The Economist published a feature story on a trend that is as old as the dotcom bubble. It used to be called the Red Herring effect, then the Tech Crunch effect, now it is being called “geo-arbitrage” or “tropicalisation”.
The article says that the term refers to the practice of backing start-ups that take an established business model and adapt it to an emerging market. The idea of tropicalisation has been lucrative for venture capitalists in India and China, with examples such as Baidu, a Chinese interpretation of Google, or Alibaba.com, a Chinese version of eBay, an online-auction site.
Now venture capitalists are looking at other markets, including Brazil, Indonesia, Russia, South Africa and Turkey. The article cautions that “most venture-capital firms do not head abroad with the sole aim of looking for copycats”, but plenty of their investments end up that way.
One VC is quoted as saying that in emerging markets like China around 50 percent of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil it is closer to 70 percent. There is much more in the article about specific examples, potential high returns and risks.