UNAIR lecturer studies company diversification comparison at international business level

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Illustration by Feri Fenoria

UNAIRNEWS – Drs. Ec. I Made Sudana MS with Nugroho Sasikirono SE., MM, lecturer of Faculty of Economics and Business, Universitas Airlangga, reviewed the concept of corporate multinationality which is often used to assess the contribution of a company in international business. According to Made, this multinationality can measure the ratio of exports to total sales number is directly proportional to the level of international diversification.

International diversification, according to him, is one of the schemes that shows the company’s competitiveness level, especially in minimizing risk and increasing revenue. Quoting data from the Central Statistics Agency (BPS), Made showed that one of the most common diversification methods, exports, has continued to increase since 2000 at $ 62M to $ 145M in 2016.

International diversification triggers companies not to keep cash as a precautionary in large amount. The companies also have easiness in finding new sources of funding along with more diverse countries in which they operate.

Other diversification besides international operation is diversification of product lines. Made thinks that international and product diversification are carried out in the hope of increasing profits.

By conducting research on 125 companies (80 listed on the IDX, and 45 on Euronext Amsterdam) as samples using multiple linear regression, Made initially suspected that product diversification would weaken the relationship of international diversification with cash holdings.

“The analysis showed that multinationality has a negative effect on the level of cash ownership in all sample groups,” he explained.

Furthermore, companies that conduct international diversification can minimize both systematic and unsystematic risks. In the sample group of Indonesian companies, the results of the study showed that companies that sell products to various countries have higher cash levels. While Dutch companies’ product diversification and cash levels in certain regions are not influenced.

“We believe that companies with capabilities and experience with developed product and international diversification are able to manage the dynamics of the two dimensions of diversification better,” said Made agreed that capable companies will also be more efficient in managing their diversification schemes.

Author: Tsania Ysnaini M

Editor: Nuri Hermawan

Detailed research results can be accessed at: https://doi.org/10.1504/IJMEF.2019.100265 . I Made Sudana, Fahima Budi Imaniar, Nugroho Sasikirono, Sanju Kumar Singh. (2019). Diversification and cash holdings: comparison between Indonesia and the Netherlands firms. International Journal of Monetary Economics and Finance (IJMEF), Vol. 12, No. 2, pp. 133-151.

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