DOI: https://doi.org/10.62204/2336-498X-2023-1-8

FINANCIAL INSTRUMENTS AS A SOURCE OF FACILITATING

DIVERSIFICATION STRATEGY IMPLEMENTATION FOR

ENTERPRISES

Dmytro Voronets,

Ph.D. in Economics,

Vadym Hetman Kyiv National Economic University

dmitry.ovm@gmail.com; ORCID: 0000-0002-1972-8574

Olga Garafonova,

Doctor of Economical Sciences, Professor, 

Vadym Hetman Kyiv National Economic University

ogarafonova@ukr.net; ORCID: 0000-0002-4740-7057

Annotation. This article focuses on the role of financial instruments as a crucial source for the successful implementation of the diversification strategy for enterprises. Diversification has become an essential tool in ensuring the stability and competitiveness of enterprises in a dynamic market environment. The article explores various financial instruments that can be utilized by enterprises to secure the required funding for new projects and the development of new business directions.

Keywords: financial   instruments, investment   activity, investment resource, diversification, enterprise, financing, strategic planning, risk, development.

The urgency of research. Financial instruments serve as a crucial resource in ensuring the successful implementation of enterprise diversification strategies. They enable financial operations aimed at expanding the range of services and products, exploring new markets, and addressing competitiveness challenges.

In international economic relations, financial instruments play a significant role in attracting external investments and resources for diversification projects. They help ensure financial stability for enterprises and reduce the risks of financial losses. However, it is important to note that the selection of optimal financial instruments should be based on a careful analysis of the risks and opportunities associated with diversification strategies. Inappropriate use of financial instruments can lead to undesirable consequences and worsen the financial position of the enterprise.

Thus, well-implemented financial instruments represent a significant source of support and stimulation for the realization of enterprise diversification strategies, contributing to its sustainable development and enhanced market position.

Target setting involves identifying possible perspectives for using financial instruments during the implementation of enterprise diversification strategies in the modern economic development context.

Recent scientific research and analysis of financial instruments and their role in investment processes have been conducted by prominent scholars such as Ignatyuk V., Malakhova Y., Sukmanyuk V. [1], Rudenko O. [2]. The characteristics of financial incentives within the context of state investment policy have been explored in the works of Lihonenko L. [3], Shevchuk I. [4], Hotsulyak L. [5], Tokmakova I. [6]. Researchers like Bryn P. [7], Tsogla O. [8], Margasova V., Garafonova O., Sakun O., Fedorenko A., Yankovoi R. [9] investigate the impact of financial instruments on diversification development in the context of global trends. Additionally, Bodie Z., Kane A., Marcus A. G. [10] study the role of financial instruments in stimulating investment activity and business diversification. Their research contributes to a comprehensive understanding of this issue and provides practical recommendations for effective utilization of financial instruments by enterprises.

Therefore, scholars worldwide are actively working on investigating financial instruments as a critical element for successful implementation of diversification strategies in enterprises, which ensures sustainable development and enhanced market positioning.

Uninvestigated aspects of general matters defining. Scientific research in this field helps identify effective instruments for enterprise operations, promoting their stable development and increased competitiveness in the market. Unexplored aspects in defining general issues are related to the lack of information about specific and practical financial instruments that support the successful realization of diversification strategies by enterprises.

The statement of basic materials and Conclusions. The implementation of diversification strategies is a crucial task for enterprises, especially in a dynamic market environment. Diversification enables expanding the range of products and services, reducing risks, and enhancing competitiveness. However, successful implementation of such strategies requires sufficient financial resources. Financial instruments play a pivotal role in providing the necessary means for diversification efforts. Offering loans, issuing stocks, bonds, leasing, venture capital, and other instruments allow enterprises to secure the required funds for expanding operations and exploring new directions. This list of financial instruments should be viewed as a range of possibilities that can assist enterprises in executing successful diversification strategies and achieving sustainable growth. The author has identified a list of ten financial instruments that can serve as sources for facilitating the realization of diversification strategies for enterprises:

