Foreign Investment

• One effect of financial liberalization is often an increased level of foreign investment in a country. Because many wealthy nations tend to have less stringent financial market regulation at home, they may find it difficult to invest in a country that has a strict financial market. When the financial market is liberalized, however, a greater number of companies often enter the market and provide capital for increased business activities.
  
  

GDP Growth

• A increase in the level of foreign investment means an increase in the amount of capital that is available for business investment. This frequently leads to increased growth in the nation's gross domestic product, or GDP, because more growth opportunities can be funded. For example, an entrepreneur in a financially non-liberalized nation may have a sound business plan for a large production facility but may be unable to obtain financing. By allowing more forms and sources of investment, the entrepreneur may now be able to create his business and stimulate the economy.
  
  

Financial Crises

• One lesson that was learned by the international community following the 1997 Asian financial crisis was the potential for economic liberalization to lead to financial crises. By loosening controls on the financial sector, governments are in effect allowing riskier forms of financing and investment activities. For example, the laws that allowed investors in the United States to package risky mortgages into mortgage-backed securities were partially to blame for the 2008 financial crisis in the United States.
  
  

Volatility

• The fact that significant GDP growth and financial crises are both more likely to occur in economies that have been financially liberalized means that the home economy as a whole is more volatile than one with strict economic controls. This means more cyclical growth patterns and greater degrees of uncertainty.