Question

3. Diversification is possibly the best technique for reducing the problems associated with international transactions. Provide one example each of international financial diversification and international operational diversification and explain how the action reduces risk.

Answer 1

Diversification is the process of reducing the risk by investing in different kinds of investment. In a diversified portfolio there will be different types of investment with different characteristics.

Diversification is possibly the best technique for reducing the problems associated with international transactions also. In International Business, people do financial diversification and operational diversification. In financial diversification, the global investors invest in different investment avanues globally, so that the international risk can be shared among those investments. For example, the investors prefer to invest in different countries, so that the foreign exchange risk will not affect their investments If they focus only in a single country, the exchange rate risk due to the changes in the value of the currency will affect the investments made in that country.

Example : China's Alibaba

In operational diversification, the companies run manufacturing of different products globally. Different types of products will be manufactured in differnt countries. The benefit of this strategy is that the fluctions in sales of the company will be less since the area of sales of the products are spread all over the world. It lowers the dependance of company on a single product and on a single country.

Example : Apple Inc