International diversification and firm Value

This paper is an interesting one as it seeks to investigate the value of a firm after having it undergo international expansion. The Ohlson model (1995) tests the value of foreign investment and returns as compared to local investment value. Secondly, this paper looks at the valuation effects of certain types of internationalisation. A limitation of this paper is that it only tests firms based in the United Kingdom. Furthermore, the test sample is relatively small – 1991-1996.

However, despite a small and short sample, the study attempts to prove two potent facts. Firstly, multinational firms have higher earnings and net assets worth as compared to domestic firms. At an apparent glance, this finding seems to fall bland as it would be a layman's perception that a multinational firm would be higher in both value aspects as compared to domestic firms. Since expansion is a reflection of a cash cow, international expansion especially would reiterate that the firm has enough net value, in terms of liquid assets to be able to expand offshore.

International expansion would entail costs that are substantial for a company operating locally. Due to this, the general nuances would be that multinational firms have higher earnings and net assets worth as compared to domestic firms. A clear question at this point of the paper would be though, to question on the liquidity of assets of a multinational firm, since initial expansion would require procurement of non-liquid assets for a company to establish a branch, even a small one, overseas.

Further personnel would have to be trained, moved and provided with a fair amount of necessities and in some cases, luxuries, to maintain a firm's establishment overseas. Here we can inquire on the liquidity of net assets worth – how much the pie constitutes of cash? Secondly, the research shows that for multinational firms there is no difference in earnings and net assets worth for their local branches as well as the international branches. This is an interesting result.

Would it be really possible for all offices internationally to have the same earnings and net assets worth? Are multinational companies so well versed in strategic management that their knowledge of international markets has been able to allow them to continue to generate equal amount of income as their flagship market? How is this possible that there is no differentiation between the two? This could even indicate that management is cloned across the different countries of operations that no one branch is able to lose out on business opportunities.

From a logical point of view, no two countries are exactly the same in infrastructure that the need or demand for a particular products or service should be so similar that a firm operating in both countries would be able to reap equal rewards. A possible initiative of this finding would be to assume that the firm has engaged in the blue ocean strategy where they have moved out of the "market" as they know it and have created a unique demand for themselves. With this new demand, it may seem that across the markets, there are consumers that fall within their target market for the new product or service.

With the appropriate pricing and managerial accounting for costs, there may be a possibility that there would not be a distinctive difference between net worth assets and earnings. This assumption is far-fetched, but is the only critical suggestion at this point of the paper. The paper describes internationalisation as a form of unit trust investment where diversification of market focus allows the firm to reduce risks – through the off-setting of one country's risk to another.

This is an interesting perception as it is true that a market's shortfall could represent another's recovering economy. However, this diversification has to be done in a way where markets are not interlinked or overly reliant upon each other. For example, during the Asian economic crisis in 1997, all Asian countries, especially those located in South East Asia experienced the worse market dip in the history of Asian economies – months prior to that, their economic performances were on the rise.

Multinationals who were stationed in two or more countries, or who relied heavily on income generated from these Asian markets, experienced a sharp decline in income. If multinationals did not possess strong footing in other countries unaffected by the downturn, it would be highly likely that liquidation would follow through. The study is actually an interesting one as it encompasses interesting aspects of international growth – especially with regards to pricing according to different levels of demands in different markets.

Since the empirical findings are only true for UK based firms, it would be interesting to run the same studies on firms based in the developing economic world. Though the first finding may prove to be identical to this paper's the second may differ – especially when internationalisation of firms in the developing world is usually held with higher regard by local consumers. However, it can be perceived that prices for products and services would also increase locally.