In the recent past, after the onset of the economic meltdown, firms, companies and businesses at large have been resorting to less traditional methods and entrepreneurial tactics in order to combat reduced demand, much more competition and increased costs. International diversification was the answer for many firms, following in the tracks of multinational and transnational companies; many businesses have resorted to relocating their plants and facilities to gain a competitive edge. International expansion or diversification can be seen as form of investment for the company, it is a costly and time consuming move to make however the benefits from this decision will affect company performance in the long run. Cost reduction is an evident result of this change, however companies can enjoy many more benefits for instance things such as a more lenient law and regulation system. Different countries also offer different kinds of labor, some have a highly educated population which makes it easy to find skilled labor for employers.
Many often wonder what exactly corporation diversification is. This is basically a strategy that businesses and producers are now becoming aware of. A business or a firm attempts to expand itself in different markets. They can do that by going in the market, figuring out its weakness and strengths and investing in it. Corporations analyze the market, set up their office and have their functions run from there. Businesses rely on labor of that area and on export to turn corporate diversification into a success.
The current generation only remember the crisis of 2008, yet Diversification has been up and going since four decades. Diversification can be in terms of product or market diversification. Product diversification first came into being when firms were wishing to attend to complete lines of internally correlated products. (Didrichsen, 1992) 500 of the industrial firms in America had diversified from thirty to eighty percent between 1950 and 1975. (Rumelt, 1982).
Benefits of International diversification
International market diversification is when corporations are integrated over different countries. As is mentioned about emerging economies, many overseas businesses are scared to be taken over by the new giants. However, hostile takeovers are rare when the corporations are looking more into diversifying their own business rather than take over a business present in the country.The benefits of corporations diversifying internationally are highlighted the most when it comes as a risk management strategy. This tactic of corporations has come handy when the currency value of their own market starts to drop. In developed economies, thus there is a sure shot benefit in investing in economies that are emerging. There are advantages when keeping risk reduction and return increase in mind. (Bhatngar & Ghosh, 2005).
Going multinational favors a company due such that it is able to take benefit from different countries. From evidence, it can be said due to international diversification, the United Kingdom had cut 83% of the risk. Italy has gone to reduce the risk 94%. The risk being talked about is that whatever the investors will invest, they will get a decent amount of return back. Global diversification has been known to magnify the return and thus provide benefit overall. (Bhatnagar & Ghosh, 2005)
There was a study done to see the results of international diversification in emerging economies. The effects were seen after the returns came from different countries in South East Asia. Pakistan had the highest amount of investment going into it which was a total of 86% of all the investment. This was followed by Korea at 31% and Malaysia at 17%. The conclusions of the study also took note of all the risks that the country had to take. The resultant portfolio of the returns was an optimistic one with one showing an augmentation from 0.42% to 2.84 in the returns. Not only were the returns increased, there was also a reduction in the risk as well. The risk variance decreased from 132.52 to 116.77. (Bhatnagar & Ghosh, 2005)
When discussing portfolios, the discussion comes about of U.S. only or global portfolios. A study was done comparing the two to see which was on top and when. The results were sufficient to explain why global diversification was a good thing in general. The study done was to analyze the portfolios from 1999-2001 in which there were a total of 121 time frame portfolios recorded.
The results indicated that in about 96% of the portfolios, the world wide portfolio gave better results than the domestic portfolio. The difference was about 2.4% every year. When there are millions of dollars being invested, 2.4% would surely make a big difference. Thus, this clearly revealed that for corporations to attract investors, global diversification would be the best strategy.
Therefore, global diversification proved to be beneficial when emerging economies were kept it mind. The emerging economies have more opportunities for investors and thus give the corporations a chance as well. A negative point of all of this that when the country is going through a currency crisis or is faced with economic problems, then this same data is not applicable to the country.
The multinational firms are considered a vehicle for diversification for all the investors willing to put in the money. When corporations diversify, it gives a chance for the investors in a country to take benefit from the corporation. This is quite simply explained that if an investor wants to invest in a country's market. He or she will not know much about the regulations of the foreign markets, about the rules of transferring money across the border or the variations in the standards. Now, if the same individual goes on to invest in a corporation who is diversified globally, he will gain the benefits from it through the company. The company at a larger level might have gotten all the details figured out and thus will benefit from all the investors willing to contribute in their firm. (Eckert and Trautnitz, 2010)
Another benefit of diversifying internationally lies in the old proverb that it's better to be safe than sorry. If the trend over the years has been noted then it is revealed that no one country has the best overall portfolio pattern. It was just in 2011, that the market outside of the United States performed poorly as compared to the rest of the market. That is to say that all the other years, there has been no one market that has been performing the best over the years. Surely, it is understandable why seeing the statistics of 2011, investors will be doubtful in investing overseas. (Fisher, 2012) What they fail to say is that no one market has been at the top most position. Seeing how the overall market analysis of every country differs at one point or another, it is good to invest in different countries rather than keep all your eggs in one basket.
Disadvantages of diversifying internationally
Surely, many corporations have the false belief that diversification is an easy process. Certainly, the idea of going into a new market and making billions sounds pretty good but the work behind is crazily insane. That can be looked at as a disadvantage of the theory as well. The managers involved in the corporations have to go through data of the entire market. They have to forecast what is to be expected and also calculate the revenue in the process. Another risk in diversifying internationally is that the companies don't know what they are going into. Surely, they think that their corporation will be a success in the new market. To be one hundred percent sure of this, the company needs to assess and see all the competitors around. They need to have a fair idea of what they are offering and giving will be the best in town. This is yet another obstacle that has to be overcome.
Many corporations will find themselves stuck in a new market with new skills and new facilities. The fact that if they don't know the people or the current market around them this lack of experience and knowledge will count against them.
There also is a discussion based on how corporation's diversifications internally can give different results based on whether the market is emerging or not. A sample was taken from 1000 firms and it was revealed that the ones who were globally diversified traded with a discount of 7%. There was a study done to see how diversification in corporate firms is resulting in emerging economies. The results of diversification were compared in developed and emerging economies. Corporate diversification did not augment the value of corporations in United States, United Kingdom, Japan and Germany. (Lins and Servaes, 2002) However, as mentioned earlier, emerging markets gain from it.
An explanation of this is that the emerging economies want to do better. They wish to be like the developed ones and they can attain that by diversification of firms into them. (Lins and Servaes, 2002) Firms also take advantage in emerging economies because laws…