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Examining The Concept Of Diversification Economics Essay

Diversification can be defined as one way in which organizations change the claims they stake for themselves in terms of the clientele they serve and the goods and services they produce (Thompson, 1967).


Diversification in the form of foreign direct investment(FDI) can present many opportunities for CADIM. A FDI occurs when a firm invests directly in facilities to produce or market a product in a foreign country (Hill, 2009).

Moving in to international, emerging markets can be a method of expanding CADIM’s market. Shenkar and Luo (2004) claim the reason for this is that national markets vary in industrial life cycle stages. The market for real estate in the developed countries CADIM are currently operating in, is saturated hence diversifying in to heavily populated developing countries with unmet needs, presents more opportunities.

Diversification leads to an increase in net earnings as proven by recent studies by Grant (1987) which found a correlation between international diversification and profitability. The average returns in most of the developed countries CADIM operate in, are well below the target hence diversifying internationally presents opportunities to achieve higher returns. Diversifying will also increase CADIM’s reputation in both the overseas and home markets hence increasing profits.

International diversification will also help CADIM reduce the volatility of its income stream by spreading its investment risks over different countries. Furthermore, Evans and Archer (1968) provide evidence that strategic risk is reduced with increasing numbers of stocks in a portfolio.

CADIM can use diversification as a tool in organisational learning, in order to sustain competitive advantages. Diversification may create learning opportunities through exposure to new practices and cultures. Understanding of these international strategies may assist CADIM in anticipating future trends and developments in the international market (Hill, 2009).

CADIM can use its core competencies like its professional operators experienced in value extraction, to earn itself a competitive advantage in the foreign country they wish to operate in (Kobrin, 1991). A foreign business can gain an advantage if it is able to transfer critical capabilities unavailable to local players (Shenkar and Luo, 2004). However, this depends on the extent to which these competencies can be transferred to a foreign sub unit to result in competitive advantages.


CADIM must also review the risks associated with diversification. Firstly, as Schwartz (1999) believes, adapting to local cultural values may create an additional burden for them. Differences between home and foreign country cultures decrease operational benefits, increase the cost of entry and hampers the firm’s ability to transfer core competencies to foreign markets (Bartlett and Ghoshal, 1989). These differences may also lead to higher levels of complexity and uncertainty for managerial decision-making regarding CADIM’s strategies and organizational choices (Shane et al., 1995).

In addition to this, CADIM will experience costs on account of coordination, communication and control difficulties (Buckley, 1985). However, these may be temporary and decrease over time as CADIM gains knowledge and experience as explained by the Uppsala internationalisation model of learning (Johanson et al., 1990).

The uncertainty over the continuation of the present political conditions and government policies that are critical to CADIM’s profitability and survival in the host country also poses a threat to their diversification strategy (Dawes, 1995). Furthermore, some developing countries have strict rules regarding the repatriation of earnings back to the investor’s home country and any change in government policies may worsen this problem.


Dunning’s (1988) eclectic paradigm explains the importance of location choice in realising full benefits of an investment. The location must possess advantages which can help the company benefit from internalising its operations in that location, while making use of its competitive or ownership advantages. The paradigm hence proves the need for CADIM to evaluate the nature of the host country. Frameworks used to evaluate emerging markets concentrate on factors such as the political environment, economic stabilization, infrastructure, cultural issues and demand factors (Kobrin, 1976).


The political and legal environment of India influences the attractiveness of the country as an investment site partly due to the fact that economic activity can only flourish in stable political conditions (Dawes, 1995). The ability of a government to implement its goals is a key political factor looked at by companies when evaluating a potential market (Dawes, 1995). India having a fragmented Government, run by many minority governments made it difficult for important decisions to be made rapidly. CADIM should consider this as the country’s development is at risk of slowing down which will eventually affect its investment in the country. Furthermore, the involvement of Western business in the Indian economy is a highly sensitive issue especially since India has a history of British colonisation. As a result of this, many restrictive rules on real estate investments are in place. Goodnow (1985) highlights the importance of assessing the effects of these host government policies and rules on investment. Additionally, India is ranked the 70th most corrupt country. Governmental corruption implies not only low efficiency and excessive red tape, but also costs of bribery (Schenkar and Luo, 2004).


When considering economic factors CADIM should keep in mind that a stable price environment is crucial for sustaining long term growth. India has a volatile and fluctuating exchange rate hence CADIM should consider that the Indian currency can depreciate as rapidly as it appreciates despite the foreseen trend of appreciation. Furthermore, India’s high rate of inflation is further proof of its unstable economy hence posing a big economic risk. However, on the positive side India is experiencing a rapid growth in Gross Domestic Product (GDP) and has risen from 4.3% in 2003 to 9.2% in 2007 showing an increasing level in economic activity.


India’s infrastructure should also be looked at as part of the decision criteria to invest in the country (Dunning, 1995). An analysis of India’s infrastructure proved it to be aging and unable to handle the rapid growth experienced by the country. This may present additional costs to CADIM when attempting to renovate or reconstruct infrastructure.