1. Bank loans and credit: Providing financial support for expanding activities and venturing into new directions.
2. Equity capital: Utilizing internal resources of the enterprise to finance new projects and investments.
3. Stock issuance: Attracting funds through the issuance and sale of new shares on the capital market.
4. Bonds: Issuing corporate bonds to secure long-term financing.
5. Mortgage loans: Obtaining financing by pledging real estate or enterprise assets.
6. Leasing: Acquiring equipment and other assets through leasing agreements with the right to purchase.
7. Venture capital: Investing in startups and promising projects to generate profits.
8. Corporate bonds: Issuing bonds on the corporate debt market.
9. Derivative instruments: Utilizing futures, options, and other financial derivatives to mitigate risks.
10. Foreign investor attraction: Attracting foreign investments to develop new ventures and diversify business activities.

Bank loans and credit are one of the most common financial instruments that enterprises can utilize to facilitate the realization of their diversification strategies. This instrument allows companies to obtain the necessary funds for expanding their activities, developing new products or services, and exploring new directions. The acquired loans can be used by enterprises to invest in new technologies, expand production capacities, launch marketing campaigns, or develop new markets. Credit resources help businesses secure the required amount of financing that may otherwise be unattainable through their limited internal financial resources.

One of the main advantages of bank loans is their flexibility. Enterprises can choose different types of loans based on their needs and repayment capabilities. Additionally, there are various loan conditions such as interest rates, terms, and repayment methods that can be negotiated according to the enterprises’ capacities and requirements. However, the use of bank loans is also associated with risks. Enterprises must plan their solvency and ability to repay loans considering current and future financial constraints. Moreover, there is a risk of changes in loan conditions from the banks’ side, which may impact the financial standing of the enterprise.

Overall, bank loans and credit are essential instruments for enterprises seeking to implement their diversification strategies, helping them secure the necessary financial resources for growth and the implementation of new business directions. Equity capital is another critical financial instrument for enterprises that can be used to support the implementation of diversification strategies. It represents the internal resources of the enterprise, such as profits, reserve funds, accumulated capital, and other assets. One of the main advantages of using equity capital is that it allows enterprises to avoid payments for credits or loans, reducing their financial expenses and risks associated with external obligations. Equity capital also provides enterprises with more flexibility and independence in decision-making since they are not dependent on external creditors or investors.

To utilize equity capital for financing new projects and investments, enterprises can employ various strategies. For instance, they can increase the size of reserve funds or accumulated profits, which can then be directed towards new projects. Enterprises can also conduct a restructuring of their equity capital by reallocating some assets or selling inefficient divisions to attract additional financial resources.

The use of equity capital allows enterprises to establish a stable financial foundation for developing new business directions, expanding product or service offerings, and effectively responding to changes in market conditions. It is important to strike the right balance between utilizing internal resources and attracting external sources of financing to ensure sustainable development and achieve set objectives.

Equity issuance is another effective financial instrument for enterprises aiming to implement a diversification strategy and facilitate business growth. This instrument involves the issuance of new company shares and their sale in the capital market, attracting funds from investors and potential shareholders. The process of equity issuance begins with the company identifying the need for additional capital to develop new business directions or invest in existing or new projects. The enterprise determines the number of shares to be issued and the price at which they will be sold in the market.

During the equity issuance, the company may employ various methods of sale, such as an initial public offering (IPO), private placement of a share package, or issuing additional shares to existing shareholders (secondary offering). This process is typically conducted with the involvement of investment banks, which help attract potential investors and carry out a successful issuance. The funds raised from equity issuance can be used to finance new projects, expand the company’s activities, acquire new enterprises or technologies, or repay debts or enhance the company’s capitalization. One of the advantages of equity issuance is that the company raises funds without being obligated to pay interest or compensate creditors. Additionally, equity issuance allows the company to attract a broad range of investors, increasing its attractiveness in the market and promoting business development.

