| Most discussions of globalization and multinationals do not address specifically how changes in financial markets and banking have helped differentiate our era’s globalization from previous ones. Given the turmoil in capital markets, this lacuna in the literature is particularly odd. Insofar as the effect of the growth of multinational financial conglomerates on the financial system is discussed in technical and more general financial literature, it is generally focused on the internalization of international sources of funding and its impact on bank and market liquidity. |
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| This paper focuses on two distinct literatures. The first deals with the theory of multinationals, especially foreign direct investment in the financial sector. The second attempts to explain and respond to the current financial crisis. Many commentators have asked why so many economists failed to foresee the current financial crisis and we argue that part of the explanation lies in that discipline’s failure to understand institutions and, by implication, the evolution of those institutions. |
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| We highlight how the development of international banking has helped reconfigure international relations and markets. We do this from a broad historical perspective. Indeed, we will emphasize that the development of multinational financial conglomerates have transformed finance from an international to a supranational activity. In effect, multinational banks have created an institutional platform, which has virtually eliminated national borders in finance and reduced the importance of individual public, national markets. By operating branches and subsidiaries in key markets with highly automated systems for trading foreign exchange and other products as well as for applying modern risk management, and by maintaining cross-border teams for deal making and distribution of securities, these giant public banks have internalized many cross-border and domestic financial activities that were once done among independent entities and in public markets. This transformation may have resulted in increased inefficiencies and reduced transaction costs, but it also entails huge upfront expenditures and greater risk. The story of this transition is a complex mixture of technological, economic, and political changes, with a little path dependency thrown in for good measure. |
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| The Business History Seminar has been made possible by financial support from the Erasmus Research Institute of Management (ERIM) and the Vereniging Trustfonds Erasmus Universiteit Rotterdam. |
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| Contact information: |
| Abe de Jong |
Ben Wubs |
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