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Geographical Diversification

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.


Further Reading


Geographical and product diversification during instability financial period: Good or bad for banks?
papers.ssrn.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Global/industrial diversification and analyst herdingGlobal/industrial diversification and analyst herding
www.tandfonline.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Weather risk management in ski resorts: Financial hedging and geographical diversificationWeather risk management in ski resorts: Financial hedging and geographical diversification
www.sciencedirect.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

How do interdependencies among human‐capital deployment, development, and diversification strategies affect firms' financial performance?How do interdependencies among human‐capital deployment, development, and diversification strategies affect firms' financial performance?
onlinelibrary.wiley.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Derivatives hedging, geographical diversification, and firm market valueDerivatives hedging, geographical diversification, and firm market value
www.sciencedirect.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Geographical diversification, risk and firm performance of US casinosGeographical diversification, risk and firm performance of US casinos
www.tandfonline.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Geographical diversification and bank performance: Evidence from ChinaGeographical diversification and bank performance: Evidence from China
www.sciencedirect.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Impacts of media conglomerates' dual diversification on financial performanceImpacts of media conglomerates' dual diversification on financial performance
www.tandfonline.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …

Corporate social responsibility and systematic risk of restaurant firms: The moderating role of geographical diversificationCorporate social responsibility and systematic risk of restaurant firms: The moderating role of geographical diversification
www.sciencedirect.com [PDF]
… If the geographical areas have marginal economic differences, more extreme geographic diversity mixes … Shiers (2002) on a sample of American banks geographically diversified in different states shows that there are no benefits for banks, in terms of ROE or ROA, in …



Q&A About Geographical Diversification


Why do large multinational corporations have a high degree of geographic diversification?

To lower 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.

What is the definition of 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.

How does geographical diversification reduce risks?

By reducing overall risk, it reduces business and operational risks.

How can you reduce risk by investing in a variety of assets?

By investing in a variety of assets, investors can reduce their overall risk and volatility.

What is diversification?

Diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk.