How Does Economic Globalization Affect Investment Banks?
Globalization is a mixed bag for investment banks. On one hand, globalization represents a expanding market of new and exciting IPO offerings and the opportunity for investment banks to capitalize by underwriting such offerings. On the other hand, globalization introduces a maze of new cultural, accounting and regulatory challenges. These challenges are forcing investment banks to change how they do business.
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What are Investment Banks
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Investment banks are financial institutions that serve as underwriters for companies and corporations looking to raise capital by issuing securities. These securities come in several forms, most notably equity securities (stocks), debt securities (bonds) and derivative contracts. As underwriters, investment banks serve as the intermediary between the company issuing the security and the general public, which may purchase the security. Investment banks also package and prepare securities to sell to the investing public.
What is Globalization
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Globalization is the process where the merger of free market capitalism and communication technology, such as the Internet, facilitates the free flow of capital, information, products and services around the globe instantly. People of different nations, cultures and government structures can now interact as one global unit. Globalization attempts to bring the developed world and the developing world together in a mutually beneficial alliance toward forging new economic and cultural relationships.
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The Expanded Market
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Even in a global recession, companies are always looking to launch a new Initial Public Offering (IPO) and investment banks are always looking to find and underwrite new IPOs. Globalization supercharges this dynamic between investment banks and aspiring IPOs. It accounts for a constantly expanding market for investment banks while offering young companies all over the globe an opportunity to issue IPOs and raise capital. New global investment banks, large and small, are entering the market to help service this expanding market.
Challenges
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Many challenges come along with the expanded market, according to the World Bank. The first and most obvious is language and culture. As investment bankers seek to evaluate and package new securities, they have to navigate multiple language, dialects and cultural nuances. Investment banks also have to wade through different accounting rules and financial reporting standards in order to evaluate the worthiness of a company prior to preparing and underwriting a stock offering for that company. In addition, due to a variety of information technology formats, getting access to needed information may be difficult. Because of these challenges, investment banks have to make some fundamental changes.
Regulatory Issues
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Government and different regulatory issues add to the challenges noted above. Although most foreign governments generally embrace global free market capitalism, governments still honor traditional governmental rules, relationships and nuances that can significantly hamper global trade. This often comes in the form of trade restrictions and the lack of financial transparency.
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References
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