Pankaj Ghemawat

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 <h4 class="ideainbrief-title">The Idea in Brief</h4>
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 Multinationals’ global operations consistently underperform their domestic operations. Why? These companies’ strategies focus mostly on similarities across their markets: whenever possible, global companies standardize their business models to achieve economies of scale. They view regional differences as obstacles to be overcome—not opportunities to be leveraged.
 This perspective, says Ghemawat, blinds firms to a contrasting strategy: arbitrage, the exploitation of differences (in culture, administrative practices, geographic distance, and labor or capital costs) across markets. Top-notch companies seize advantage of such differences while also leveraging similarities that create scale.
 Consider Cemex. The Mexico-headquartered cement maker arbitraged differences in the cost of capital across Mexico and the United States by listing itself on the New York Stock Exchange (thereby mitigating “Mexico risk”). Yet it also standardized its production-to-distribution chains in major markets. Today, Cemex is the world’s most profitable international cement manufacturer.
 The Idea in Practice
 Ghemawat suggests considering four arbitrage strategies:
 Cultural. Cultural arbitrage exploits differences in culture across countries or regions. Example:&nbsp; 
 Many consumers associate Brazil with football, carnivals, beaches, and sex. Canadian brewer Molson exploited this cultural difference by launching in the Canadian market “A Marca Bavaria”—a superpremium beer imported from Molson’s Brazilian subsidiary. Molson uses the product’s association with Brazil’s high-energy, sensual image to target 19- to 24-year-old men. 
 Administrative. Administrative arbitrage exploits legal, institutional, and political differences across countries. Example:&nbsp; 
 Through the 1990s, Rupert Murdoch’s News Corporation incorporated about 100 subsidiaries in havens with no or low corporate taxes and limited financial disclosure laws. Result? It paid income taxes at an average rate of less than 10%—compared with the statutory 30% to 36% rates of the three main countries in which it operated (the United States, Britain, and Australia). And by placing its U.S. acquisitions in holding companies in the Cayman Islands, the company could deduct interest payments on offshore debt against the profits generated from its home operations in Britain. 
 Geographic. Geographic arbitrage takes advantage of the impact of physical distance on transportation and communication costs. Example:&nbsp; 
 The cost of air transportation has declined more than 90% in real terms since 1930—more sharply than older modes of transportation. The drop has enabled the Netherlands’ Aalsmeer international flower market to thrive. Every day, more than 20 million flowers and 2 million plants are auctioned off through this market. Blooms flown in from as far away as India are sold to customers in the United States or Europe on the day they arrive. 
 Economic. Economic arbitrage strategies exploit cross-country differences in economic factors such as cost of labor. Example:&nbsp; 
 Headquartered in a cheap labor market, Brazilian regional jet manufacturer Embraer focuses its internal operations on final assembly, which is the most labor-intensive part of the production process. It outsources other activities (such as R&amp;D) to its supplier partners. Its employment costs came to $26,000 per employee in 2002, versus an estimated $63,000-per-employee cost of its chief rival, Canadian-based Bombardier.
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</article-ideainbrief>Ten years ago, globalization seemed unstoppable. Today, the picture looks very different. Even Coca-Cola, widely seen as a standard-bearer of global business, has had its doubts about an idea it once took for granted. It was a Coke CEO, the late Roberto Goizueta, who declared in 1996: “The labels ‘international’ and ‘domestic’…no longer apply.” His globalization program, often summarized under the tagline “think global, act global,” had included an unprecedented amount of standardization. By the time he passed away in 1997, Coca-Cola derived 67% of its revenues and 77% of its profits from outside North America.

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Reprint: R0311E 

Most multinationals see globalization as a matter of replication&#8212;spreading a single business model as widely as possible to maximize economies of scale. From this perspective, the key strategic challenge is choosing how much of the model to keep standard and how much to grudgingly adapt to local tastes. But focusing exclusively on that choice is a mistake, for it blinds companies to the very real opportunities they can still gain from arbitrage&#8212;from exploiting differences as opposed to similarities.
Indeed, the scope for arbitrage is as wide as the differences that remain among countries, and those differences continue to be broad and deep. They can, in fact, be divided into four main categories&#8212;cultural, administrative, economic, and geographic. In each category, old opportunities persist and new ones are arising, sometimes very quickly. Consider the continued cachet of French culture in its wines and haute couture. Witness, too, how swiftly the Finns have become known for their expertise in wireless communications. Clearly, legal and other administrative differences, particularly in tax laws and the cost of capital, remain large. So do purely economic wage differentials, especially for knowledge workers and other skilled employees. And if modern transportation and other technologies have reduced geographic advantages and brought down the price of spices, they&#8217;ve also made possible expanded trade in other goods like perishable flowers and out-of-season produce.
Both the differences that make arbitrage valuable and the similarities that make replication important will remain with us for the foreseeable future, and combining the two, while necessary, is tricky. But that spells competitive advantage for those companies that have the imagination to see the full range of possibilities.

The Forgotten Strategy

Reprint: R0311E Most multinationals see globalization as a matter of replication—spreading a single business model as widely as possible to maximize economies of scale. From this perspective, the key strategic challenge is choosing how much of the model to keep standard and how much to grudgingly adapt to local tastes. But focusing exclusively on that choice is a mistake, for it blinds companies to the very real opportunities they can still gain from arbitrage—from exploiting differences as opposed to similarities. Indeed, the scope for arbitrage is as wide as the differences that remain among countries, and those differences continue to be broad and deep. They can, in fact, be divided into four main categories—cultural, administrative, economic, and geographic. In each category, old opportunities persist and new ones are arising, sometimes very quickly. Consider the continued cachet of French culture in its wines and haute couture. Witness, too, how swiftly the Finns have become known for their expertise in wireless communications. Clearly, legal and other administrative differences, particularly in tax laws and the cost of capital, remain large. So do purely economic wage differentials, especially for knowledge workers and other skilled employees. And if modern transportation and other technologies have reduced geographic advantages and brought down the price of spices, they’ve also made possible expanded trade in other goods like perishable flowers and out-of-season produce. Both the differences that make arbitrage valuable and the similarities that make replication important will remain with us for the foreseeable future, and combining the two, while necessary, is tricky. But that spells competitive advantage for those companies that have the imagination to see the full range of possibilities.

The Forgotten Strategy

Summary.

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