What is ‘Geographical Diversification’
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 risk.
Explaining ‘Geographical Diversification’
As with 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, Brazil 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 jurisdictions 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.
Further Reading
- Geographical and product diversification during instability financial period: Good or bad for banks? – papers.ssrn.com [PDF]
- Global/industrial diversification and analyst herding – www.tandfonline.com [PDF]
- Weather risk management in ski resorts: Financial hedging and geographical diversification – www.sciencedirect.com [PDF]
- How do interdependencies among human‐capital deployment, development, and diversification strategies affect firms' financial performance? – onlinelibrary.wiley.com [PDF]
- Derivatives hedging, geographical diversification, and firm market value – www.sciencedirect.com [PDF]
- Geographical diversification, risk and firm performance of US casinos – www.tandfonline.com [PDF]
- Geographical diversification and bank performance: Evidence from China – www.sciencedirect.com [PDF]
- Impacts of media conglomerates' dual diversification on financial performance – www.tandfonline.com [PDF]
- Corporate social responsibility and systematic risk of restaurant firms: The moderating role of geographical diversification – www.sciencedirect.com [PDF]
