What is ‘Geographical Diversification’
The practice of diversifying an investment portfolio across different geographic regions so as to reduce the overall risk and improve returns on the portfolio. The term also refers to the strategy employed by large companies of locating their operations in different regions or countries in order to reduce business and operational risk.
Explaining ‘Geographical Diversification’
As with diversification in general, geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another. For example, if the US and European stock markets are declining because their economies are in a recession, an investor may choose to allocate part of his portfolio to emerging economies with higher growth rates such as China, Brazil and India.
Most large multinational corporations also have a high degree of geographic diversification. This enables them to reduce expenses by locating plants in low-cost jurisdictions and also lowers the effect of currency volatility on their financial statements. In addition, geographic diversification may have a positive impact on a corporation’s revenues, since high-growth regions may offset the effects of lower-growth regions.
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