Language remains a key characteristic of culture (Dawes, 1995). A common language reduces cultural distances and speeds up communication. Cultural distance is defined as “the difference between national cultural characteristics of home and host countries” (Brouthers, 2002). Indian citizens have been educated in english hence are fluent in the language. In addition to this the western influence exerted by the British in colonial India has further reduced cultural distances. Companies tend to invest in countries with less of a cultural distance from their home country as the less the cultural distance the more applicable CADIM’s procedures, routines and techniques will be, in India (Madhok, 1998).

Demand factors

Industry competition in the host country should also be considered by CADIM as the intensity of this competition directly impacts gross profit margin from local sales and a firm’s market position (Goodnow, 1985). The shortage of and high demand for hotel rooms in India due to a growing population, proves that competition is low. In addition to this, the present and forecasted growth in the residential market, which Root (1987) considers vital factors in considering a host location for diversification, presents a good opportunity for CADIM to exploit. Furthermore, an increase in purchasing power means, more people can afford to buy houses hence increasing opportunities for CADIM.

India may not seem like a good location to invest in with its unstable economic system presenting an economic risk and its fragmented political system not to mention its ageing infrastructure. However, the returns achievable from exploiting its growing population, demand, GDP and purchasing power may possibly outweigh these risks.


In assessing the risk of the investment, CADIM needs to assess the attractiveness of the host country by balancing the benefits, costs and risks of investing in that country (Hill, 2009). Both India and China are fast growing nations and CADIM can benefit from exploiting their high demand for real estate and high purchasing power. However, China does present more risks than India, in that its legal system can be changed at will by the Government. The implication of this is that if at any time China has conflicts with Canada, the Government may amend rules in order to restrict FDI. In addition to this no clear land titles in China makes it very hard for CADIM, dealing in real estate, to operate efficiently. This poses bigger legal risks compared to India where the legal system is established. Furthermore, China is prone to earthquakes which can prove to be very costly to a real estate company and would outweigh any possible infrastructure costs that CADIM would incur in India. The cultural distance between Canada and China is larger than with India, hence creating unnecessary costs of communication. Therefore, India seems to be a better location for investment.

As for mode of entry, CADIM could consider investing in India and maintaining 100% ownership ( wholly owned subsidiary). However, this is often a very expensive and risky approach given CADIM does not have much experience in that particular marketplace hence, local partners may be very helpful in dealing with all sorts of local barriers. Plus, the market growth rate in India is high and demand unmet hence, in order to benefit from first mover advantages like building customer loyalty (Hill, 2009), CADIM should attempt to establish itself as rapidly as possible using a joint venture mode of entry. Brouthers et al (2002) used the perceived environmental uncertainty concept in explaining MNEs’ choice between a joint venture and wholly-owned subsidiary. They highlighted that the level of risk was a significant determinant of international entry mode decisions. Since there are risks associated with investment in India such as economic risks, CADIM should consider a joint venture with a local firm. An international joint venture is an agreement between two or more partners to own and control an overseas business (Rugman and Hodgetts, 2003). Not only will this enable them to make use of the local market knowledge that the indiginous firm possesses but it also reduces the risk of the large investment. Dawes (1995) highlights how joint ventures allow direct access to local expertise and contacts in managing cultural adaptation and acceptance. Furthermore, firms prefer a JV entry mode because restrictive local policies have less an impact on a jointly owned foreign business than a purely wholly-owned foreign business (Brouthers, 2002). This is especially beneficial when investing in India as protectionist Government attitudes have led to the implementation of a vast number of restrictive policies. A joint venture mode is said to avoid these problems as the local company is well acquainted with, and has methods in place to manage these restrictions (Cui, Jiang, and Stening, 2007).

Entry via a joint venture can be a temporary short term strategy in order to assess whether future growth conditions are as promising as forecasted. Another advantage of joint ventures is that costs of market exit are reduced, benefitial, if growth is in decline or if joint venture performance is not satisfactory. CADIM needs to keep in mind that joint venture performance and, ultimately, partners’ satisfaction with operations however, can be affected by partners’ commitment to JVs, inter-partner conflicts and any imbalance in parent firms’ influence in formulating JV strategy (Demirbag and Mirza, 2000). Harrigan (1984) argues that “the key to successful joint ventures will be a meeting of minds. Effective joint ventures depend upon trust, but they are often forged as a compromise between two or more parent firms who would rather own the child wholly”. Therefore, to avoid these problems, parent organisations should endeavour to create mechanisms which can resolve conflicts as they emerge, a regular meeting of executives being a start (Demirbag and Mirza, 2000).

If growth is promising in the long term, CADIM, when having fully accumulated enough knowledge and expertise, can opt to transform itself in to a wholly owned subsidiary. The internationalisation model explains how companies investing abroad gain knowledge and experience in time and hence internalize even further by increasing commitment and resources to the investment (Johanson et al., 1990).

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