However, equity issuance also comes with certain risks, such as dilution of ownership structure, the possibility of losing control over the company if a significant portion of shares is sold, and the need to ensure a high level of transparency and trust from investors. Therefore, before conducting equity issuance, the enterprise should carefully analyze the risks and benefits of this financial instrument and adopt an appropriate strategic approach to its implementation. Bonds are another significant financial instrument that helps enterprises implement their diversification strategy and secure stable and long-term financing. Corporate bonds are debt securities that companies issue to attract capital from investors.

When a company decides to issue bonds, it sets a specific amount of debt that it commits to repay with interest over a defined period. Such bonds may have different maturity terms, for example, 5, 10, or 20 years, enabling the company to attract long-term financing for important projects and the development of new business directions. The advantages of bonds include the ability to raise funds at a lower interest rate compared to loans or bank credit. Additionally, bond issuance does not require the company to sell a share of its stocks, allowing it to retain control over the business.

The terms of bond issuance, such as interest rates, maturity period, and other conditions, are determined by the company based on an analysis of financial indicators, risks, and financing needs. Investors, in turn, consider bond issuance as a means of placing their funds to generate stable, long-term income. However, bond issuance is associated with certain risks, particularly the risk of insufficient solvency of the company to repay the debt and interest, which can lead to a decrease in investors’ confidence. Therefore, the company must approach the bond issuance process with great responsibility and ensure timely and stable repayment of the debt and interest.

Mortgage loans are one of the important financial instruments that businesses can use to secure financing for their projects and investments. This type of credit is based on the collateral of real estate or other assets owned by the company. When a company needs additional funds for a new project or business expansion, it can approach banks or other financial institutions to obtain a mortgage loan. In this case, the company pledges its real estate or other assets with sufficient market value to ensure the reliability of loan repayment.

One of the advantages of mortgage loans is that they provide businesses with access to additional financial resources on more favorable terms. Since the credit is secured by collateral, it reduces the risk for the creditor and allows for a lower interest rate on the loan. As a result, the company can obtain the necessary funds at lower interest costs, making its projects more efficient and profitable. It is also important to note that mortgage loans allow businesses to use the pledged real estate or assets even during the loan repayment process. This enables companies to continue effectively using their assets for business development, providing a more flexible approach to financing. However, it is worth mentioning that mortgage loans also carry certain risks for the company. In case of failure to fulfill obligations to the creditor, the company may lose the pledged real estate or assets. Therefore, before taking a mortgage loan, the company should carefully assess its solvency and ensure a reliable strategy for loan repayment.

Leasing is a popular financial instrument that allows businesses to acquire necessary equipment and other assets through a rental agreement with an option to purchase. This mechanism becomes an effective solution for enterprises that require specialized equipment for their activities but lack sufficient financial resources to purchase it outright. In a leasing agreement, the lessor, usually a financial company or specialized leasing intermediary, acquires the equipment using its own funds and provides it to the lessee (the enterprise) for rent. The lessee is obligated to make regular lease payments, similar to rent, throughout the leasing agreement. The agreement can have various terms, ranging from several months to several years.

During the leasing agreement, the enterprise gains access to the necessary assets, enabling it to develop and enhance production efficiency. In some cases, after the leasing term ends, the enterprise may have the option to purchase the equipment for a nominal amount or at a price that has already been partially compensated during the lease. Leasing is especially beneficial for enterprises that require frequent and flexible upgrades of their equipment. After the leasing term expires, the enterprise can renew the agreement for new equipment, allowing it to always have access to modern technologies and equipment without significant capital investments. Thus, leasing enables businesses to implement their diversification strategies, improve efficiency, and competitiveness necessary for sustainable development.

Venture capital is one of the financial instruments aimed at investing in startups and promising projects with high potential for profitability. This type of investment is used to finance innovative technologies and business ideas that have significant risk but may yield high returns in the future. Venture investors, such as venture capital funds, private investors, or corporate venture funds, invest their funds in startups at early stages of development when they typically do not yet generate profits or have a stable financial position. This makes venture capital investments quite risky but can lead to substantial capital growth if the startup successfully develops.

