Investments

Globalization and Global Investments

The globalization phase that began in the late 20th century was, to a significant extent, facilitated by transnational investments of unprecedented scale and scope. Investment flows increased in size as well as reach in the first decade of the 21st century. The reasons for this are manifold and include factors such as the fall of state socialism, market liberalization and policies encouraging direct foreign investment, the opening up of many investment opportunities in new technologies, transition economics and emerging markets, the ability to taking advantage of changing interest rates, tax regimes, and transparency and accountability requirements.

All of these factors played a role in the significant expansion of global investment flows, but a key issue was simply that assets in both developed market economies and emerging markets were now freed up to look for more lucrative opportunities abroad. This was made possible by more liberal policies based on a belief in the efficiency of markets, on the one hand, and the development of financial instruments and risk management models on the other.

The late 20th century was not the first time that international investments flows fueled economic growth. Indeed, investments in foreign markets by government and financial as well as nonfinancial firms have long been part of capitalist development. European investor banks provided the investment capital needed for the expansion of the [Page 965]U.S. economy before and after the Civil War; building railroad systems in the late 19th century in many countries within a few decades required a massive amount of funds coming in from abroad; and the short-term availability of international investment capital was related to speculative bubbles and the boom and bust patterns in different markets, be they in gold or raw materials, in the United States, South Africa, Australia, and various Latin American countries between 1900 and 1930. Moreover, U.S. banks and U.S.-backed institutions like the Marshall Fund or the Bank for Reconstruction and Development offered the initial investment capital needed in Europe after World War II, and Chinese funds provide a growing share of investments flowing into Africa in the new millennium.

Nonetheless, by the turn of the century, more investments could flow more easily and quickly than ever before. Many actors were involved in building the globalized system of investment flows: large mutual funds, pension funds, and private equity funds, along with trusts and investment firms like Lehman Brothers or Merrill Lynch, as well as European (e.g., Deutsche Bank) and Asian (e.g., HSBC) banks. Governments also took part, in particular those of China and the United States. However, the resulting global investment system proved at least temporarily unstable, resulting in a significant drop of flows after 2008 when financial markets around the world experienced considerable stress and several of the world's largest investment banks went bankrupt.

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