International Business Research; Vol. 16, No. 6; 2023 ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education 47 Index of Economic Stability and Financial Integration of Small Open Countries Mirnesa Baraković Nurikić 1 & Senija Musić 1 1 Faculty of Economics, Tuzla University, Tuzla, Bosnia and Herzegovina Correspondence: Mirnesa Baraković Nurikić, Faculty of Economics, Tuzla University, Urfeta Vejzagića 8, 75000 Tuzla, Bosnia and Herzegovina. Tel: 387-61-639-434. E-mail: mirnesa-barakovic@hotmail.com Received: April 28, 2023 Accepted: May 26, 2023 Online Published: May 26, 2023 doi:10.5539/ibr.v16n6p47 URL: https://doi.org/10.5539/ibr.v16n6p47 Abstract Over the recent decades, we have witnessed advanced processes of liberalization of capital flows, and increasing integration and globalization of financial markets. Along with the globalization trend, ever since the end of the 1980s, the process of financial integration has also been taking place, as a consequence of removing barriers to free movement of capital between countries. Therefore, this research explores financial integration of small open countries and aims to make conclusions on how this integration can affect their economic stability. Qualitative definitions of small countries point out that they typically have a limited territory, relatively small population and limited resources. The research hypothesis is postulated as follows: the economic stability index of small open countries is conditioned by their financial integration. The analysis includes small open countries of Southeast Europe observed from 2005 to 2020, with relevant statistical data used for the total inflow and outflow of investments, the share of assets and liabilities in gross domestic product and the calculated value of the economic stability index. The analysis was made using the methods of correlation analysis and correlation test. The results show that there is a correlation between financial integration and the economic stability index in small open countries. Keywords: financial integration, small open countries, Southeast Europe, the economic stability index 1. Introduction One of the basic features of modern national economies is precisely their openness through owing to which goods, services, capital, technology, workforce, knowledge and the like can freely move across national borders. In theory, financial liberalization or capital account liberalization is seen as a better inclusion of the country in world savings and investment flows, which would, in principle, have to enable a better allocation of scarce economic resources (Globan, 2011). Liberalization allows for the strengthening of trade ties with foreign countries and inflow of foreign capital as well as a stronger influence of foreign movements on the economy of the domestic country and the strengthening of the import of goods to the detriment of home production. Kovačević (2016) noted that disparate macroeconomic and institutional characteristics of countries largely define country's openness and international capital flows. Small and less developed countries are a special case as they, when opening to the world market, must be particularly careful since they have no influence on international economic developments, i.e., world prices, foreign interest rates, as well as international capital flows (Andabaka, 2016). There is no formal definition as to what makes a small country; however it is generally accepted that this designation applies to sovereign economies with a population of less than 1.5 million. However, this is only a quantitative determination of small countries, while the paper will use a qualitative determination, which implies that the size of the states is associated with their special behavior, typical of a group of small states (East, 1975, 160). Although the average ratio of the volume of gross capital flows to gross domestic product (GDP) is higher for small countries than for other developing countries, it is still some 25 percent lower than that of industrialized economies. Aid dependence is an important problem in several small states, as foreign aid is still the main source of income. Although there is a long list of special challenges related to small countries, most of them are ultimately linked to the fact that small countries have relatively high output volatility, even after they control income level and level (degree) of openness. One reason may be that smaller countries tend to be less diverse and more vulnerable to external shocks. History has showed that capital account liberalization, due to its high mobility, may cause the outbreak of many