Custom Advantages and Disadvantages of International Diversification of Corporations essay paper sample

Free EssaysBusinessAdvantages and Disadvantages of International Diversification of Corporations
← Comparative Business SystemsBusiness Strategy: Starbucks →

Buy custom Advantages and Disadvantages of International Diversification of Corporations essay paper cheap


Business corporations have quickly adapted to the growth of international relations. They are the main push for globalization turning the world into an integrated market. The adaptation to the foreign markets in the world causes a significant impact on the managerial process of the multinational corporations. The benefits or downsides of the diversification of corporations internationally get weighed to on various aspects. The adaptation to risks, the operational costs and the market opportunities are amongst these aspects that the disadvantages and advantages get formulated. The focused and diversified corporations get compared on the basis of profitability and stability in a bid to determine the suitability of international diversification.

The advantages and disadvantages of international diversification of corporations are useful in moderating the management of multinational corporations. These factors get considered in the analysis of the Kudler Fine Foods Company in the exploitation of the advantages of international diversification. Moreover, the adaptation to the disadvantages of international diversification also gets considered to determine how the corporation survives despite their existence.


The presence of corporations impinges on various aspects of society in a particular country such as employment, economy and other numerous factors. In addition, other local factors in the society impact corporations irrespective of their locations. These are factors like political stability and policies, economic states and labor. The establishment of corporations in international bases has various effects on the corporation as a whole making it prone to the above stated effects. A multinational corporation has to develop in a way that it fully exploits its advantages in its international bases. The disadvantages of international diversification limit operations to these factors need to be dealt with by the host country, local country and the corporation as a corporation establishes itself in an international location.

Effects of International Diversification on Corporation

International diversification of a corporation opens the business to a wider customer base as it gets newer, unsaturated markets. For instance, for the US, 96% of consumers of goods lie outside the country and two thirds of the purchasing power parity lies outside its borders. The Indian market has massive purchasing power parity and china has a wide variety of cheap goods and services. The international diversification of a business introduces the corporation to markets that are not explored fully increasing their consumer base. This increases profitability and production as the goods will be on high demand. The introduction into a new market causes a rapid increase in customers, as the countries that the corporations establish themselves in international bases have to exploit a market niche. As a matter of fact, the introduction into a new country has beneficial effects to the corporation in this way, as it increases the profitability and production in the new international market that has higher demand for its products. This leads to a reduced competition with other corporation in the country, as there are fewer investors in such regions. The lack of competition increases the sales of a particular company in a given region (Helpman & Krugman 1987, p.144).

However, the increased consumer base comes with a need for increased production that might cost the corporation heftily. Initially, the high cost of production would be a drag to the corporation as it catches in its new market. The capital for such investments is not easily acquired, as the risk factors involved in foreign markets cannot be put on a scale due to the dynamism of the international business. The lack of investors altogether might cripple the whole initiative, because there will be no funds in order to establish themselves in the new market. The lack of competition over a large customer base is also deleterious to the company as monopoly reduces their product quality (Doeringer 1986, p.89). This has an overall reduction in the production of a company, and furthermore, reduces their adaptation to future competition that might arise (Areeda 1987 p.55).

Among the things that a corporation intends to go around as it diversifies internationally is the restricting law of its home country that limits its production and profitability. Various business and labor laws might stunt the development of a corporation. International regions have less restricting laws on business in that they do not have strict environment regulations, labor laws and generally promote international business to develop within their jurisdiction. However, this is limiting to the corporation, as they will then be subject to foreign laws that might be restrictive to operations. The volatility of the political arena could prove strenuous to the operations of multinational corporations. Licensing may be strenuous to the corporation as there are extra licensing requirements for multinational corporations if they want to begin operation in foreign places.

The tax levies may prove to be heavy to the corporation in a foreign base as the governments try to benefit maximally from the presence of multinational corporations in the foreign bases. The custom duties for exporting and importing in the foreign countries is expensive increasing pricing in distant countries and thus limiting the flexibility of price of goods in foreign countries. The transport taxes in foreign countries increase operational costs, as countries are strict on import and exports to the countries to control balance of payments. This has a limiting effect on the multinational corporation as the operational costs increase. The legislature in foreign countries might corner the multinational corporation in a tight spot with new laws aimed at them. These might be environmental or financial laws in the foreign country. This instability is a threat to multinational corporations that cannot be predicted.

