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Essay / Research Paper Abstract
This 3 page paper looks at how and why international diversification takes place. Focusing on the financial aspects including interest rate parity the paper considers the advantages and disadvantages. The bibliography cites 5 sources.
Page Count:
3 pages (~225 words per page)
File: TS14_TEintdivers.rtf
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Unformatted sample text from the term paper:
directly through dividends or growth in capital value, as without reaching this goal business would be severely constrained. There are many recognised risk such as exchange rate risk, interest rate
risk, as well as political risks that can all leader to danger, but the increased market may also lead to increased profits as well as potential cost savings. Therefore, the
risk must be seen as worth taking. The way in which profit is created may vary, not only in terms of corporate governance,
but in terms of geographical location. International diversification has been noted to have a pattern with returns. In the initial expansion there is a decrease, but as the international diversification
is established and expands the profit levels increase again, giving a U shape is plotted on a graph (Capar and Kotabe, 2003, Kotabe et al., 2002). It has also been
noted that for many companies that have diversification internationally there is also an increased capital value for the company and its assets (Morck and Yeung, 2001). However, not all
evidence is as conclusive. Annavarjula and Beldona, (2000), have shown that there are conflicting paradigms where value can be lost as well as gained. The U shape model of Capar
and Kotabe, (2003), may be a partial explanation, with different firms studies being at different stages in the U shape, which can be a forward or backward progression. However, we
can also look to arguments such as interest rate parity for an explanation why the increased returns may not always be present. If
we look at the financial perspective international diversification is an investment from with a return is expected. Interest rate parity theory tells us that internationally the interest rate we receive
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