# **I. Introduction**

With the deepening integration of national economies, the world witnessed sustained output expansion and increase exports of manufactured goods over most of the decades leading to the 2008 global financial crisis [IMF (2007)]. However, in a major trend reversal, the global financial shock prompted by the US subprime mortgage explosion late last year pushed many countries into the tailspin of depression. This crisis was particularly severe as reflected in the scale of output decline at the global level. On an annual basis in 2009, output is projected to decline in advanced economies, marking the first contraction in the post-war period for this group of countries [IMF (2009)]. In addition, the crisis led to unprecedented collapses in asset prices as well as in equity and bond markets, dramatic drop in global trade and capital flows [Reinhart and Rogoff (2009)].

In spite of the massive injection of fiscal stimulus resources in the economy as part of aggressive countercyclical policy measures implemented in a large number of industrialized countries, the ramifications of this crisis are still hard felt. Rising unemployment rates and growing fiscal deficits, particularly in advanced economies, are part of the growing stream of negative spillover effects associated with the ongoing crisis. The speed of transmission across countries is another major characteristic of it, probably reflecting the relatively matured nature of economic and financial globalization, but also the inherent risk associated with such a process.<sup>2</sup> Prior to the crisis, global exports had been growing unabated since the 1970s, and reached the critical threshold of US$17 trillion in 2007, representing a tenfold increase over the last three decades. Interestingly, this remarkable surge has also been accompanied by a parallel increase in capital flows. Estimates suggest that global capital flows exceeded a trillion US dollar in the precrisis era [World Bank (2007)]. And a significant proportion of resources is primarily deployed either to finance foreign direct investments or for portfolios diversification motives, particularly in a context of globalization of corporate finance and emergence of attractive equity and capital markets in a growing number of developing countries [Word Bank (2006), (2007)].<sup>3</sup> Of course, the process of integration of world economies is not new. Historical data suggest that there have been at least three waves of unprecedented booms in global trade since 1870 [Maddison (2001), World Bank (2002a)]<sup>4</sup> . However, the scale and speed in movements of goods and services in earlier waves of export booms were of smaller magnitude. Furthermore, the process was highly concentrated, largely driven by a small number of countries, first by industrialized countries in Europe, and then later followed by latecomer nations, especially in the new world [Gerschenkron (1962), Maddison (1995, 2001)].<sup>5</sup>

> 2 Although this recession was trigerred by the US subprime financial crisis, it was almost instantaneously transmitted to other major financial centers and countries, especially in Europe and Asia.

> 3 To the extent that corporate finance primarily focuses on raising capital for corporations under a model that maximizes corporate values while reducing firm’s financial risks, the financial globalization which increases the pool of investors and hence competition at the global level should lower the costs of funds and increase profits margins for multinational corporations.

> 4 According to Maddison (2001), three major waves of accelerated trade have been observed in the world since 1870: the first wave started in 1870 and lasted through World War I in 1914; the second wave kicked off in 1950 and went all the way to 1980; the third wave has spanned the last three decades.

> 5 Key among these latecomer nations are the USA and Germany, which in the previous centuries relied on technological catch-up strategies to bridge their knowledge and development gaps [Gerschenkron (1962)].

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