the cost problem, the researcher will register into areliable library to gain access to research material at a low cost.The researcher will also read about basic people skills or take ashort course to learn how to handle people of different types.

References

Alfaro,L., Chanda, A., Kalemli-Ozcan, S., &amp Sayek, S. (2004). FDI andeconomic growth: the role of local financial markets. Journalof international economics,64(1),89-112.

Asafo-Adjei,A. (2009). Foreign direct investment and its importance to theeconomy of South Africa.

Berger,P. and Luckmann, T. 2012. Thesocial construction of reality: a treatise in the sociology ofknowledge.1st ed. [S.l.: s.n.

Elo,S. and Kyng&quotas, H 2008. The qualitative content analysisprocess. Journalof advanced nursing,62(1), pp.107–115.

Hsieh,H. and Shannon, S 2005). Three approaches to qualitative contentanalysis. Qualitativehealth research,15(9), pp.1277–1288.

Klenke,K 2008. Qualitativeresearch in the study of leadership.1st ed. Bingley, UK: Emerald Group Pub.

Loungani,P., &amp Razin, A. (2001). How beneficial is foreign directinvestment for developing countries? Financeand Development,38(2),6-9.

Lyutiy,I., &amp Borovikova, M. (2013). THE FINANCIAL MARKET OF UKRAINE ANDTHE ROLE OF FOREIGN DIRECT INVESTMENT. Ekonomika,92(1),67-68.

Merriman,B., &amp Merriman, B. 2010. Genealogicalstandards of evidence(1st ed.). Toronto [Ont.]: Ontario Genealogical Society.

Muijs,D 2004. Doingquantitative research in education with SPSS(1st ed.). London: SAGE.

Parahoo,K. 2006. Nursingresearch.Basingstoke: Macmillan.

Polit,D. F. and Beck, C. T. 2010.Essentialsof nursing research.Philadelphia: Wolters Kluwer Health/Lippincott Williams &ampWilkins.

Robson,C. 2007. Howto do a research project.Malden, MA: Blackwell Pub.

Ho,N. W. (2009). Financial Integration: Concepts and Impacts. MacaoMonetary Research Bulletin,10,69-84.

Allen,F., &amp Carletti, E. (2010). An Overview of the Crisis: Causes,Consequences, and Solutions. InternationalReview of Finance,10(1),1-26.