Studies show costs to operate
global firm outweigh benefits
By Luis Jiménez
Summer
Reporter
Although globalization has increased over the years,
a study conducted by a Purdue professor shows that for the average firm,
the costs of global diversification appear to outweigh the benefits.
Diane Denis, associate professor of management,
along with colleague David Denis and doctoral candidate Keven Yost,
conducted the study that examined 44,288 firm-years over the period
1984-1997.
Denis said the aim of the study was to look at
whether operating in more than one country, on average, was a valuable
thing for firms to do. She also said the study focused on firms that
move operations to other countries, not on firms that export goods to
other countries. And while exports are a type of globalization, exports
alone, do not qualify a firm as globally diversified, she said.
Denis found that there was a trend among firms
to presume that global expansion is the way to go; however, this is
not necessarily the case.
She said there are advantages and disadvantages
of moving operations to another country.
She said the potential of selling more goods and
lowering production costs sometimes drive companies to diversify. But,
diversifying also means making operations more complex and more difficult
to oversee.
"It's often not just as simple as lowering labor
costs by moving an operation to another country," Denis said. "Along
with lower labor costs can come lower productivity."
There are also risks associated with having operations
in a country that uses different currency because of the fluctuating
currency exchange rate.
In light of all the potential pitfalls of setting
up foreign operations, Denis said companies must have some sort of advantage
over local companies. She said local established companies already know
their market, understand the language and culture and have no currency
exchange risks making it necessary for companies — wishing to expand
operations abroad — to exploit some sort of advantage such as technology,
brand reputation or a better product.
Denis said that there is sometimes a divergence
between the points of view of management and shareholders when it comes
to global diversification.
The dissention usually strides in the fact that
management "likes (global diversification) because there is more to
manage, a more complex organization to run and therefore, more prestige
and compensation for top company officials." However, according to Denis'
study, this can also be a disadvantage to shareholders.
"This can be to the disadvantage of the shareholders
because our research shows that, on the average, global diversification
decreases the value of the company."
She said that despite conventional wisdom, the
markets have an awareness of the risks involved in global diversification
for companies.
"We'd like our research results to help minimize
the conflicts between management and shareholder interests that show
up in areas such as global diversification," she said.
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