Geographical diversification is the process where a firm moves to new markets outside the home markets. This may include movements to regional or geographical countries. According to various authors, geographical diversification boosts the worth of shareholders by taking advantage of specific assets, by accelerating functioning flexibility and by satiating investors’ preferences for holding worldwide diversified positions. Global diversification adds value to companies because of extensive information-based resources related to R&D as well as advertising. Information based-assets have increasing incomes but they are hard to sell. The appropriate tactic for companies …show more content…
Furthermore, the sophistication of geographical diversified organizations can result in higher costs of coordinating business guidelines due to information unevenness between companies’ headquarters and divisional managers as outlined in (Campa & Kedia, 2002)
2.3.3 Product and Geographical Diversification Strategy on Capital Structure Decisions
Wide range of information shows that corporate control is adversely related to global diversification. This is because multinational companies (MNCs) tend to bear less debt burden in their capital structure than domestic firms (DCs). Related diversified firms made much less use of debt than was the case for either unrelated-diversified or specialized firms (as predicted by the transaction cost theory). Unrelated-diversified firms carried more debt than either related-diversified or specialized firms, probably due to the low probability of distress and the low cost of debt (coinsurance …show more content…
(2003) used a sample of 1,127 companies based in the US. After analyzing global diversity based on asset turnover, company size, and other features, they discovered that diversification is negatively linked to debt. On the other hand, their research shows that global diversification is greatly associated to lower debt ratios. Nevertheless, they argued that firms that are product diversified do not have lower control ratios in comparison to domestic firms. This was based on the fact that the interactions of product commodity and worldwide diversification may lessen the negative effect of global diversification on control. Besides, there is no finding of a negative relation between the level of global diversification and control of the product diversified companies. They explained this by the fact that the interaction of product and geographical diversification might diminish the negative influence of geographical diversification on leverage.
Moreover, they do not find a negative relation between the degree of geographical diversification and leverage for the product-diversified MNCs. Their conclusion was therefore that the two types of diversification supplement each other in creating debt usage, albeit their negative relation to firm