The forgotten strategy.

Abstract

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.