International Diversification and Risk

Literature Review

International Diversification and Risk

There were many definitions of corporate diversification. However, diversification word comes from the diverse, which means distinct and different that shows a discrepancy in the firm activities (R. Pitts & Hopkins, 1982). History had shown that foreign direct investment from another country has come since the period of the 1970s and 1980s in the colonial era and after the country's independence. Many multinational companies began to invest in Malaysia since Malaysia has a good demography and natural resource. Scholars have defined diversification as firm enters new sector (Iacobucci & Rosa, 2005), or new industry (Jacquemin & Berry, 1979), or new segment (Denis, Denis, & Saarin, 1999) or a new line of business (C. Montgomery, 1994).

Moreover, according to Ansoff (1957), corporate diversification classified into two groups, product diversification and international (geographic) diversification. The statement given by the scholar can be seen which some multinational invest in the country with the advantage of the country itself. We can get an example of Sime Darby companies which has made investment in Malaysia since 1910 when open first office on Malacca. With the proper structure in geographic had made the company to invest in the country especially in rubber and oil palm. With the foreign direct investment had been constructed, It must have afforded many benefits to the company especially in financial, asset and so on. Cosset and Suret (1995), the benefits of global diversification have been documented by financial economists over the past four decades. The correlations of asset returns across countries are lower than within a country, the volatility of a portfolio's yield can be reduced, without sacrificing its expected return, by investing in overseas assets. It can be seen nowadays where multinational had aggressively broadened their company in many sectors and do not only focus in one sector only.

Each investment which had been made has its own risk, diversification that had been produced by the company has high risk but the return is high and it worth for taking those actions. The caller must make sure when evaluate the risk. Information about risks and uncertainties has become an increasingly important component of financial reporting (Linsmeier & Pearson, 1997, 2000). In addition, investors risk perceptions directly influence their investment decision making process (March & Shapiro, 1987; Weber, 2004). To make a decision many aspect must be seen from the perspective investor. The economy condition in the country also the main factor which will affect the investor either want to invest or not. Research has shown that people's risk perception directly influences their investment decision making process (Weber, 2004; March &