Four types of arbitrage that can create political advantages for global companies are as follows:

Cultural, economic, administrative and geographic arbitrage can create potential advantages for global companies.

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The globalization effort of most companies comprises extending their business models geographically with necessary modifications to maximize the companys economies of scale. The key strategic challenge becomes to determine how much to adapt the business model-how much to standardize from country to country versus how much to localize to respond to local differences.

Companies focus on similarities across countries and balance localization and standardization. The primary focus is on similarities so that greater scale economies are achieved. Differences from country to country are viewed as obstacles to be overcome.

But in their rush to exploit similarities across borders, multinational companies have ignored the original global strategy-arbitrage, the strategy of difference. Though still important, arbitrage is much more than cheap capital or labour. The scope of arbitrage is as wide as the differences among countries, which continues to be broad and deep. Following are the types of arbitrages:

It exploits differences in culture. The international success of French haute couture, cuisine, wines and perfumes is due to cultural arbitrage. U.S. based fast-food chains exploit the general global surge of American popular culture. Less developing countries and regions also have strong cultures with which outsiders are fascinated.

The persistent association of Brazil with football, carnival, beaches and sex helps in the marketing of youth-oriented products and services when such products are believed to be coming from these markets. Super premium beers imported from Brazil are very popular. The reductions in tariffs and transport costs will increase the viability of cultural arbitrage.

Legal, institutional and political differences from country to country enable administrative arbitrage. Tax differentials are common examples.

Because of decrease in transportation costs, new opportunities for geographic arbitrage have been created. More than 20 million flowers and 2 million plants are auctioned off every day in Netherlandss Aalsmeer international flower market.

Blooms flown from India are sold to customers in the United States and Europe on the day they arrive. Hong Kong based Li & Fung earns its revenues from a sophisticated kind of geographic arbitrage. It sets up and manages multinational supply channels for clients through its offices in more than 30 countries.

Economic arbitrage comes from differences in the costs of labour and capital, as well as variations in more industry-specific inputs such as knowledge or the availability of complementary products, technologies or infrastructures.

The best type of economic arbitrage is the exploitation of cheap labour, which is common in labour-intensive industries like clothing. Capital cost differentials are slimmer but considering that most companies earn returns within two to three percentage points of their cost of capital, even such small differences are consequential. The subtlest form of arbitrage is exploitation of knowledge differential. The rush to establish R&D and software development centres in India is due to availability of relevant talent.

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