Corporation Diversifying Internationally in the Recent Past,

Corporation Diversifying Internationally

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 and regulations are weak there. They can exploit the labor and the tax rates and thus go on to reach revenues they wouldn't have attained otherwise. A report taken out by the Economist Intelligence Unit went on to say there were no violent acquisitions in any country from the period of 1993 till 1996. (Lins and Servaes, 2002)

Another issue that arises due to Global Diversification is the exploitation of ethics and morals. Pharmaceutical companies who have been put on limitations by the regulatory authorities can't do much in their own company. These sorts of drugs are rendered the only treatment option for those who can't afford the proper treatment. In 2005, more than 150,000 people took part in clinical trials that were carried out by companies originally in America or Europe. The industry went on to make 189 Euros. Many of the people were used without consent and weren't even told that they are taking part in a study. Between the years 2007 and 2010, over 1,730 people passed away during or after the trials ended. (Buncombe and Lakhani, 2011)

This is surely a negative impact of the global diversification as with emerging economies with no strict regulations, humans are being exploited to a fatal extent.

There are many methodological and conceptual inconsistencies that come in to play when considering international diversification. (Eckert & Trautnitz, 2010) Many authors argue that the value of a company increases or decreases after going multinational. No one sided answer has been speculated till now whether a corporation being multinational increases its value. What has been said it is that there are certain conditions which go on the favor international diversification. If a corporation has gotten those conditions under control, then going global will be in their favor. (Eckert & Trautnitz, 2010)

It was mentioned earlier that global diversification can lead to better investment opportunities. Yet, is a possibility that the revenue or cash can go in the opposite direction. The money can go from the multinational company into the economy which was falling down.(Lins and Servae,2002)

Thus, when corporations go on to diversify internationally, they target emerging markets as oppose to already formed ones. That is a good tactic to go for and many studies have been based on this trend. The studies, which will be explained further, state how diversification in emerging markets have made much better results as opposed to markets that are already formed. That is one risk in going into markets already formed. (Porter, 1987)

Another reason why global diversification is a risky business is due to the instability in the stock market. A portfolio from the stock market from 20 country indices reveals that today the market double times more unstable as it used to be more than 4o years ago. It isn't news for anyone to see how international disputes and economic instability has made a stock market a bargain as well. (Quin&Voth, 2008) Thus, a corporation should be quite sure and certain about the market before they introduce themselves into it.

Another risk in global diversification is the fact that what if the country's own market starts gaining momentum. Surely, when a corporation expands its reach to more than one company, the attention is diverted. For some corporations, they only went out of their country because the currency value was decreasing. By the time they have gotten their firms up and running in the foreign country, the market could be swinging in their own country. Then the cost would outweigh the benefit leading the country into loss as opposed to profit.

With the aforementioned discussion, it is clear that there are disadvantages and advantages of diversifying corporations globally. Where one keeps a focused and maintained economy in mind, then going on to different countries does not seem like a better option for some corporations. Nonetheless, with emerging economies and the ones who are hoping to succeed, diversification of a corporation is a good plan of action. Many U.S. firms have gone to expand themselves in different countries. Where some firms have gone to undermine their value, others have exceeded. Another major corporation tasting success merely due to internally diversifying is Apple and its success in China. Apple's success in China beat Lenovo and left everyone shocked.

A case study in which international diversification proved to be beneficial is of the Royal Bank of Scotland. In June of 2004, RBS was the second biggest bank in Europe and United Kingdom and the fifth biggest one worldwide. It was in 1873, that the bank started its first branch in Glashow. It was through international diversification that RBS expanded its branches to United States and Hong Kong. In diversifying the corporation, RBS went onto acquire many companies as well. There have been a total of thirty won companies that RBS has achieved. (Gupta, 2004). It was also in May of 2004 that RBS bought Charter One financial. This sale elevated RBS's economic rank even higher and thus proved how diversification has worked on the side of this bank.

The major strategy that RBS used while keeping other countries in mind was acquiring their major corporations. Seeing how RBS was able to, it bought off car insurance companies and leasing companies in different countries.

If seeing the total revenue that RBS has generated due to diversification, the sum would be about $9.19 billion dollars in profit. ("Benefits of Diversification' Help" 34) The corporation owns Charter One banking Group in America and also purchased a stake in Bank of China. Due to the bank spreading its reach to different countries, it has gained quite a lot of revenue.

Apple is yet another company which is prominent when discussing diversification. Starting off with Mac computers, it extended its branches to iPods, iPhones and iPads. Along with product diversification, Apple is now moving from country to country as well. After the launch of the new iPhone 5, the demand for the phone kept on increasing. With more demands and decreased supply, Apple sought to China for help. China has a big part in pushing Apple sales. Apple is hoping to have 4G LTE licenses issued for the Chinese Market in next year sometime. Also, Apple is hoping to make a contract for distributing the phone. If the contract is signed, then the largest telecom company in China, China Mobile will now include iPhone in its contracts. All these alterations can go under global diversification and thus are expected (Hall, 2012).

Experts are anticipating that the iPhone sales will augment to $46 million this quarter and $43 million in the subsequent quarter. As for the shares, with more than $935 million shares in the industry, the total return would be about $2.5 billion. These stats are surely a good sign for Apple as it's using China for its increased production.

This is a smart tactic that Apple uses. Another benefit of global diversification is that the cost production decreases. For instance, the labor in China is less costly as opposed to America. Also, there might be varied rules for the labor or government unions. This can lead to increased working hours with decreased wages. Falcon which is the factor y in which Apple iPhones are made had workers which worked for more than 60 hours. (McDonald, 2012). It could be because of these working conditions and decreased wages that riots were breaking in the factory. Apart from flexible labor, tax rates are also decreased in developing economies as opposed to developed ones. This in turn leads to increased production with decreased cost and thus more profit. A negative point however is that when riots like this start occurring, companies like Apple can be held responsible. Thus, companies should be careful about not exploiting the resources and labor in the international markets.

These were success stories of two known companies and how diversification benefitted them in the long run. A study was conducted on Japanese corporate firms and its experience on international diversification. As aforementioned in the text, overall global diversification proves to be beneficial if certain conditions are met. These conditions or needs are such that the company willing to expand must have certain knowledge and experience about going international. Certain resources should be given that prove to be rare and thus advantageous in the host country. (Fang, et al.,2006)