DOI: https://doi.org/10.21847/1728-9343.2013.5(125).18991

Advantages and disadvantages of diversification strategies in multinational companies and their impact on firm's value

Vladyslav Kret

Abstract


The article analyses diversification of business activities in multinational corporations. Diversification has not so clear impact on financial performance of firm. Modern research proves that diversified firms trade at discount. Such conclusions should stop diversification in multinational organizations. Nevertheless modern global companies only expand their production in geographical and industrial scope. Most modern researches seek for advantages and reasons why profitable industry concentrated firms decide to go globally or expand production in different products. There are several theories, which explain these trends in multinational companies. One of them is free cash flow theory, which states that companies tend to spend income on expansion rather than on dividends for stakeholders. Such approach often leads to non-profitable investments and to financial support of management projects. Other explanation of diversification discount states, that only firms with no potential in growing profit, decide to expand in more likely profitable industries or countries, which require considerable investments. We consider few different points of view on possible positive or negative impact of industrial and geographical business expansion by grouping different kinds of expansion by geographic and production principles. Despite of various disadvantages, diversification brings most valuable asset to global company - stable financial performance in long run. This is achieved by expanding range of products and sources of income. With that in mind, we can only predict, that trend of growing companies over their optimal size will continue, unless no external, not economic factors work against it.


Keywords


diversification; multinational companies; diversification discount; income rate; direct investments; production portfolio

References


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REFERENCES

Berger P., Ofek E. (1995), Diversification’s effect on firm value, Journal of Financial Economics, рр. 37, 39-66.

Lamont O. A., Polk C. (2001), Does diversification destroys value? Evidence from the industry stocks. Journal of Financial Economics, рр. 63, 59-62, 75.

Kan O. B. (2002), Corporate investment activity, industrial and global diversification and internal capital markets, Old dominion University, рр. 25-40.

Jensen M. C. (1986), Agency costs of free cash flow, corporate finance, and takeovers, American economic review, Vol. 76, рр. 5-8.

Campa J., Kedia S. (1999), Explaining the diversification discount, Working paper, Harvard Business School and IESE.

Doukas J., Pantzlis C. and Kim S. (1999), Intangible assets and the network structure of MNCs, Journal of International Financial Management and Accounting, Vol. 10, pp. 1-19.

Gerner R., Powers E., Scsarfstein D. (1999), Learning about internal capital markets from corporate spinoffs, Working Paper, MIT Sloan School of Management, pp. 15-20.


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