Financial globalization refers to the free movement of finance among countries and the increasing flow of capital. Technological developments in the acceleration of financial globalization are effective in removing restrictions on the movement of finance. Financial globalization has found its theoretical basis with Mc Kinnon (1973) and Shaw (1973) ‘financial liberalization theory’. The theory states that financial liberalization will provide financial deepening in countries with the assumption that savings will regulate the world scale and equalize interest rates among countries, contributing to the efficient and cheap growth of resources. Developing economies that have difficulty in financing and insufficient financial savings can use the capital that comes from the country to increase productivity and income, and to make efficient investments. At the same time, the capital that comes to the country helps diversify risks and strengthens financial stability. Financial globalization also supports the development of global trade by accelerating trade integration. It enhances the credit facilities by providing diversification of the financial instruments to finance the trade.
The positive effects of financial globalization on the country will arise from macroeconomic stability, fiscal discipline and a well-regulated financial system. Otherwise, capital coming to the country will lead to increased risks, deterioration of company’s balance and financial crises. Since the 1980s, the willingness of countries to lift restrictions on financial markets has increased both short-term and long-term investments in global finance. The United States, the United Kingdom, has become the center of global finance. Developing Asian economies are also becoming important centers of attraction for global finance.
In the process of financial globalization, the country should have the conditions to attract foreign investors and be able to offer international financial assets. This is also related to the fact that it has an advanced export sector. A developed export sector will create an developed international financial market. Financial globalization will help to grow in developing countries, but it also can lead to financial crises. Therefore, building a strong institutions and a strong macroeconomic framework before financial globalization, economies overcome the crisis from financial instability.