Diversification

Diversified International Portfolio
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Introduction
As a business grows, it becomes essential to consider viable diversification. This aspect denotes a kind of diversification that is capable of seeing the expansion of the firm as well as creating room for higher profitability. One of such diversification is the creation of an international portfolio. In embracing global collection, it becomes necessary to weigh the factors that affect the smooth running. In this paper, there is a discussion of the creation of a diversified international portfolio. There is also an assessment of the risk factors involved in foreign investment as well as highlights on the theory of optimum global portfolio in consideration of how the method affect the analysis of the international portfolio aspects.
Diversification
In many occasions, a business will always start at a lower and localized level of operation. Such a start does not imply that the company cannot achieve an international diversification. As time goes by and a business embraces the right kind of management, there are high possibilities of attaining elevated levels of operations such that it becomes necessary to diversify the portfolio of the firm. At the start, the diversification could start at the national level, but it is not always the case. When there has been the right assessment, there is arrival at a determination point on embracing diversified international portfolio. Diversified global portfolio comes with many advantages, (Liu, 2016).

Nevertheless, there is bound to be risks that investors musk seek to mitigate if success is to be in attainment.
The primary drive of the diversified international portfolio is the consideration of the advantage related to risk reduction that comes with its embrace. In the international business analysis, there is the realization that; there exist differences in the economic growth levels of various countries. The timing of business cycles is also different in the diverse countries. It is those differences that offer grounds for advantage regarding risk management when an investor embraces diversified international portfolio. The differences in the levels of economic growth provide that there is the attainment of viable ground for the sales of each product in the diversified global portfolio that a firm creates. This advantage is in attainment following the right kind of management.
The level of growth of the economic in the different countries of venture provides a ground for the much distribution of products, (Peng, 2015). The products for the lower level of economic growth will go to the countries with lower economic growth level where there will be fetching of high profitability. On the other hand, the products for a highly developed economy will go to countries with such an economic level and therefore bring high returns. Thus, such grounds offer an advantage to the firms that embrace diversified international portfolio. Hence, there is little risk of falling into a loss.
There is also another advantage of creating a diversified international portfolio which comes concerning the increment of the credit base. When a firm attains diversified global portfolio, there is a broadening of the credit base for the enterprise, (Liu, 2016). This aspect emanates from the consideration of the ability to access credit from the various foreign countries. This issue is not available in the localized portfolio because such a business will be limited to the local credit access. With the diversity of the credit access, it becomes possible for the firm with a diversified international portfolio to borrow selectively from the enterprises that are offering the best terms even if they are not local. For example, if the funding institutions in the locality happen to be much expensive, the firm with a diversified international portfolio can consider borrowing from another country where they are operative, and there are low rates.
Risk Factors
In looking for diversification and higher returns, many firms engage in the diversified international portfolio. Engagement in international investment comes with many advantages and satisfaction. However, various risk factors are in association with the engagement. It is essential that there is understanding of those risk factors before embarking on the international operations so as to avoid stagnancy and falling into irreversible losses.
One risk factor is the transaction cost. When there is involvement in international operations, there is bound to be high transaction cost emanating from the varied aspects that require coordination, (Peng, 2015) For instance, the issue of transportation from one place to the other may come with huge cost depending on the distances involved. The transaction cost gets further compounding by the different rates in the different countries. You may find that; though a transaction may be cheap in one country, in another one it becomes way very expensive.
The transaction cost is also in alignment to the diversity that comes with the varied cultures that ought to get satisfaction in the international operations. However, there is mitigation of the risk by the adoption of diversification. Embracing diversification in the global portfolio ensures that; there are operations in other countries that offer cheap cost; hence, there is compensation for the high cost of the transaction that comes from the high-cost areas. Diversification also ensures that there is an extensive credit base, hence smooth running of the operations despite the high cost.
Another risk factor is that of currency. There is volatility of currency which scares investors when it comes to consideration of engagement in international business. In many instances, there is a need to change the currency to US dollars when there is a direct involvement with companies in international operations. Many countries face the uncertainties when it comes to their exchange rate, (Eun & Resnick, 2014). Such a situation offers a delicate environment for international transactions of business. The high uncertainty of the future exchange rate makes it tough for the setting of the prices for the products. There is, therefore, taking significant risks when there is engagement in international operations.
However, with diversification, there is room for conducting an independent analysis to ascertain the countries with high probabilities of the stable exchange rate and consider a significant investment in them. Also, diversification mitigates the risk of currency volatility by offering an extensive credit base if there is instability from the effects of currency volatility.
Optimum international portfolio theory
Before engaging in international operations, it is essential to have a consideration of the theory of an optimum international portfolio. This notion emanates from the realization that the theory informs most of the information that is essential in the international business operations. This theory has been of great insight in the analysis of the advantages of the diversified global portfolio as well as the risk factors involved in international business transactions. This theory is much practical in the study of the concepts of internationals business operations and diversification due to its basic framework.
The basis of the theory is on the assumption that; investors try frantically to minimize risks while at the same time seeking to achieve the highest returns. Let alone the international ventures; even the small sized businesses would not succeed without basing their operation n such a framework.
If there is no avoidance of risks in the business process, there is bound to be more spending than the gains at the end of a transaction period, (Eun & Resnick, 2014). Again, without reaping the maximum benefits, it would be difficult to sustain the needs of business. The theory of optimum international portfolio is has been essential in the analysis of the diversified international portfolio because; there has to be a consideration of the maximization of profitability while reducing risks, to great extents in international businesses that seek to maintain success.
The fundamental concern is that; the profitability is not only in the measure of the exchange, rather, in the international operation, but there is also bound to be a consideration of the other operative costs which are obliged to be high due to the issue of currency volatility. Maximum gain ought to be the pinpoint in every transaction.
Conclusion
Creating a diversified international portfolio offers a firm, high level of competitive advantage. Such attainment comes with many merits which sustain the business when there is the right management. Foreign investors also face some risks. There are high chances of reducing the risk factors in international investment by embracing diversification. In the efforts of sustaining the diversified global portfolio, the theory of optimum international portfolio plays a great role of offering the right basics.
References
Eun, C.S., & Resnick, B.G. (2014). International financial management (7th ed.). New York, NY: McGraw-Hill
Liu, E. X. (2016). Portfolio Diversification and International Corporate Bonds. Journal Of Financial & Quantitative Analysis, 51(3), 959-983. doi:10.1017/S002210901600034X
Peng, M. W. (2015) Global Strategy (3rd ed.) NY: McGraw-Hill ISBN-13: 9781285545004