ABSTRACT
As with vertical integration and diversification, the key issue in geographic diversification is, how does the company add value by diversifying into different countries or regions? In addition to the benefits and costs associated with any kind of diversification, we also see some benefits and costs associated specifically with geographic diversification. These include the potential for cross-subsidization and currency or political risks.
We can analyze geographic diversification at different levels. At the national or industry level, Porter’s diamond model helps us understand why some industries concentrate in certain geographic areas. At the firm level, we can identify four types of international strategies—international, multidomestic, global, and transnational—depending on the extent to which a company emphasizes national responsiveness and global integration. Within a firm, we can analyze the attractiveness of potential markets using a country-portfolio analysis or the CAGE framework.
In all of these cases, behavioral strategy underlies the strategic decisions that companies make. The value a company places on integration (e.g., by having the parent make all key decisions) versus responsiveness to national conditions (e.g., by decentralizing decision making to the geographic unit level) influences the choice of international strategy and how the parent and the geographic units influence one another, eventually determining the success of the company’s geographic expansion.
