Over the past quarter-century, multinational firms have grown in size and number and have established operations in a greater number of countries. This growth in foreign investment can be explained in part by the exploration for valuable natural resources, the search for low cost labor, and the exportation of advanced technology. Another possible reason for the growth in foreign investment may be that multinational firms achieve greater stability through an international diversification of operations.While the past quarter-century has seen a growth in international diversification at the corporate level, there has also been an increase in international diversification at the shareholder level. Investors and mutual fund managers have appreciated the risk reduction possibilities of including securities from different countries in their portfolios. The possible benefits of international diversification, whether at the corporate lev61 or the shareholder level, stem from the less than perfect correlation of the economic conditions in various countries of the world.The purpose of this study is to update with more recent data, previous investigations that note the potential for gains from international diversification. The results of the present study show that the gains to be realized by either multinational corporations or shareholders through international diversification may have become more difficult to achieve in recent years than has been indicated in prior studies.
Previous ResearchGrubel (1968) developed the theoretical structure which first suggested that welfare gains can accrue to wealth holders through international diversification. Levy and Sarnat (1970) demonstrated that a more efficient portfolio could be constructed for an investor who purchases both domestic and foreign stocks rather than just domestic stocks. Additionally, Grubel and Fadner (1971), using rates of returns for various industries, show that the painvise correlations for intracountry pairs of assets are higher than for intercountry pairs of assets for any given holding period.Robichek, Cohn, and Pringle (1972) found that by lifting restrictions on international diversification a reduction in nondiversifiable risk for each security and a decline in the slope of the capital market line would result. The combined
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