Diversification of the economy in a general sense is a strategy designed to reduce risk by adding assets, products or services, as well as customers or markets to an already formed portfolio. For the first time, the concept is found in the body of Judaism, in the Talmud. The described formula is a division of assets into three parts. One part is business, including the purchase or sale of goods, the second part is liquid assets, for example, gold, the third part is funds concentrated in real estate. Perestroika can be called the competent distribution of valuable resources with such a perspective that the loss of one profitable segment does not affect the general state of affairs. This definition is ideal for both the state level and for investment, agriculture, any industry.
Narrow interpretation of diversification
Economic diversification is conditionally divided into the following areas:
- Banking. It implies a redistribution of loan capital between a significant number of customers. In some states there is a restriction on the provision of loans. A financial institution does not have the right to provide a one-handed loan if its size exceeds 10% of the capital of the bank itself.
- Investment. Provides for the inclusion in the portfolio of additional types of securities or similar, but differing in issuers in industries or companies.
- Production. This is an expansion of the product range in the development of new production and production technologies.
- Business diversification is defined as the conquest of new markets, the development of new industries.
- Agricultural. Defined as an expansion of activity: the active development of livestock and vegetation.
- Conglomerate. This is an extension of the list of services and goods provided within one enterprise. In this case, the list of products should not bear any resemblance to the already existing nomenclature.
- Risks This is the use of a wide range of tools for making money. At the investment level, this is a purchase of not only stocks, but also bonds. At the business level, the development of a new policy, at the economic level, is the elimination of dependencies on the world price environment by fully satisfying the needs of the population by state forces.
Bit of history
Market economy was formed in stages. Each stage of development has its own individual characteristics, especially if we take into account the level of specialization and diversification in the aspect of antagonistic forms of building the production industry. For the first time, the concept of “diversification of the economy” manifested itself as the dominant economic category in the 50s of the 20th century. During this period, production efficiency in almost all countries of the world fell significantly as a result of the relative exhaustion of domestic sources. An active battle between states over the world market began. The transformation of production became necessary as a result of vivid prerequisites for a slowdown in the development of economic growth and under the influence of scientific and technological progress. Against the background of the fact that the purchase of innovative technology at that time and the introduction of new technologies into the activities of large enterprises, diversification took the place of the most common form of capital concentration. Enterprises and organizations that tried at the expense of income to expand their sphere of influence and increase the number of sources of income, achieved not only a high level of competitiveness, but also success.
Strategy and its role at the enterprise level
A focus on management in one direction alone defines a wide range of benefits for a business: organization, management and strategy. The fall in the return on capital invested in production leads to the need to use a strategy of redistribution of resources. The diversification of a company or enterprise, acting as a tool to eliminate imbalances in reproduction and logical distribution of resources, plays the role of an important coordinator in the direction of restructuring the entire economy as a whole, thereby setting corporations with a wide variety of tasks and goals. Redistribution is related to the modification of the most essential elements of activity. This is the finished product, and the industry, and the market, and the place that the company occupies in a certain field. In an actively developing macro environment, the process acts as a kind of basis for achieving a completely new level of market flexibility, both internal and external. The decision as to whether or not to apply a diversification strategy is made on the basis of forecasting the future. The true concept of the process is associated with the active development of the company, with the conquest of new areas of its impact. If the company continues to accumulate capital, then the redistribution process does not play the role of the main strategic goal.
Economic diversification
Diversification in the economic aspect means restructuring, which is aimed at modernizing and actively developing a wide variety of industries. Perestroika is very relevant for Russia, in the development of which only three sectors play the most significant role:
- Military.
- Industrial.
- Energetic.
As for tourism, the agricultural segment, the production of consumer goods, the service sector, these areas are poorly developed. A critical percentage of consumer-oriented goods is a consequence of imbalance in the economic sector. This leads to the fact that Russia is strongly exposed to instability in terms of inflation. The high inflation rate leaves its mark on the formation of high interest rates on loans. So, mortgages and other types of financing for private and legal entities are simply inaccessible to a fairly wide range of people. The structure of the economy, which is today characteristic of the country, serves as nothing more than a brake on development. For the overall development of the state, it is extremely important to stimulate the development of completely unrelated industries, in particular, automotive and tourism, agriculture and food production.
