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The Idea in Brief

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 reach economies of scale. They view regional differences equally obstacles to be overcome—not opportunities to exist leveraged.

This perspective, says Ghemawat, blinds firms to a contrasting strategy: arbitrage, the exploitation of differences (in civilization, administrative practices, geographic distance, and labor or capital costs) beyond markets. Top-notch companies seize advantage of such differences while likewise leveraging similarities that create scale.

Consider Cemex. The Mexico-headquartered cement maker arbitraged differences in the toll of capital beyond Mexico and the United States by listing itself on the New York Stock Exchange (thereby mitigating "Mexico risk"). All the same it also standardized its production-to-distribution chains in major markets. Today, Cemex is the globe'southward most assisting international cement manufacturer.

The Idea in Practice

Ghemawat suggests considering 4 arbitrage strategies:

Cultural. Cultural arbitrage exploits differences in culture across countries or regions. Case:

Many consumers associate Brazil with football, carnivals, beaches, and sex. Canadian brewer Molson exploited this cultural difference by launching in the Canadian marketplace "A Marca Bavaria"—a superpremium beer imported from Molson'due south Brazilian subsidiary. Molson uses the production'southward association with Brazil's loftier-energy, sensual image to target 19- to 24-twelvemonth-quondam men.

Administrative. Authoritative arbitrage exploits legal, institutional, and political differences beyond countries. Example:

Through the 1990s, Rupert Murdoch's News Corporation incorporated most 100 subsidiaries in havens with no or low corporate taxes and express 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 information technology operated (the United states of america, Britain, and Australia). And by placing its U.Due south. 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 affect of physical altitude on transportation and communication costs. Example:

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 kingdom of the netherlands' Aalsmeer international bloom marketplace to thrive. Every day, more than xx 1000000 flowers and two one thousand thousand plants are auctioned off through this market. Blooms flown in from as far away as India are sold to customers in the U.s.a. or Europe on the 24-hour interval they arrive.

Economic. Economic arbitrage strategies exploit cantankerous-country differences in economic factors such as price of labor. Example:

Headquartered in a cheap labor market, Brazilian regional jet manufacturer Embraer focuses its internal operations on final associates, which is the most labor-intensive office of the production process. Information technology outsources other activities (such as R&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 main rival, Canadian-based Bombardier.

Ten years ago, globalization seemed unstoppable. Today, the film looks very different. Fifty-fifty Coca-Cola, widely seen every bit a standard-bearer of global business, has had its doubts about an idea information technology once took for granted. It was a Coke CEO, the late Roberto Goizueta, who declared in 1996: "The labels 'international' and 'domestic'…no longer use." His globalization program, ofttimes summarized nether the tagline "think global, human action 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.

But Goizueta's strategy soon ran into problem, due in large part to the Asian currency crisis. By the finish of 1999, when Douglas Daft took the reins, earnings had slumped, and Coke'south stock had lost nearly one-third of its peak market value—a loss of well-nigh $70 billion. Daft's solution was an aggressive shift in the opposite direction. On taking over, he avowed, "The earth in which we operate has inverse dramatically, and we must modify to succeed.…No one drinks globally. Local people become thirsty and…purchase a locally made Coke."

Unfortunately, "local" didn't seem to be any meliorate a description of Coke'south market space than "global." On March 7, 2002, the Asian Wall Street Periodical announced: "After two years of lackluster sales…the "recall local, deed local" mantra is gone. Oversight over marketing is returning to Atlanta."

If the business climate can strength Coke, which historically was (and is) more than profitable internationally than domestically, to seesaw back and forth on globalization in this way, think of the pressures on the typical large company, for which international concern is commonly much less profitable than domestic business organization, equally the sidebar "A Poor Global Showing" reveals.

Since 1990, the foreign operations of large companies accept consistently posted lower average returns on sales than their domestic operations. Nor do strange revenues piece of work equally a hedge confronting slumping domestic results. As the graph beneath clearly shows, foreign and domestic margins more often than not move in the aforementioned direction. Based on data supplied by Michael Gestrin of the OECD, the graph compares the foreign and domestic operating margins for 147 of the companies in the Fortune Global 500 for which such data were bachelor for at to the lowest degree half-dozen years.

