International diversification represents an economic strategy that entails investing in different parts of the world and expanding the reach of the company’s product or service. This area of business has been widely discussed and studied, and several benefits, as well as disadvantages, have been discovered and contemplated. The decision-making on whether or not a company goes international depends on specific assets that the company possesses and the specifics of its market niche.
Certain factors act in favor of international diversification and factors that act against it. Beneficial factors include reduced portfolio risk, value stability, and decreased taxes (Alsmairat et al., 2018). These benefits are possible due to internationalized firms’ access to both emerging and developed markets. Despite these advantages, some companies choose not to expand internationally. The reasoning behind this could be explained by the manifestation of problems with agencies, poor allocation of assets, and misalignment of information between stakeholders and managers (Alsmairat et al., 2018). Another reason for this could be a miscalculation in choosing the expansion region. For example, when Starbucks came to Australia, it failed to consider this country’s rich coffee culture and already existing diverse market.
When allocating facilities to places with lax business regulation laws, firms have a potential for both success and failure. For example, a large apparel brand H&M has factories worldwide, but mostly in countries with less strict work regulations, China, Bangladesh, and India. On the one hand, it allows H&M to cut production costs; however, this comes with customers’ concern for the workers’ wages and living conditions. The consequences of this manifest in claims that H&M’s practices are unethical and consumers’ boycotts of the brand.
In conclusion, international diversification has different benefits and disadvantages which affect whether a company decides to expand internationally. When chasing advantages created by international diversification, a firm must take into consideration its risks and, most importantly, analyze the niche market of a region it is planning to infiltrate. If international strategies are used to take advantage of a country’s lax employment laws to decrease production costs, it is vital to recognize the risks of public scrutiny.
Alsmairat, Y. Y. Y., Yusoff, W. S., Fairuz, M., & Basnan, N. (2018). International diversification, audit quality and firm value of Jordanian public listed firm. Academy of Accounting and Financial Studies Journal, 22(1), 1–7.