Venture capital is particularly important for innovative industries such as technology, biotechnology, internet startups, etc., where there is high risk but also great potential to disrupt traditional markets and create new revolutionary products or services. After the investment, venture capital usually actively helps startups manage, develop, and find new opportunities. Investors often provide expert advice, support in developing business strategies, and help attract new investors for further funding rounds. Thus, venture capital serves as an essential source of funding for startups and promising projects, helping them realize their ideas and achieve success in the market, while also contributing to the development of innovative ideas and technologies.

Corporate bonds are a type of financial instrument used by companies to secure long-term financing, as opposed to short-term loans or bank loans. When issuing corporate bonds, a company promises to pay bondholders a certain interest income (coupon) over a specified period and return the value of the bonds at a certain point in the future (maturity). Issuing corporate bonds allows companies to raise significant amounts of money to finance their projects, expand their operations, invest in new technologies, or acquire assets. This provides companies with stable access to long-term capital, which can be crucial for strategic development and increased competitiveness.

Corporate bonds can be issued on both the domestic and international capital markets. To successfully raise funds through bond issuance, a company must have a sufficient credit rating, which provides investors with a high level of confidence in the company’s ability to repay the bonds and interest on time. Corporate bonds have different characteristics, such as maturity terms, interest rate levels, interest payment rules, and can be either secured by company assets or unsecured. Investors who purchase corporate bonds receive a stable income stream from interest payments and may also receive the return of the principal amount in the future. Overall, the issuance of corporate bonds is an important financial instrument for companies, helping to ensure stable financing and implement diversification strategies, ensuring stability and success in the market.

Derivative instruments are a complex group of financial instruments based on the value of an underlying asset, such as stocks, currencies, commodities, bonds, etc. The main purpose of using derivatives is to reduce risks associated with fluctuations in the prices of underlying assets and protect the company’s portfolio from unwanted financial risks.

Futures are one type of derivatives where parties agree to buy or sell an asset at a certain price on a specific future date. This allows a company to lock in the price of the asset and reduce the risk of further price fluctuations. For example, a company involved in importing goods can use a futures contract to hedge against currency exchange rate fluctuations, thereby avoiding adverse changes in the cost of the ordered goods.

Options are another type of derivatives where the option holder has the right but not the obligation to buy or sell an asset at a certain price on a specific future date. This provides the company with flexibility in managing risks. For instance, a company may purchase a call option on crude oil to secure the right to buy oil at a fixed price in the future if its price increases, thus mitigating the risk of unfavorable changes in the cost of its products.

In general, using derivative instruments allows companies to reduce risks associated with asset price changes, ensure financial stability, and protect their business from adverse market conditions. However, using derivatives also comes with certain risks, and therefore, careful analysis and consultation with financial management experts are necessary before employing them.

Attracting foreign investors is one of the effective financial instruments for implementing a company’s diversification strategy. Foreign investors can provide significant funding and expertise to develop new business directions, allowing the company to expand its capabilities and enter new markets. To attract foreign investors, a company must take several key steps. Firstly, it needs to analyze its potential competitive advantages and investment opportunities that would attract the attention of foreign investors. Strategic directions that are worth developing with the help of foreign capital should be identified.

Secondly, the company should actively promote its business and opportunities for foreign investors in international markets. This can be achieved through participation in exhibitions, conferences, presentations, and meetings with potential investors.

Thirdly, the company needs to create an attractive investment proposal that includes a clear diversification strategy, development plans, financial indicators, and expected results. Foreign investors typically invest in projects that have a clear and promising business model.