Operating Margins

Of course, an international presence could theoretically add value even if international operations were persistently less assisting, in bookkeeping terms, than domestic operations. Say, for case, that meaning stock-still costs incurred at home can be avoided by entering foreign markets. Simply other contempo studies, based on market values rather than accounting information, as well tend to indicate that, on average, an international presence impairs operation instead of improving it.

Such studies are certainly bailiwick to many caveats (about data, inferences of causality, and so on). And in any case, they reflect average tendencies around which there is substantial—and anticipated—variation. So one should non conclude from them that private companies ought never expand beyond their abode countries. A more sensible lesson to depict is that companies need to remember harder almost how globalization can add value instead of bold that if they are profitable at home, they will surely exist profitable abroad.

Why is globalization proving so hard to get right? The respond is related in part to how companies frame their globalization strategies. In many if not most cases, companies see globalization as a affair of taking a superior (by supposition) business organisation model and extending it geographically, with necessary modifications, to maximize the business firm's economies of scale. From this perspective, the key strategic claiming is only to determine how much to conform the business model—how much to standardize from country to land versus how much to localize to respond to local differences. Recently, as at Coke, many companies take moved toward more localization and less standardization. Only no matter how they balance localization and standardization, all companies that view global strategy in this manner focus on similarities beyond countries, and the potential for the calibration economies that such commonalities unlock, as their primary source of added value. Differences from state to state, in contrast, are viewed equally obstacles that need to be overcome.

Correctly choosing how much to accommodate a business model is certainly important for extracting value from international operations. Merely to focus exclusively on the tension between global scale economies and local considerations is a mistake, for it blinds companies to the very real opportunities they could gain from exploiting differences. Indeed, in their rush to exploit the similarities across borders, multinationals have discounted the original global strategy: arbitrage, the strategy of divergence.

Of class, we're all familiar with arbitrage in its traditional, and to the lowest degree-sustainable, form—the pure exploitation of toll differentials. Simply the world is not and so homogeneous every bit to accept removed arbitrage from a company'due south strategic tool kit. In fact, many forms of arbitrage offer relatively sustainable sources of competitive advantage, and every bit some opportunities for arbitrage disappear, others spring up to take their place. I do non claim that arbitrage to exploit differences is any more than a complete strategic solution than the optimal exploitation of scale economies. To the opposite: If they are to become their global strategies right in the long term, many companies will have to discover means to combine the two approaches, despite the very real tensions between them.

The Strategy of Differences

Arbitrage gets little respect these days as a global strategy. This partly reflects the tendency of companies to equate size with a global presence, which naturally focuses the mind on scale economies rather than on the absolute economies that underlie arbitrage. But information technology as well reflects the fact that arbitrage has been effectually for so long. Many of the industries in which arbitrage has historically been applied—farming, mining, and textiles—are regarded as low-tech and mature. At that place is also the sense that well-run global enterprises have already reaped what competitive reward they can from arbitraging such generic factors of production as capital or labor, which, as i leading management guru has put it, can now exist sourced efficiently with the click of a mouse.

But arbitrage is about much more than cheap capital or labor (although these, as we will see, continue to be very of import). Indeed, the scope for arbitrage is as wide every bit the differences that remain amongst countries, which proceed to be wide and deep. Some of the empirical evidence for this can be constitute in my last HBR commodity, "Distance Still Matters: The Hard Reality of Global Expansion" (September 2001), where I presented a 4-dimensional framework for measuring distance between countries. I argued that distance could be measured non only by geography but also past the extent of differences in civilisation, differences in the administrative and institutional context, and differences in economical attributes (which all together I call the Muzzle framework).1 Let u.s. consider each type of arbitrage in plow to examine both the traditional and less obvious ways companies can apply arbitrage strategies to exploit differences.

Cultural Arbitrage.

