Toward a General Theory of Regulatory Arbitrage: A Marketing Systems Perspective

Abstract

Businesses and consumers frequently exploit differences in laws and policies across jurisdictions to circumvent local laws, regulations, or restrictions. This practice, known as regulatory arbitrage, can have negative consequences for both business and social welfare. Although previous research examines regulatory arbitrage in specific contexts such as financial markets and the pharmaceutical industry, a general framework remains missing. Drawing on marketing systems theory, this study proposes a conceptualization that reflects the necessary conditions for regulatory arbitrage to occur across a variety of contexts. It also derives a typology of strategies to prevent and eliminate regulatory arbitrage. Using the context of alcohol policy in Finland as an illustrative example, the study applies the conceptualization to examine a situation where regulatory arbitrage has repeatedly threatened local policy. The findings illustrate how the broader perspective offered by marketing systems theory can help to more accurately predict whether businesses and consumers will pursue regulatory arbitrage in a given situation, and to select appropriate strategies for preventing and eliminating regulatory arbitrage in situations where it has negative consequences.