Ever since the dawn of globalization and the emergence of large multinational corporations, leading companies and economists have been trying to find the golden formula of success – the perfect strategy template everyone should follow if they wish to achieve success in the international arena. The consensus on what is considered best for MNEs has changed over the course of time. At first, limitless expansion and the economy of scale was considered to be the end goal for any multinational business venture.
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After the emphasis on the practice proved to be less than profitable following the Asian economic crisis in the 1990s, the concept shifted towards opening production facilities domestically in every market of interest. This model of global strategy suffered a hit following the economic crisis of 2008, which, for many, heralded the end of the globalization trend (Ghemawat, “Finding Your Strategy” 56). Currently, it has become profoundly clear that a single strategy based on one or two key defining attributes cannot be utilized as a universal template fit for every product and every multinational corporation. In order to continue being successful, MNEs should adapt their global strategies according to not just one, but several arbitrage elements that influence the profitability of particular ventures in particular regions around the world.
According to Ghemawat (“Distance Still Matters” 140), there are four different kinds of arbitrage. Cultural arbitrage defines how well a product is placed in accordance with the cultures and traditions of marketing in a specific region. Geographic arbitrage defines the need for a specific product in relation to climate, transportation distance, and other geographic features. Economic arbitrage exploits specific economic factors in order to get more value out of a product. The most famous example of economic arbitrage is the wage gap. Administrative arbitrage involves the legal framework of a specific region, including both positive and negative factors, such as corruption, sanctions, and other issues.
Every region that an MNE is planning to expand into should be analyzed in regards to all four of these arbitrages, not just one. Companies that put an emphasis on one part of the picture over the whole suffered a loss of profit (Ghemawat, “The Forgotten Strategy” 84). For example, many multinational corporations, such as Apple, BMW, and others, view China as a prospective market for expansion and are spending money in order to “crack it open,” expecting significant revenue.
This approach is based on the geographic and economic arbitrages – China has the largest population in the world, while at the same time having low wages. Being able to produce items domestically means the company can save costs not only on wages but on transports as well. However, this strategy does not take into account administrative and cultural arbitrages. Chinese customers do not support western brands, preferring products manufactured by domestic companies. At the same time, Chinese restrictive laws and corruption prohibit vigorous business activity in foreign countries that wish to sell their products in China. Thus, while the Chinese market is very large, its effective value is much smaller than it was perceived to be (Ghemawat, “The Forgotten Strategy” 80).
The same mistakes were made by other large ventures, such as Coca Cola’s attempt to create a profitable branch business in Russia. McDonald’s suffered a series of failures to establish a presence by not accounting for important arbitrage factors of the local markets. For example, the cultural factor was not accounted for in Bolivia, where many teachers, nutritionists, and doctors have opposed McDonald’s as ‘foreign to Bolivian diet,’ which resulted in McDonald’s shutting down. In Montenegro, the failure to take into account the administrative factor ended in the food chain being closed down before it even started – the government of Montenegro did not welcome the food giant in their country. Thus, in order to stay on top of the competitive curve, companies need to take all four factors into account, not just one.
Ghemawat, Pankaj. “Distance Still Matters.” Harvard Business Review, 2001, Web.
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“The Forgotten Strategy.” Harvard Business Review, 2003, Web.
“Finding your Strategy in the New Landscape.” Harvard Business Review, 2010, Web.