Arbitrage strategies have in fact long exploited differences in culture. For example, French civilisation (or, more specifically, its cachet away) has long underpinned the international success of French haute couture, cuisine, wines, and perfumes. Simply cultural arbitrage can also be practical to newer products and services. Consider, for example, the extraordinary international dominance of U.S.-based fast-food bondage, which at the end of the 1990s accounted for 27 of the world'south acme 30 fast-nutrient chains and for over 60% of worldwide fast-food sales. In their international operations, these chains exploit to varying extents the general global surge of American pop culture by serving upwards slices of Americana (at least as information technology's perceived locally) along with their nutrient. Nor, certainly, is this reward reserved for rich nations; many poor countries are important platforms for cultural arbitrage. Think of Haitian compas music and dance music from the Congo, which enjoy epitome advantages in their respective regions.

Claims that the telescopic for cultural arbitrage is decreasing over fourth dimension are clearly not true for all countries and production categories. The persistent association of Brazil with football, carnival, beaches, and sexual activity—which all resonate powerfully in the marketing of youth-oriented products and services—illustrates the unexploited potential of some countries in this regard, though in this example the potential is starting to be recognized. Witness Molson's contempo launch in the Canadian market of A Marca Bavaria, a superpremium beer imported from its Brazilian subsidiary, which uses its association with Brazil's loftier-energy and sensual prototype to target primarily 19- to 24-year-old men. In fact, new opportunities for reinforcing cultural arbitrage are appearing all the time. For case, the push past the European Marriage to restrict labels such as Parma ham and Cognac brandy to only those products that actually come from those places is a move to reinforce the natural advantages of item geographic areas. What's more, equally Republic of finland'southward recently adult reputation for excellence in wireless applied science shows, in sure product categories, such advantages can now be created much faster than before, in years rather than decades or centuries. Reduction in other dimensions of deviation—tariffs or transport costs, for instance—tin also increase the viability of cultural arbitrage.

Administrative Arbitrage.

Legal, institutional, and political differences from country to state open up a host of strategic arbitrage opportunities. Tax differentials are an obvious example. Through the 1990s, to take one case, Rupert Murdoch's News Corporation paid income taxes at an average rate of less than ten%, rather than the statutory 30% to 36% of the three main countries in which information technology operated: Britain, the United states, and Australia. Past comparison, major competitors such every bit Disney were paying close to the official rates. These tax savings were critical to News Corporation'south expansion into the U.s.a., given the profit pressures on the company: cyberspace margins consistently less than 10% of sales in the 2d one-half of the 1990s and an nugget-to-sales ratio that had ballooned to 3 to one. By placing its U.S. acquisitions into holding companies in the Cayman Islands, News Corporation could deduct interest payments on the debt used to finance the deals against the profits generated from its newspaper operations in United kingdom of great britain and northern ireland. Overall, the company has incorporated approximately 100 subsidiaries in havens with no or depression corporate taxes and express financial disclosure laws. The intangibility of its informational assets has helped in this regard. As one accounting authority puts it: "At that place's admittedly no reason why a slice of newspaper, which is the right to show something, couldn't sit anywhere. And then information technology could be sitting in the Cayman Islands."

Few managers e'er explicitly treat taxation or other authoritative arbitrages every bit a strategic tool, despite their potential. That'southward partly because executives are reluctant to describe attending to such arrangements for fear that they might be outlawed. For instance, many Chinese businesspeople aqueduct investment funds through foreign third parties and and then back into China to secure amend legal protection, revenue enhancement concessions, or otherwise favorable treatment. In fact, virtually half the foreign straight investment flowing into China is estimated to have originated in People's republic of china. Similar considerations explain why Mauritius is one of the meridian two sources of FDI flowing into Bharat.

A number of strategists have proposed that rather than adapt its business organisation model country by country, a company should organize its operating units along regional lines, business lines, or some combination of both. The idea is to avoid thinking in terms of a country-level trade-off betwixt localization and standardization and instead build global networks that tin share cognition, find and train global managers, and create a truly global corporate culture.

The most famous practitioner of this arroyo was ABB's Percy Barnevik, who broke up the bureaucracy and geographic fiefdoms he had inherited in the power and automation-technology company created by the merger of Asea of Sweden and Chocolate-brown, Boveri of Switzerland. He flattened the system and fragmented its businesses into small, local operating companies that reported to both a country manager and a business organisation-expanse manager—a matrix, or dual basis of aggregation. This approach helped ABB digest acquisitions and reorganize and refocus operating units on new opportunities. The business organisation-country matrix itself wasn't new, merely ABB was one of the few companies that seemed to exist able to get in piece of work, through groundbreaking management information systems and many other linking mechanisms, both formal and informal.

