DISTANCE…
Still MATTERS
The hard reality of global
expansion.
http://www.slideshare.net/katiahf/distance-still-matters
There is a
Problem…
…the very analytic tools that
managers rely on in making
judgments about international
investments, tools that
consistently underestimate
the costs of doing
business internationally.
ANALYTIC TOOLS
It ignores
National GDP. the costs
Levels of consumer and risks
wealth. of doing
People’s propensity to business in a
consume. new market.
To place all the emphasis
on potential sales.
Those costs and risks
result from…
…barriers created by
1 DISTANCE.
2
Cultural
Administrative
3 Geographic
4 Economic
Those can
make
foreign
markets
considerably
more or
less
attractive.
Distance is death?
IT and global
communications are
shrinking the world,
turning it into a small
and relatively
homogeneous place.
But does it apply for business?
Distance still matters, and
companies must explicitly and
thoroughly account
for it when they make decisions
about
global expansion.
1Cultural
Industries or
products affected
by distance
Attributes creating
distance
Cultural Distance (Germany) – Qwerty
vs. Qwertz Keyboard
Note:
In this QWERTZ keyboard, ALT GR + Q will give you the @ symbol.
6
2Administrative
Attributes creating
distance
Industries or
products affected
by distance
Electricity
Drugs
Farming
Mass transportation
Aerospace
Telecommunications
Oil.
Mining
Infrastructure
3 Geographic
Attributes creating
Industries or
distance
products affected
by distance
Economic Distance - Examples
• Rich-poor differences
• Natural resources, financial resources, human
resources, infrastructure, information or
knowledge
• Economic size
• Low per-capita income
9
Gravity Model
Gravity Models
• Trade is directly related to economic sizes and
inversely related to physical distance
• 1% increase in size of the economy leads to 0.7-
0.8% increase in trade between 2 countries
• 1% increase in distance leads to 1% decrease in
trade
11
Just how much difference does
distance make?
* Study by economists Jeffrey Frankel and Andrew
Rose
Applications of CAGE
Framework
CAGE Framework - Applications
• Making Differences Visible
• Understanding the Liability of Foreignness
• Assessing Natural Owners and Comparing
Foreign Competitors
• Comparing Markets
• Discounting by Distance
14
Making Differences Visible
• Visible differences reduce the risk of bad
decisions
• Need to consider all four dimensions of distance
• Failing to consider all dimensions can lead to
erroneous decisions.
15
Understanding the Liability of
Foreignness
• People tend to believe that MNCs always triumph
over local companies.
• The CAGE framework suggests that MNCs are
often having disadvantage over local firms.
• Cultural Disadvantages
• Idiosyncratic tastes - different designs &
standards
• Entrenched taste for local products
• Local biases in demand (“buy local”)
• Lack of social connectivity or networks
• Administrative Disadvantages
• High government involvement, domestic
resistance to displacement
• National patrimony effects
• Constraints by home government, multiple
regulatory requirements
16
Understanding the Liability of
Foreignness
• Geographic Disadvantages
• High transport costs
• Lack of required infrastructures –
Communications & Transportation
• Intense local supervision requirements
• Local performance requirements
• Economic Disadvantages
• Cost disadvantages (e.g. labour)
• Disadvantages in agility/responsiveness
• Susceptibility to global pricing squeezed,
dilution of profitability
• Late-mover disadvantages
• Less perceived commitment to particular
market
17
Comparing Foreign Competitors
• The CAGE framework can be used to compare the
chances of success of different countries in a
given foreign market.
• For example, US companies would likely win over
European ones should Cuba open up its border to
FDI.
18
Comparing Markets
• Companies can use the CAGE framework to
choose where to invest.
• Example: Should they invest in China or India
• The answer varies across industries.
19
Discounting by Distance
• Intuitively, China may look more attractive to US
investor than Mexico.
• However, its closeness to the United States along
the CAGE dimensions suggests favouring Mexico
over China.
20
Example 1
Which country is more
attractive to USA – China or
India? Why and How?
India versus China from Perspective of
US Companies
22
Conclusion – US and (India or China)
In general terms, China is more attractive to
American investors on both geographic and
economic grounds while India tends to win over
investors valuing cultural and administrative ones.
US (China) – Preferred destination for
manufacturing industries requiring geographic or
economic sensitivity
US (India) – Preferred destination for industries
requiring cultural sensitivity like software
23
Example 2
Walmart Global Operations
& Profitability
Walmart Global Margins by Country
Walmart
Cultural
• Linguistic, Religious, Diaspora and Ethnic
similarities across US, CA, ME, PU regions
Administrative
• Canada and Mexico partners with US in
NAFTA
• Puerto Rico is unincorporated territory of
USA
Geographic
• Canada and Mexico share common land
border with USA. PU also significantly closer
to USA
Economic
• Consumer wealth and Income matches
between these countries making them
economically similar
Example 3
Starbucks in Asia?
Starbucks and the Four
Distances
Cultural
• Asian markets prefer tea
• Different markets have different coffee
preferences
• Starbucks’ influence is perceived as
Americanization
Administrative
• Russian and Chinese trademark issues
• Difficulty in controlling operations abroad
Starbucks and the Four
Distances
Geographic
• Difficulty in transporting teas and roasted
beans to far-away markets
• Rural areas abroad do not have the
infrastructure required
Economic
• In some countries, Starbucks coffee costs
more than a meal
• Costs of setting up operations in a new
country can be high
Starbucks – Global Expansion
• Starbucks decided to expand after exclusively
focusing on the North American market.
Starbucks’ Global Expansion
• By 2006,Starbucks operated approximately
11,000 stores, with 70% in the United States and
30% in international markets.
• Offered the same basic coffee menu; however,
food products and other items varied somewhat
according to local customs and tastes.
• Starbucks in Japan: With higher rent and the
issue of transporting roasted coffee from
Washington to Japan, Starbucks decided on a
joint venture with Sazaby, a restaurant operator
in a 50-50 deal.
Starbucks – Global Expansion
• Starbucks in the UK: Because the cultural and
legal frameworks were similar to the USA,
Starbucks acquired the Seattle Coffee
Company, which had a presence in the UK, as a
wholly-owned subsidiary.
• Starbucks in China: In developing markets,
Starbucks chose to enter into minority share
licensing agreements with high-quality,
experienced local partners in order to minimize
market-entry risks.
Under these agreements, the local partners
absorbed the capital costs, enabling to establish
a presence in foreign markets much more
quickly than it would have if it had to invest its
own capital.
Starbucks – Global Expansion
Starbucks in India: Strategic alliance with Tata
Coffee
Setting up stores in the Tata group's retail outlets
and hotels, besides sourcing and roasting coffee
beans at Tata Coffee's Kodagu facility.
Example 4
Meat Industry – Company
from Canada going to UAE?
(Refer to separate ppt)
