A reason why international diversification increases profitability

Topics: Knowledge, Firm, Learning Pages: 2 (533 words) Published: September 23, 2014
International diversification can be understood as the expansion of a firm into different countries and geographical regions. This expansion offers firms various advantages like the exploitation of opportunities aboard, economies of scale, sharing of core competencies, and learning. Learning is a key factor of the efficient development of new capabilities. Learning itself is fostered by diverse experiences. This shows the connection to international diversification, hence operating in diverse environments (countries/geographical regions) increases the intensity and frequency of events and ideas to which a firm is exposed. Anyway, it is questionable whether learning through diverse experiences leads ultimately to capabilities that increase profit of a international diversified firm. To assess this question I am going to emphasize a few arguments that support and contradict this statement.

On the one hand, managers and workers who have experiences in diverse environments are more productive than employees who don’t have such experiences. This is mainly because these employees have a broader range of experiences and can spot and solve problems more easily than employees with a narrow view. Furthermore, an organization that operates in several countries has a wide range of subsidiaries from that it can learn. These subsidiaries provide access to a wide range of new ideas and new practices that give rise to innovation and lead to increased technological capabilities. In addition, firms which remain in their domestic country as well as in their main industry face similar threats and opportunities and develop ordinary methods to handle them. Thus, they have relatively narrow experiences and their methods and capabilities also tend to be narrower because they face a limited set of challenges. These limitations won’t affect the firm in the short term but I believe that it decreases the performance of the firm in the long run.

On the other hand, firms that seek to...
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