The International Entrepreneur: Arbitrage, A Smart Firm’s Source of Competitive Advantage

There are many small and medium-sized firms that expand to the most similar markets they can find. For American firms, this means Canada, then Australia and New Zealand, followed by the U.K. and then eventually northern Europe. The language and cultures are similar, so why not take advantage of these similarities to make international expansion easier?

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This approach misses a key source of competitive advantage gained from doing international business: arbitrage. Arbitrage is the learning from differences between business environments and culture. The first type of arbitrage most in business think of is outsourcing – exploiting the differences in wages to locate especially manufacturing and call centers in places where it costs much less.  But as we all know, outsourcing usually only produces short-term gains. Other types of arbitrage hold greater advantages. First is market input. The original Pampers diapers from Procter & Gamble were thick and bulky. When P&G introduced them in Japan, the diapers did not sell well because Japanese households are much smaller & have smaller storage spaces. In meeting the need of thinner diapers, P&G was able to improve its product and use this improved version to have a more competitive product in its home market. The Chinese business culture holds many keys to cultivating long-term business relationships. This knowledge can then be used in other cultures where business dealings rely more heavily on relationships. So instead of taking the easy path of similar business environments, consider the value of differences and what can be gained from arbitrage.

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