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INST&GLOB — Result In Brief

Project ID: 241114
Funded under: FP7-IDEAS-ERC
Country: Italy

The impact of globalisation on economic institutions all over the world

An EU-funded project conducted theoretical and empirical research on the role that economic institutions have in this globalised world where countries and regions interact.
The impact of globalisation on economic institutions all over the world
INST&GLOB (Institutions and globalization) analysed these interactions in three different settings. First, they looked at globalised capital markets, where a country's financial institution can interact with foreign investors. The second setting observed was military competition, in which the taxation apparatus of different countries compete, in the context of financial wars. Third, researchers explored globalised product markets, where companies are located in geographical places with different institutional settings.

It is generally accepted that globalisation improves economic conditions and spurs on institutional developments in all three settings. Globalised capital markets encourage financial institutions to develop profitable and sustainable business models, in order to bring discipline to the domestic financial system.

Concerning military competition, this benefited the states capable of raising taxes and mobilising economic resources, laying the foundations for modern nation states. For economic globalisation, it is believed that it fosters trade in goods and migration, which increases opportunities for workers and firms and subsequently improves economic growth.

Project results have challenged, both theoretically and empirically, the aforementioned ideas. Concerning capital markets, evidence shows that the banking system of capital-receiving countries is influenced by financial globalisation to introduce financial innovation, taking advantage of investors' misperceptions of risk. Therefore, financial globalisation can increase domestic banking sectors' fragility by exposing them to sovereign default risk. The mechanisms studied offer insight into the recent financial crises in both developed and emerging countries.

In the case of military competition, researchers studied state building in early modern Europe by combining economic-theoretic reasoning with historical data collection. They found that military competition has resulted in marked differences, with strong states becoming stronger and other states giving up and abandoning any centralisation attempts.

INST&GLOB analysed economic integration, collecting data on economic growth and productivity of firms operating in subnational regions all over the world. Results show that economic integration isn't a strong enough incentive to reduce inequality standards of living and productivity, in the regions studied. Regions with better institutions and higher levels of education enjoy significantly higher standards of living.

The competitive forces of globalisation shape economic outcomes in the different arenas of economic interaction. However, this doesn't happen in the way expected – rather, as the project revealed, globalisation can worsen economic outcomes in countries with weak financial, fiscal and legal institutions.

Related information


Globalisation, economic institutions, INST&GLOB, capital markets, economic growth
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