Question 2,6,7 Essay Example | Topics and Well Written Essays - 2500 words

Question 2,6,7 - Essay Example Firm diversification is a central issue of importance to managers. The research literature on the subject of diversification affirms that over the past two decades the growth in the globalization of markets and products by firms has been tremendous. Globalization as a concept is used often to imply a condition of increased mutual interdependence among nations. The given condition depends on a number of factors. First, there is decreased governmental policy on trade barriers. Second, free international movement of capital across borders. Third, there is high volume of foreign direct investment. Fourth, there is migration of the workforce across the borders. Finally, there is exchange of services and goods among the nations involved in trade. However, despite the recorded increase in diversification by firms, the definite factors that contribute to diversification remain debatable among firm managers. The drivers of a firm’s diversification decision-making process can be explained with the aid of two theoretical frameworks. Namely, the Resource Based View and the Transaction Cost Theory. The resource-based view theory offers an understanding of the choice of industries into which a firm diversifies. According to the theory, a firm is best viewed as a collection of resources that enable it to compete against other firms. The theory suggests that the potential of a firm to gain and maintain a sustained competitive advantage relies on its defined resources (Wierseme, 2008). Firms that have the ability to develop unique and difficult to imitate resources, are more likely to engage in diversification compared to other firms with no such unique and inimitable resources. The transaction cost theory of strategic management also offers an understanding of firms drivers for diversification. The theory holds that firms diversify when the firms’ activities can be performed cheaply within the company,