Thinking Global? Company Shareholders May Wish You Wouldn't

Compiled By Jill Jusko Despite the globalization of the economy, globalizing company operations rarely benefits shareholders, says a Purdue University finance professor. "There are companies that are successful in global diversification," says Diane K. Denis, an associate professor of management at the Krannert School of Management, West Lafayette, Ind. "But for the average firm, the costs of global diversification appear to outweigh the benefits." "Firms today tend to start from the presumption that global expansion is the way to go," Denis continues. "Actually, the first question for a company should be, 'What can I do better in another country than a local firm in that country can do?'" Denis says solid reasons for firms to diversify internationally include putting a company's strengths -- such as production or marketing -- to work in competitively conducive environments, and increasing operating flexibility. Eli Lilly & Co., Fruit of the Loom Ltd., and Intel Corp. are a few of the companies that have successfully globally diversified. Denis says these companies appear to have more than covered the cost of diversification by the creation of new revenue. "All things being equal, though, it's still difficult to compete with local companies who know their market, understand the language and culture, and have no currency exchange risks," she says. Management tends to like global diversification because it provides more to manage, a more complex organization to run, and more prestige and compensation for top executives, the Purdue professor notes. "But 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."