Question

Hi, I have to read company's 10 k and discuss about the degree of geograhic diversification and industry diversificatoin.
I try to understand, but I have hard time with it. Can you help me, please? Some example would be great.
Thanks!

Answer 1

Geographical Diversification

Geographical diversification is the practice of diversifying an investment portfolio across different geographic regions so as to reduce the overall risk and improve returns on the portfolio. The term also refers to the strategy employed by large companies of locating their operations in different regions or countries in order to reduce business and operational risks.

BREAKING DOWN 'Geographical Diversification'

Much like diversification in general, geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another. For example, if the US and European stock markets are declining because their economies are in a recession, an investor may choose to allocate part of his portfolio to emerging economies with higher growth rates such as China and India.

Most large multinational corporations also have a high degree of geographic diversification. This enables them to reduce expenses by locating plants in low-cost regions and also lowers the effect of currency volatility on their financial statements. In addition, geographic diversification may have a positive impact on a corporation's revenues, since high-growth regions may offset the effects of lower-growth regions.

Pros and Cons of Geographical Diversification

Diversifying a portfolio of investments across different geographic regions can help investors avoid the peaks and valleys of a single economic region. This type of globally-diversified portfolio can help reduce volatility over a less-diversified portfolio in the long run. Exchange-traded funds (ETFs) and mutual funds have made investing globally easier than ever before.

There are some investors and economists who would argue that since everything in our global economy is already so interconnected, any international investments might be redundant to domestic ones. It's also important to consider that many of the largest companies in the world are already set up as multinationals.

Faster-growing international economies and markets may also experience heightened levels of political risk, currency risk, and market risks compared to more developed markets.

International currency exchange rates are always on the move. Sometimes, one currency may be strong, and other times it may be weak. Leveraging these movements to reallocate from a position of strength may benefit the investor. Investing in multiple currencies can also provide an additional layer of risk reduction.

Domestic markets have become very competitive with many businesses offering similar services. Foreign markets, however, may offer a less competitive and sometimes a larger potential market. A business may sell more wearable devices in one Asian country than in the entire U.S. market, as an example.

INDUSTRIAL DIVERSIFICATION

Since self-reliance through the building of heavy industries was the key element of India's industrialization strategy, a major drive for diversification was launched in the mid-1950s, establishing machine tool industries, heavy electricals, machine building, and other branches of heavy industry. The value of production of machine tools increased from Rs. (rupees) 3 million in 1950–1951 to Rs. 8 million in 1960–1961 and Rs. 430 million in 1970–1971. Production of power transformers increased from 0.2 million kilovolt amps (KVA) in 1950–1951 to 8.1 million KVA in 1970–1971. Production of crude steel increased from 1.5 million tons in 1950–1951 to 6.1 million tons in 1970–1971. Production of caustic soda increased from 12 thousand tons in 1950–1951 to 371 thousand tons in 1970–1971, while the production of soda ash increased from 46 to 449 thousand tons in that period. Between 1956–1957 and 1970–1971, the value of chemical industrial production increased at the rate of 12.6 percent per annum.

In spite of the setback to industrial growth after the mid-1960s, the progress in diversification of the industrial structure was maintained. The weight of capital goods in the Index of Industrial Production increased from 4.7 percent in 1956 to 11.8 percent in 1960 and further to 15.2 percent in 1970. The weight of "basic goods" (heavy chemicals, fertilizers, basic metals, and cement) increased from 22.3 percent in 1956 to 32.3 percent in 1970 and further to 39.4 percent in 1980. The weight of consumer goods, on the other hand, declined from 48.4 percent in 1956 to 31.5 percent in 1970 and further to 23.7 percent in 1980.

The diversification achieved by India in its industrial structure is reflected in a relatively high share of high and medium tech industries in manufacturing value added. In 1985 this ratio was 56 percent for India, the foremost position among all the major industrializing countries (UNIDO, Industrial Development Report, 2002/03, p. 164). This ratio was 54 percent for Brazil, 49 percent for China, 47 percent for Korea and Malaysia, 43 percent for Taiwan, 37 percent for Mexico, 25 percent for Indonesia, and 18 percent for Thailand. But, in terms of the share of high and medium tech products in manufactured exports, most of these countries were ahead of India, with the exception of China and Indonesia. By 1998 China had surpassed India, and Indonesia had caught up with India in terms of the level of technological sophistication of manufactured exports.

The fact that the share of medium and high tech industries is relatively high in India's industrial production while the products of such industries constitute only a small part of India's manufactured exports shows that in most cases these industries are not internationally competitive. Since India's initial drive for diversification was directed at attaining self-reliance in a wide range of industrial products, that process neglected cost considerations, which did not receive sufficient attention. Its new industries therefore were not under any strong pressure to improve efficiency and reduce costs until 1991. In such an environment, the global competitiveness of new industries was obviously low.