Diversification of Business Risk
A familiar cliché warns “don’t put all of your eggs in one basket.” Applied to business, this cliché suggests that it is dangerous for a firm to operate in only one country. Business risk refers to the potential that an operation might fail. If a firm is completely dependent on one country, negative events in that country could ruin the firm. Just like spreading one’s eggs into multiple baskets reduces the chances that all eggs will be broken, business risk is reduced when a firm is involved in multiple countries.
Firms can reduce business risk by competing in a variety of international markets. For example, the ampm convenience store chain
has locations in the United States, Mexico, Brazil, and Japan.
Wikimedia Commons – CC BY-SA 3.0.
Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If Japanese
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automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the financial consequences could have been grave. Because these firms operate in many countries, however, they were protected from being ruined by events in Japan. In other words, these firms diversified their business risk by not being overly dependent on their Japanese operations.