The labor situation in foreign countries provides the multinational corporations with better options for human resource than numerous local labor situations. The US has expensive labor costs that reduce profitability in the corporations. The availability of labor in the US is also limited. The labor costs in international areas reduce operational costs for the corporation and thus increase profitability. The less stringent labor laws encourage a stable work force that has reduced tendencies to strike and paralyze operations. India and China have an abundance of labor that multinational corporations can benefit from, as the human resource will not be a problem. These countries have relatively cheap skilled labor than the US, and this has been exploited to increase profits as the products and services get sold to the affluent regions in the North America and Europe.

Though, multinational corporations have to train the personnel that work for them in order to establish a competent work force in the foreign country. Employment for the locals is necessary for it to get endorsed in the foreign country. The foreign countries accept the operation of multinational corporations within their jurisdiction only if the presence of the organization would heighten the standards of living. The new regions also come with a need to develop the managerial and technical skills in order to adapt to the prevailing circumstances in the foreign base. As a result, this comes with costly acquisitions of managers and equipment that could prove the strenuous to the budget of the multinational corporation (Falzoni 2000, p.177).

The adaptation to crises by internationally diversified companies is also commendable, as the companies are not based on the economy of a particular localized region. The fluidity and stock market shares do not dwindle as the various branches the corporation has over the world are subject to different economic situation making them able to offset deficiencies in one branch with the booms in another branch. Consequently, this increases the stability of the corporations making them highly credit-worthy. Sales of stocks to the public are thus lucrative enough to provide resources for investment in new fields and markets. The multinational corporations’ stocks are thus less volatile making investors entrust them with a lot of money.

Effect of International Diversification on Host Nation(s)

The host countries provide the multinational corporations permissions to produce, sell, export and import goods to its countries. This intrusion of the economy, environmental and social aspects of the countries that host multinational corporations has considerable significance to the nation. The corporation increases its profitability and market share value in the new region at the expense, or together with local corporations and society.

The host country boasts of increased investment level within it as the corporation establishes itself within the country. The infrastructural development that follows is the establishment if a multinational corporation is beneficial to the country. Investment in construction of buildings and roads would be beneficial to the host country. In addition, the employment in the host country increases as the multinational corporation establishes itself within the state. This is welcome by the host countries as most countries as battling the issue of widespread unemployment in their countries. This would come as a relief to the host country. The income level is also bound to increase as multinational corporations have different payment packages. This improves the standards of living within the host country and reduces the poverty level in the country (Klug 2006, p.67).

The equipment and technologies that get employed in the multinational corporations are of sizeable benefits to the host country. The global diffusion of technology is limited, as technologies do not reach the level of national appreciation in the home countries of the multinational corporations. This also makes the other organizations and institutions in other countries that might find these technologies relevant unaware of their presence. The multinational corporations come along with the technologies that will increase production and efficiency of operation in the host country. Adoption of such advanced technologies might boost its own industry and make life activities more convenient. The appreciation of the new technologies by the host country thus benefits the host country as the multinational corporation establishes itself in the new region. The equipment that the multinational corporations use also explicates to local industries how advanced machinery increase productivity.

The monopolies within countries get eliminated by the introduction of multinational corporations in host countries. This is the result of the competition that they pose to the local industries that have had the consumer base to themselves before the intrusion of their market with other international corporations. Monopoly is devastating for local economies as it leads to low quality products and services by local corporations due to the absolute dependence of consumers on them. They have a tendency of being in a comfort zone induced by lack of competition, and thus their own development is stagnated. However, a multinational corporation can change this by creating a healthy competitive environment for these monopolies. The product quality would increase substantially and the industries would develop to keep in tandem with consumer trends and needs. Host countries of multinational corporations benefit from such ventures in this fashion. The standards of the host country’s business organizations and institutions improve with competition from internationally diversified corporations. This was evident with the invasion of the Kenyan telecommunications industry that was dominated by one of the service provider. Bharti Airtel, Safaricom and Vodacom increased competition for Telkom Kenya that had monopolized the industry.

The multinational corporations produce and offer goods within the country that get consumed both locally and internationally. The exported goods reduce deficits or increase surplus to the balance of payments for the host country. The increased exports by the host country relative to imports due to local production reduce the need for the massive expenditure on imports. This decreases the expenditure of the country on international business relative the expense incurred by its international business companions. This breeds a healthy economic environment for the host country. The banks of the host country will have few monetary problems, as the supply of currency will remain sufficient. Another important factor is that formulation of monetary policies will be less strenuous and policies will not be as stringent as for countries with massive deficits in balance of payments. The host country thus benefits from the foreign corporation within it as its economy rises from the suitable balance of payments.

The managerial strategies of the multinational corporation can also be of great significance to the host country’s businesses. The structure of management might reveal the weaknesses in the local management structures. Therefore, this will result in increasing the success of local business by overcoming such weaknesses. Market and domestic intermediaries also get a lot of contracts from the multinational corporations thus, their market is increased. These boost the local businesses by providing them with market for their goods and services in bulk.

However, the multinational corporations might destroy the local industries they found in place by various competition strategies. The pricing strategies of the multinational corporation might kill their competition in the same way as the “Wal-Mart effect”. The corporations usually have enough capital to operate profitless for a long time to establish brand loyalty. During this time, their competition from the local industry fades, as the price wars do not auger well with their strategies (Milkovich & Bloom 1998, p.40).
In addition, the outflow of capital from the proceeds of the multinational corporations back to their head quarters is harmful to the host country’s economy. The repatriation of funds back to the home countries of these corporations is deleterious to the host country. These proceeds can only be of benefit to the host country if they get invested in the foreign country, but in most cases, this does not happen by leading to the crumbling of the host’s economy eventually (Latta 1999, p.132).

The multinational companies come, because of lower operational costs in the host country and thus exploit them regardless of the effects on the locality. Environmental concerns within the host country might be slack and thus the multinational corporation takes advantage of this in order to produce maximally regardless of the environmental effect of their activities. The US military created a nuclear base in Bangkok during its strife with the Soviet, this imposed numerous environmental and health threats to the locals. The labor laws in the host country might also provide an opening to the multinational corporation to exploit non-unionized personnel and low wages for wanting tasks. Virgin Atlantic Airlines caused uproars with its harassment of foreign employees with unwarranted retrenchments and low remunerations.

Effects of International Diversification on Home Country

The multinational corporations form an avenue within which local products receive international appreciation thus marketing the country. The extent to which corporations diversify increases the advertisement of local products, and consequently, their demand increases. The exports by the home country thus increase leading to a surplus in balance of payments. The multinational corporations thus promote local goods and services on a worldwide basis. The local industries have an increased market base due to this marketing and reduction in local pressure on the market, and thus they increase their production.

The home country can also benefit from the culture brought back home by the multinational corporations. Technology, management, and goods from the international bases of the international corporation may be of benefit to home country. Friendly democratic relations with various countries that the multinational corporations establish themselves in get strengthened to increase trade ties between the home and the host country (Godley & Shechter 2008, p.78).

The capital outflow for the reason of investment in different countries does not favor the balance of payment in the country. This comes with a weakening of the economy of the home country. The employment opportunities also get transferred to foreign places leaving the home country with fewer jobs to offer its citizens. The industrial and economic advancement of the home country gets jeopardized by extensive international diversification of corporations.

Case Study: Kudler Fine Foods Company

The Kudler Fine Foods store started in San Diego, California. It prepares gourmet foods and makes door-to-door deliveries. Their high quality food production at large scale covered a niche in the market that has seen to its global expansion. They specialize on seafood bringing in exclusive recipes, ingredients and sushi. The management chose to open a branch of the store in Vancouver as it would have increased the market and profitability of the corporation.

Impact of Diversification in the Company

Kudler Fine Foods store diversified in a waterfall approach throughout the entire US, and the move to go international got pushed by the success it had in its previous endeavors. The move to Vancouver got analyzed intensively before getting implemented, and its effects have not disappointed the management. Vancouver provides an increased market for its foodstuffs as was predicted with the 600,000 population in the city. The sale of gourmet food in this region is scarce hence reducing the competition for the consumers. This has also provided the company with adequate human resource as the city has many people looking for jobs. This ensured the smooth induction of the company into Canada.

The trade sanctions between the US, Mexico and Canada reduced expense of their importation and exportation to and from the USA accordingly reducing operational costs. This goes a long way in increasing the profitability of the business based on this trade agreement namely the North American Free Trade Association.

The labor laws in Canada are stringent making Kudler Fine Foods spend a lot in catering for human resources. The minimum wage in this region is $10.25, and given the culinary skills that are required for personnel by Kudler Fine Foods Store, the labor does not come cheap. The unionizations also cripple the human resource management as they may strike irrespective of the strategies that were in place to accommodate their welfare.

Impact of Kudler Fine Foods in Canada

Kudler Fine Foods has increased investment in Canada creating jobs and improving living standards. The fresh gourmet food company has provided market for services of the existing transport industry in distributing and supplying its goods. It also integrated with Stong’s Market to work together to boost production. This is an instance where a local company has benefited directly from the international corporation.

Lastly, the repatriation of proceeds of the Vancouver branch back to the US has a deleterious effect to the balance of payments in the country. The company is based in the US and plans to invest only in its branches and not in other ventures in Canada.

Related essays

  1. Business Strategy: Starbucks
  2. Business Law Problem
  3. Comparative Business Systems
  4. Macy's
Chat with Support