Globalization and Risk Sharing

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Globalization and risk sharing are closely inter-linked. Economic globalization is defined as the incorporation of national economy into international economy through factors like capital inflow, migration, trade and foreign direct investment. Risk sharing basically means the risks associated with any enterprise is distributed among the various participants in the enterprise. The current trend of globalization has encouraged many entrepreneurs and manufacturers to explore the market beyond their own inhabited territories. The liberal economic policies and the changing consumerism are the two major factors that have encouraged investors to invest in markets abroad. It goes without saying that globalization and risks sharing also go hand in hand.

Advantages of Globalization

One of the primary benefits of globalization is that it has allowed certain evolutions in the risk sharing pattern. Trade with other countries has definitely become easier than it was before. Due to globalization there is a higher likelihood of developed countries investing in developing countries and this can bring about a dynamic change in developing the economy of a country. Globalization has ensured that corporates have a higher flexibility in operating across borders. As a result of this, there has emerged a greater interdependence of nation-states.

Globalization and International Risk Sharing

Credit inflow from around the globe can be used as an insurance against adverse financial crisis that may hamper an economy. It is better for the investors if risk sharing is distributed with other countries. Studies suggest that globalization and international risk sharing is very small. It is likely that there are more unexploited gains of international risk sharing for developing countries. Generally, people prefer to have steady consumption yearly rather than widely fluctuating amounts. This helps them to counter any adverse economic situation that they may encounter.

There are three things that need to be considered for international risk sharing.

They are:
  • To ask for a unified investigation in the risk sharing economies and to analyze the emerging markets in developing countries
  • To examine changes caused due to the globalization and risk sharing programs in different countries and then correlate them with the growth rate of financial inflows.
  • To evaluate different cyclical actions undertaken by risk sharing programs with the help of research.

Disadvantage of globalization and risk sharing

One of the primary disadvantages of risk sharing in globalization is that the age old patterns of risk sharing have not been replaced in the global market with newer ones. The steps currently being followed for risk management is not conducive to all developing and emerging economies. Every market is different and generally the risk sharing welfare programs are not suitable for these varied economies. Studies have indicated that the openness of financial inflows improves risk sharing in a country’s economy; however this is not a global phenomenon. It has been seen that developing economies have attained better benefits from the risk sharing schemes.

Corporate Globalization

Last Updated on 5/18/2011