Chapter 9: Problem 1

Multinational enterprises may diversify their operations along vertical, horizontal, and conglomerate lines within the host and source countries. Distinguish among these diversification approaches.

Short Answer

Expert verified

Vertical diversification involves expanding operations within different stages of the same industry. Horizontal diversification involves moving into different markets at the same stage of production. Conglomerate diversification involves expanding operations into altogether different, unrelated industries. The choice depends on the firm's strategies, resources, and market opportunities in host or source countries.

Step by step solution

Understanding Vertical Diversification

This approach involves expanding operations into different stages of the production or distribution within the same industry. For example, a car manufacturer diversifying into parts manufacturing.

Understanding Horizontal Diversification

Horizontal diversification occurs when a firm extends its operations within the same stage of production or distribution, but into other markets or industries. For example, a car manufacturer diversifying into motorcycle or truck manufacturing.

Understanding Conglomerate Diversification

Conglomerate diversification refers to the expansion of operations into different industries altogether, which are unrelated to the firm’s current industry. An example could be a car manufacturer diversifying into the food industry.

Distinguishing Among the Approaches

In distinguishing these types, it is important to consider the level and type of integration involved. Vertical diversification has to do with integration along the value chain within the same industry, horizontal diversification involves exploring different markets within the same stage of production, and conglomerate diversification involves moving into entirely distinct industries. The type of diversification a company chooses depends on its strategy, resources, and the market opportunities available in the host or source countries.

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