CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Generally, globalization can be viewed as the integration of national economics through trade, capital flows and the accompanying convergence of economic policies. It is the process whereby political, social, economic and cultural relations increasingly take on a global scale and which has a profound consequence for individual’s local experience and everyday lives (Bilton, 1997). The definition above implies that globalization operates both at global and local levels and therefore impacts on the economy and politics of a country as well as the culture and well being of the citizens. Globalization is rooted in multinational trading and investments arrangements and the opening up of trade, through liberalization of the financial sector as well as the economy as a whole.
The reasoning behind this policy thrust is that the promotion of trade enriches the wealth of nations. For instance, trade liberalization under the Uruguay round of multilateral trade agreement of 1995 was estimated to have provided over 100billion U.S dollars a year in net benefits accruing mainly to those countries that have removed trade barriers (Hausters, Gerd, 2000). Financial integration as a part of globalization therefore envisages the free flow of loanable funds, openness of capital flows when combined with sound domestic policies, allow countries access to be much larger pool of capital. High capital flows leads to enhanced investment and economic growth, particularly when the inflows are in foreign direct investments, as against potentially volatile short term portfolio flows. Furthermore, Foreign Direct Investment not only complements domestic savings but also enhances the depth and efficiency of the domestic financial markets and the absorption of foreign technologies. However, the monetary and fiscal policy framework of the nation must be appropriate for the economy to benefit financial globalization (Yusuf, 2001).
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