Yet, equally ABB was to demonstrate, complex aggregation schemes are hugely expensive and difficult to manage. The challenge is magnified by the fact that at that place aren't just 2 potential dimensions for aggregation, countries and product lines, but many others every bit well: function, competence, client industry, primal accounts, and on and on. Indeed, in 1993, Barnevik himself added a regional overlay to the matrix by grouping countries into iii regions. Five years after, his successor as CEO, Göran Lindahl, removed this overlay considering it was likewise costly.

Under Lindahl, ABB moved toward a more traditional global construction, organized past products, and also developed a global account-management structure to serve key accounts across borders. Just pressures on the visitor connected to mount as a result of a slowdown in demand in the wake of the Asian financial crunch, which acquired prices to plunge and efficiency requirements to escalate. These conditions complicated ABB'south already intricate efforts to market systems that integrated products from different business organization areas or for which the key customers were global or regional, non local. There were too other problems intertwined with the autonomy of the local companies.

In 2001, new CEO Jörgen Centerman replaced the matrix with a structure that combined front-end operations in a unlike way than it grouped its back-end functions. Specifically, ABB created four main customer-oriented units, defined by the industries (rather than the countries) that the customers were in, which were supposed to enhance the company's ability to create value for its global and regional customers in item. Then it as well created two back-end technological units, Ability Technologies and Automation Technologies, which (assuming that advisable linking mechanisms could be created) were supposed to aggregate technology development beyond the businesses in each of ABB's two master areas of technological competence.

Centerman, however, was forced out in 2002, amid pressures associated with the sluggishness of this new organization and asbestos-related liabilities picked up in the acquisition (under Barnevik) of the U.South. visitor Combustion Engineering. His successor, Jürgen Dormann, dismantled the front-end/back-end organization, which was deemed unworkable, sold off portions of the front end, and regrouped the remaining businesses into two divisions—Ability Systems and Automation—thereby returning the visitor to simply one primary ground of aggregation, products. But losses grew from $691 million in 2001 to $787 1000000 in 2002, and questions persisted in mid-2003 about whether a turnaround was really at hand.

Maybe the broader moral from the ABB story is that attempting to organize a global business without showtime agreement what one is hoping to reach through cross-border activities—in item whether one is trying to exploit similarities or differences—is a bit similar putting the proverbial cart before the horse. Indeed, to limit the strategic word to construction and process is to presuppose that there is just one best global strategy. The discussion in this article should convince you that this is not the example.

In some cases, administrative arbitrageurs are actually breaking the law. By some estimates, more than than half the regular filter cigarettes smoked in India are smuggled in. Given the taxes and tariffs evaded, they tin be sold for thirty% to 50% less than cigarettes legally produced and sold there. Major international tobacco companies take been widely defendant in the press of conniving in such activities to boost profits and market penetration. And if Bharat has high tariffs, "there is," as the CEO of a candy manufacturer pointed out, "always Dubai" (a major entrepôt and smuggling hub). Clearly, legislation and police enforcement face a huge challenge.

Most forms of administrative arbitrage involve working with or effectually given rules. In some cases, though, companies can leverage political power to try to alter the rules. In 1994, for instance, four big Swedish corporations—ABB, Volvo, Ericsson, and Stora—threatened to transport overseas as much as $six.6 billion in investments to force per unit area the Swedish government into limiting corporate taxation rates. Similarly, companies tin use powerful home governments to pressure level foreign governments into granting favorable treatment. Enron, for case, enlisted the help of the Clinton State Section, which obligingly threatened to cut off development assistance to Mozambique, one of the poorest countries in the world, if it granted a gas deal to a South African competitor instead of to an Enron-led consortium. Unattractive though they are, stories similar this advise that the potential for using regime influence to create administrative arbitrage opportunities remains high.

The scope for arbitrage is as wide as the differences that remain among countries, which continue to be wide and deep.

