International expansion or diversification of an organization enhances additional opportunities and risks, as well (Hitt, Ireland, and Hoskisson, 2009). However, the risks are more pronounced than the opportunities. The leading international risks involved are political and economic. Political risks entail the risk of investment return due to changes in a country’s stability through the influence of the government, legislative structures, military, and foreign policies. This risk intensifies with the increase in investment limits. The result of this risk is enormous and can lead to the decline of the investment returns to the extent that an organization is unable to withdraw the capital investment. On the other hand, economic risks are associated with foreign exchange. This comes as a result of fluctuations in the capital invested. This is triggered by changes in the currency exchange rates. Aside from international risks, there are various limitations to international expansion. The limitation includes cultural differences, industry structure, and market complexity (Hitt, Ireland, and Hoskisson, 2009).
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Significance and scope of the study
Previously, numerous studies have been conducted about risk management in firms during international diversification. Most studies have revealed a significant relationship between these two variables (Harrison, and St, 2008). Although studies have invested a lot in these two variables, little has been done in the ways of handling the multiple risks arising in the entry mode. This is because any single entry mode chosen is influenced by only one risk. This study will purpose to examine political and economic risk influencing international diversification of the organization. Additionally, the limitations involved in the international expansion will also be addressed.
Key Words: International diversification, International risks
Research has revealed that there exists a correlation between international diversification and risk (Hitt, Ireland, and Hoskisson, 2009). International diversification is seen as a way of reducing risk in firms, particularly economic risks. Risk is considered a factor that spurs international expansion. Recently, globalization has triggered the rise in international competition. In turn, this implies more risk for firms planning to expand or diversify the corporations internationally. Therefore, firms should be careful while planning and executing their entry mode internationally. Entry mode is defined by two dimensions namely control ability for operations and resource commitment (Daft, 2010). More specifically, the level of resource commitment and control ability is critical in risk management in international diversification. There are three entry modes into foreign markets. The first mode is where the management entirely controls the firm’s operations by committing many resources. Here, the management bears all the total risk. The second aspect will deal with the sharing of the resources of the firm with other organizations. This will be done to avoid the risks involved in the entire process. The last aspect is where the firm shifts the control of operations as well as resource commitment to evade most risks (Hitt, Ireland, and Hoskisson, 2009).
For this study to examine fully the variables of the study, firms in the line of business will be selected. The researchers will concentrate mainly on the firms conducting business internationally particularly in these eight areas Central/South America, United Kingdom/Australia, Eastern Europe/Western Europe, Soviet Union, Canada, Mexico, Middle-East/Africa, and Japan/Asia. These firms will provide a good background about the two variables. A questionnaire survey will be used for this study based on interview mode and through the mail. Before the questionnaires are sent through emails, a call will be made to all the firms selected. This will seek to identify whether the firms have accepted to participate in the research. Afterward, a questionnaire accompanied with a cover letter and directions for completion will be mailed to the respective firms. The questionnaire to be used will be two-sided. One will entail the general information, whereas the other will contain risk questions based on different world locations for international business.
The following measures will be used; control risk, market complexity, and total risk. The types of risks will be constrained to political and economic risks. Relative to control risk, this will measure three dimensions, first, the duration which the firms have operated in the areas. The next dimension will concentrate on the cultural differences between the regions. The last dimension will feature the industry structure based on the competition in different regions. In regards to market complexity, the different market factors posing risks to firms in each region will be evaluated. These complexities include market infrastructure, demands, and customer tastes. Most of these measures will employ the use of a 5 point Likert scale for comparison reasons. Furthermore, total risk will be computed by combining and obtaining an average of the control risk and market complexity risk.
Decision-making is crucial in international diversification and risk management. Therefore, decisions made by these firms will be evaluated using mental models. The mental models will measure the decision made in the home and foreign markets. This will help to determine the types of risks perceived and experienced in different regions. One way of risk management involves a measure of the differences or similarities between what the firms are initially used to handle at home and the expected situation in the foreign market. Finally, the entry model of the firms into the international market will be measured. The data obtained will be analyzed through the exploratory system. This will involve a comparison of the data to identify trends and the relationship between the variables of study in the selected firms.
Daft, R. L. (2010). Organization theory and design. Mason, Ohio: South-Western Cengage Learning.
Harrison, J. S., & St, J. C. H. (2008). Foundations in strategic management. Mason, OH: Thomson/South-Western.
Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2009). Strategic management: Competitiveness and globalization : concepts. Mason, OH: South-Western Cengage Learning.