Restructuring Benefits
Diversifying the economy offers many benefits. The main one is the complete independence of the state of one economic sector from another. If difficulties arise within the framework of one market, the decline of the entire economy of the state will not occur. The disadvantages of the process include the need to take into account the numerous differences between markets and the specifics of their service, between the intricacies of the production of different types of products. Due to the fact that the Russian government did not expand the range of manufactured goods, did not master new types and types of production, did not change the types of products, that is, did not modernize production, today the country's economy is in complete decline. The cause of the decline can be called the statistical state of investments that were previously directed to the oil and gas industries. Due to the drop in oil prices and the imposition of sanctions by the EU, the Russian budget is not replenished in the planned volume, and domestic production cannot meet the country's needs. That is why, at this stage of development, diversification of the Russian economy is extremely necessary, not only for prosperity, but also for the opportunity to survive the crisis. Until the process is activated, the world elite has a chance to influence the country by changing the global pricing environment, in particular fuel.
Who needs diversification of the economy?
The diversification goals are ideally suited for those states whose development and prosperity are closely related to the export of minerals and the sale of natural resources. Russia is one of the countries that needs a complete restructuring of the existing economy in accordance with a more efficient model. Countries such as Chile and Malaysia, Indonesia and many others can serve as a worthy example of a successful modernization. It is worth paying attention to the multi-level procedure when studying the question of what is the diversification of the economy. The definition leads to the fact that this task is overwhelming for most countries of the world that have been successfully surviving for more than a decade due to the extraction and sale of minerals. Despite the active statements of politicians and analysts, in the vast majority of situations, everything remains at the level of conversation.
Work for the future
The main feature of the process of economic restructuring is that a wide range of activities is carried out today, and the results are achieved with a significant time delay. In other words, diversification, examples of which are very difficult to find in history, is essentially a long-term job. The result of the measures taken in the present tense will bear fruit for a long period of time. Active investment in various sectors of the state’s activities, including in the service sector, in the tourism industry, in production, gives a good impetus to the active prosperity of private enterprise. Relations between sectors are actively beginning to line up, and preconditions will be formed for an active increase in trade turnover within the international market. All this will lead to an improvement in the living standards of the population, to an increase in demand and the formation of proposals. The increase in domestic trade in the country in tandem with the strengthening of material flow will raise the general economic indicators of the state.
The subtleties of the Russian economy and the relevance of diversification
The development of a state with huge raw materials, in particular Russia, has characteristic features. In the prevailing number of situations, the rate of extraction of energy resources is significantly lower than the population growth rates. Over time, the level of profitability per capita gradually decreases. It is worth noting that the extractive industries are not able to provide a sufficiently large number of jobs. This all leads not only to the formation of a social threat, but also negatively affects the standard of living. The risk of a crisis arises as a result of active growth in unemployment. Russia, being a merchant exporter of natural resources, is almost completely dependent on the international pricing environment. Despite the use of agreements between countries on an acceptable level of prices for raw materials, there is a risk of a sharp change in pricing policy. The risk was justified in the situation that developed in 2015. The fall in oil prices led the Russian economy to decline. The concept of diversification implies a competent redistribution of income from the raw materials industry between all other areas of the state’s activity, otherwise the “Dutch disease” may occur.
What will save Russia?
Russia is characterized by large volumes of resource extraction. The main problem is not only that income from the industry goes into the pockets of the privileged part of the country's population. Difficulties in the development of the state are related to the direct relationship between the volumes of resource extraction and the level of corruption. The most elementary option for generating large capital is to appropriate income from the energy industry. When the formation of the dominant part of the budget is carried out at the expense of taxes of mining companies, the Russian leadership does not feel much responsibility to other areas of activity due to their insignificant contribution to the economy. The state of affairs dictates the relevance of the restructuring. Diversification of business, industry, production, all sectors will be the country's response to the dictates of the world market. The manifestation of political will and significant efforts can change the situation radically.