The most common forms of attracting foreign investors are Foreign Direct Investments (FDI) and investment projects on the basis of partnerships or joint ventures. In FDI, the foreign investor becomes the owner of a certain  share of the company and participates in its management, while in joint ventures, a joint structure is created with the participation of foreign and local capital. It is essential to remember that attracting foreign investors also comes with risks, including political and economic risks. Therefore, a thorough analysis, investor selection, and favorable agreements that consider the interests of both parties should be carried out before starting cooperation with foreign investors.

Conclusions. Financial instruments are essential for enabling the implementation of a company’s diversification strategy. These instruments provide companies with the opportunity to attract the necessary resources and financing for expanding their operations and introducing new directions. Based on the analysis of 10 different financial instruments, the following conclusions can be drawn:

Bank loans and credit:

1. Providing financial support for expanding activities and venturing into new directions.
2. Equity capital: Utilizing internal resources of the enterprise to finance new projects and investments.
3. Stock issuance: Attracting funds through the issuance and sale of new shares on the capital market.
4. Bonds: Issuing corporate bonds to secure long-term financing.
5. Mortgage loans: Obtaining financing by pledging real estate or enterprise assets.
6. Leasing: Acquiring equipment and other assets through leasing agreements with the right to purchase.
7. Venture capital: Investing in startups and promising projects to generate profits.
8. Corporate bonds: Issuing bonds on the corporate debt market.
9. Derivative instruments: Utilizing futures, options, and other financial derivatives to mitigate risks.
10. Foreign investor attraction: Attracting foreign investments to develop new ventures and diversify business activities.

The successful implementation of a company’s diversification strategy depends on a thorough analysis and selection of optimal financial instruments, as well as consideration of risks and investor interests. The use of diverse financial instruments can help companies ensure stable growth and enhance their competitiveness in the market.

References:

1. Ignatiuk V.V., Malakhova Yu.A., Sukmanyuk V.M. Modern sources of financing investment needs of the enterprise. Priazovsky Economic Bulletin, 2020, No. 2 (19). [Electronic resource]. URL: http://pev.kpu.zp.ua/vypusk-2-19
2. Rudenko O.A. Features of regulating investment processes and studying investment potential in post-socialist countries. Economics and Management Organization, 2019, No. 1 (33), pp. 85-91.
3. Lihonenko L. O., Molodozhenia M. S. State and problems of implementing economic management in Ukrainian enterprises. Problems of Economics. – 2014. – No. 1. – pp. 65-71. – URL: http://nbuv.gov.ua/UJRN/Pekon_2014_1_9.
4. Shevchuk I. V. Influence of tax policy on investment processes in Ukraine. Bulletin of ZHNAEU, 2015, No. 1 (48), Vol. 2, pp. 160-170.
5. Hotsuliak L. V. Investment policy of developed countries in the context of the emergence of an innovative economy. Effective Economy, No. 9, 2014. [Electronic resource]: URL: http://www.economy.nayka.com.ua/?op=1&z=3330
6. Tokmakova I. V. Development of transport infrastructure potential in the conditions of expansion of international integration as a factor of economic growth of Ukraine [Electronic resource]. Visnyk ekonomiky transportu i promyslovosti. – 20XX.
7. Brin P.V., Perehodova L.O. Diversification of economic activity of enterprises. Bulletin of National Technical University “KhPI”. Series: Actual Problems of Development of Ukrainian Society. 2013. 69 (1042). Pp. 172—175.
8. Tsogla O.O. Formation of competitive advantages of the enterprise through diversification of its activities. Actual Problems of Economics. 2010. No. 4. Pp. 109—115.
9. Margasova, V. G., Garafonova, O. I., Sakun, O. S., Fedorenko, A. Ye., & Yankovoy, R. V. (2021). FINANCIAL INSTRUMENTS OF STIMULATING INVESTMENT ACTIVITY: FOREIGN ASPECT. Financial and Credit Activity Problems of Theory and Practice, 4(35), 121–128.
10. Bodie Z., Kane A., Marcus A. J. Principles of Investments: Translation from English. 4th edition. Moscow: Williams, 2008. 984 p.