Geographic Arbitrage.

Considering all that has been written about the alleged expiry of altitude, it is hardly surprising that few strategy gurus take geographic arbitrage very seriously. It is true that transportation and communication costs have dropped sharply in the last few decades. Simply the drop does non necessarily translate into a subtract in the telescopic of geographic arbitrage strategies. Consider the case of air transportation, the toll of which has declined more than ninety% in real terms since 1930, more sharply than older modes of transportation. In the process, new opportunities for geographic arbitrage have been created. For case, in the Netherlands' Aalsmeer international flower marketplace, more than than xx million flowers and 2 million plants are auctioned off every solar day; blooms flown in from Republic of india are sold to customers in the United States or Europe on the day they arrive.

Although communication costs take dropped more than sharply than transportation costs, at that place are cases in the telecom sector where returns earned by focusing on rest distance have been higher than those gained past edifice or exploiting global connectivity. Cable & Wireless, a far-flung and one time high-flying telecom company headquartered in London, has two primary areas of business, organized into a regional unit and a global ane. Analysts assess the marketplace value of the global unit of measurement, in which $10 billion has been invested since 1999, at about zero because competitors also invested in much the same kind of long-haul overcapacity and global connectivity. The valuable part of the company is its regional unit, which consists of subsidiaries providing a full range of telecommunication services to consumer and business customers in 33 minor countries effectually the globe—mainly islands, whose communication links with the exterior world C&Due west still dominates.

The geographic arbitrageurs that take lost some basis in contempo decades are the great general trading companies of the by, which traditionally took advantage of large international variations in prices for a broad array of products past getting them from market A to marketplace B (and in the process somewhat eroding those price differentials). Lower transportation costs and greater connectivity have made it much easier for manufacturers and retailers to exploit these opportunities themselves. However the savviest trading companies have found ways to stay in business organization. For example, instead of simply engaging in trading, Hong Kong-based Li & Fung derives most of its revenue from a more sophisticated kind of geographic arbitrage, setting up and managing multinational supply chains for clients through its offices in more than xxx countries.

Economical Arbitrage.

In a sense, all arbitrage strategies that add value are economical. But I use the term here to refer to exploitation of specific economic factors that don't derive direct from a country'due south culture, geography, or administrative context. These factors include differences in the costs of labor and capital, as well every bit variations in more manufacture-specific inputs such as knowledge or the availability of complementary products, technologies, or infrastructures.

The best-known type of economic arbitrage is the exploitation of inexpensive labor, which is common in labor-intensive, upper-case letter-calorie-free industries like vesture. But high-tech, capital-intensive companies can utilize the strategy just as well. Consider the case of Embraer, the Brazilian firm that, amongst other types of aircraft, designs and assembles regional jets. Many factors contribute to Embraer's success, including managerial and technical excellence, but labor arbitrage has clearly played a critical role. Witness Embraer'south employment costs, which came to $26,000 per employee in 2002, versus an estimated $63,000 in the regional jet concern of its primary rival, Montreal-based Bombardier. If Embraer had had Bombardier's employment toll construction, its operating margin would accept fallen from 21% of revenues to 7%, and its net income would have turned negative. Unsurprisingly, Embraer has focused its operations on final assembly, which is the most labor-intensive part of the production procedure, and has outsourced other operating activities to its supplier partners.

Fifty-fifty if labor costs converge in the long run, the period between now and so tin can extend into decades.

Labor arbitrage can be practical to R&D as well as to ongoing operations, as Embraer also demonstrates. The company is currently preparing for the certification and initial delivery of a 70-seater, the first model in a new, larger family unit of regional jets. When information technology was announced in 1999, the plane was projected to cost $850 1000000 to develop. It would have toll $100 meg more than, the company estimated, had the x meg engineering human-hours involved in developing the new family come from Canada.

1 might fence that labor arbitrage is an unsustainable strategy in knowledge industries because labor costs rapidly rising to friction match need. But the experience of Due east Asian economies suggests that even if i assumes labor costs will converge in the long run (or that costs will somewhen reflect productivity levels), the menses between now then tin can extend into decades. Indeed, the pinnacle Indian software services firms take consistently posted returns on capital letter employed in the range of 50% to 75% and take grown at 30% to twoscore% a year over the past decade. And the prospects are for connected profitable growth, in part because the reduction in big companies' technology budgets makes labor cost advantages more of import.

