Domestic and international financial liberalization have generally gone hand in hand. Both respond to many of the same incentives and pressures. Costs and benefits Capital mobility has important benefits. In particular, it creates valuable opportunities for portfolio diversification, risk sharing, and intertemporal trade. Companies can protect themselves against cost and productivity shocks in their home countries by investing in branch plants in several countries.
Capital mobility can thereby enable investors to achieve higher risk-adjusted rates of return.
In turn, higher rates of return can encourage increases in saving and investment that deliver faster rates of growth. At the same time, however, in a significant number of countries, financial liberalization, both domestic and international, appears to have been associated with costly financial crises. This association may be somewhat deceptive, given that financial crises are complex events with multiple causes and have occurred in less liberalized as well as more liberalized financial systems. At the theoretical level, the controversy over the benefits of financial liberalization reflects diverging views on whether liberal financial markets bring about an efficient allocation of resources or are so distorted that the benefits they yield to direct participants too often are detrimental to the general welfare. There is, moreover, good reason to think that asymmetric information is particularly prevalent internationally, because geography and cultural distance complicate the acquisition of information.