At commencement sight, capital cost differentials would seem to offer slimmer pickings than labor cost differences; they are measured in unmarried percentage points rather than multiples of 10 or twenty. But considering that nearly companies (at least in the United States) earn returns within ii to three pct points of their toll of capital letter, such differences are consequential, especially in capital-intensive industries. Thus, Cemex, the international cement visitor headquartered in United mexican states, has striven to reduce the effects of "Mexico risk" on its finances not just by listing the visitor on the New York Stock Exchange. More uniquely amongst Mexican companies, Cemex has too folded the ownership of all its non-Mexican assets into its operations in Spain (where interest costs are lower and are taxation deductible) and has formed investment partnerships with entities such equally the insurer AIG and the private equity arm of the Authorities of Singapore Investment Corporation. These moves accept reportedly helped reduce Cemex's capital costs by several hundred basis points and has solidified its position equally the world's most profitable international cement manufacturer (as well equally the largest trader).

The subtlest forms of economic arbitrage involve the exploitation of knowledge differentials.2 Forget, for a moment, the tangible aspects of Cemex's international operations and focus on its internationally recruited knowledge workers. The company seeks out graduates of leading concern and other professional schools around the world and creates career paths for them that involve sending them abroad and immersing them in foreign cultures. (CEO Lorenzo Zambrano himself has an MBA from Stanford.) The company also makes heavy use of strange (mostly U.Due south.) direction and technical consultants and benchmarks its performance against best-in-course foreign companies (like Federal Express in logistics). Some analysts see these international influences every bit cardinal ingredients in Cemex'southward heavy emphasis on it, also as in its decision to remain focused on the cement industry and expand geographically rather than diversify into other industries—the model followed by well-nigh other Mexican conglomerates. Whatever the truth of the merits, there is no doubtfulness that the various experiences of Cemex's international workforce has broadened the company's horizons.

Reconciling Departure and Similarity

I would think companies that try to exploit differences would not find it easy to exploit similarities too. And indeed, a large body of research on the horizontal versus the vertical multinational enterprise has shown that in that location are key tensions between pursuing scale economies and playing the spreads. (See the table "Conflicting Challenges.") The information signal that at that place is some merit to classifying companies according to the chief way they add value through their international operations over long periods of fourth dimension. But that either/or characterization of globalization strategies is very broad. Finer-grained analysis of example studies—particularly of companies that have in various means been global innovators—suggests that information technology is possible to combine the two approaches to some extent.

Conflicting Challenges

For a outset, it'southward possible to employ different strategies to different elements of a business. Cemex pursued a fiscal strategy of arbitraging capital letter toll differences fifty-fifty as information technology implemented a standardized operational strategy. It gear up complete, uniform product-to-distribution chains in most of its major markets, reinforced by cantankerous-edge scale economies in such areas every bit trading, logistics, information technology, and innovation (in the broadest sense of the term). Mixing and matching was possible in this case because, to a large extent, Cemex tin cull how to raise capital independently from the mode information technology chooses to compete in product markets.

Some companies take gone further. Consider the case of GE Medical Systems (GEMS), the sectionalization that Jeffrey Immelt built up between 1997 and 2000 earlier he was tapped to accept over from Jack Welch every bit CEO. Immelt pushed for acquisitions to build upward scale because, for the leading global competitors, an R&D-to-sales ratio of at least 8% represented a significant source of scale economies. But he also implemented a product strategy that was intended to arbitrage toll differences by concentrating manufacturing operations—and, ultimately, other activities—wherever in the world they could exist carried out most price effectively. By 2001, GEMS obtained fifteen% of its straight material purchases from, and had located 40% of its own manufacturing activities in, low-price countries.

Similar Cemex, GEMS was able to pursue both approaches because information technology could organize its operations into relatively autonomous bundles of activities (like product development) in which economies of scale and standardization were essential and those (like procurement and manufacturing) where arbitrage economies were being pursued. What's more, it was able to coordinate its widely dispersed operations by applying centrally developed learning templates. In item, Immelt practical the "pitcher-catcher concept," developed elsewhere in GE, in which for each move, a pitching team at a loftier-toll existing plant works with a communicable team at a low-toll new location, and the move is not considered complete until the operation of the catching team meets or exceeds that of the pitching team. Every bit a result, GEMS (and GE) seems to have managed to move production to low-toll countries faster than European competitors such equally Philips and Siemens while also benefiting from greater scale economies.

Probably the single most disregarded fact in the history of globalization and strategy is that, for a number of centuries, firms' international economic activities were motivated entirely by considerations of arbitrage. The peachy trading companies of the seventeenth and eighteenth centuries arbitraged across extreme differences in cost and availability created by geography. Spices, to take simply one instance, could be grown in the East Indies but non in Northern Europe, where they originally cost several hundred times equally much.

Arbitrage was also the strategy of the global whaling fleets of the late eighteenth century (which, with their floating factory ships, can be said to take originated offshore manufacturing). It was also behind the vertically integrated agricultural and mining companies that arose relatively early in the nineteenth century. The freestanding enterprises that dominated British foreign direct investment through the latter office of the nineteenth century attempted to arbitrage across differences in administrative structure (and ability) by pursuing strange investment opportunities nether British police. Exports of labor-intensive, capital-calorie-free manufactured goods—textiles and wear, for instance—by countries with relatively low labor costs involved arbitrage besides, but of economic rather than geographic or administrative differences.

The pursuit of scale, rather than of absolute, economies is quite new. Replicating successful business models in new locations didn't begin until the finish of the nineteenth century. Since then, however, it has become the dominant strategy, which is why the net effect of most types of distance betwixt countries is to reduce the economic activity betwixt them.

Merely even the best management tin go only so far in melding the 2 strategies. Acer, 1 of the world'south largest computer manufacturers, supplies a cautionary tale of what can happen when companies go as well far. Acer entered early into the contract manufacturing of personal computers, operating in depression-wage Taiwan, and made skilful money with that arbitrage play. Just in the early 1990s, it began to push Acer as a global make, peculiarly in developed markets. This two-track approach turned out to be problematic. The branded business concern grew to significant volumes just connected to generate losses considering the competitive environment was particularly tough for a late mover. Meanwhile, customers for Acer's contract-manufacturing arm worried that their business secrets would spill over to its competing line of business organization. They as well feared that Acer could cantankerous-subsidize its own brand with profits from its contract-manufacturing operations and and then undercut their prices. In 2000, the strategy blew up when IBM canceled a major social club, reducing its share of Acer's total contract-manufacturing revenues from 53% in the outset quarter of 2000 to but 26% in the second quarter of 2001.

Acer responded by making some hard choices. Contract manufacturing has remained focused on customers in developed countries—and will gradually be spun off into a separate visitor. Meanwhile, sales of its own branded products have been focused on the East asia region, particularly Greater China, where the contract customers cannot sell at a low enough toll to compete. With this move, the company has best-selling that the logic of exploiting similarities often calls for targeting countries similar to a company's home base of operations, whereas the logic of arbitrage involves exploiting one or more of the differences inherent in distance.

The future of the globalization procedure is by no ways obvious. Markets may integrate further once economic weather amend. But some fence that the process could actually shift into opposite, toward even greater economic isolation, if the experience between the two Globe Wars is any precedent. Whatever the ultimate direction, though, the differences that make arbitrage valuable as well as the similarities that create scale economies will remain with us for the foreseeable future. That spells opportunity for those companies that have the imagination to meet the full range of possibilities.

one. For an fifty-fifty more all-encompassing, market-based review of the prove, see my article, "Semiglobalization and International Business Strategy," Periodical of International Business Studies, June 2003.

two. Arbitrage aficionados are also fond of talking nigh "dynamic arbitrage," in which a broader global presence tin can enable companies to exploit substitution rate changes and other volatile financial fluctuations more quickly and efficiently. Merely the full general benefits from such efforts, beyond pure portfolio insurance effects, remain in doubt.

A version of this article appeared in the Nov 2003 issue of Harvard Business organization Review.