Introduction:
In today’s world companies are ambitious to undertake a global expansion projects. In class we focused a lot on culture as an important factor when considering international expansion for company or employee career. This article by Pankaj Ghemawat identifies a key point or a main reality that company needs to keep in mind is the distance component that can impact the effectiveness of the deal. By distance he basically means performing a gap analysis on four dimensions: 1) culture, 2) administrative,3) geographic and 4) economics. Much of this is a common knowledge the article tries to quantifies the impact of each factors with examples and detail research. It provides a case study of launching a restaurant internationally by comparing the four dimensions of distance with traditional analysis done by company using country portfolio analysis (CPA).
Analysis:
The type of distance influence different businesses in different ways, companies that deal with heavy or bulky products requires a high degree of coordination compared to consumer’s product. Author mentions theory of gravity that quantifies various attribute of distance and its impact on change in international trade. Traditional economic factors, such as the country's wealth and size (GDP), matter; a
1% increase in either of those creates, on average, a .7% to .8% increase in trade. But other factors related to distance, matter even more e.g closeness to administrative and political distance had positive impact of +900%.The amount of trade that takes place between countries 5,000 miles apart is only 20% of the amount that would be predicted to take place if the same countries were 1,000 miles apart. The CAGE Distance framework (Culture, Administrative, Geographic, and Economic) encompasses many different factors, some of which are apparent while others are subtle.
Culture Distance: Differences in religious beliefs, race, social norms, and language are all capable of creating distance between two countries. In the opening example when owner of New Corporation, Rupert Murdoch decided to buy license to broadcast Star TV in
Asia it was a high profile disaster because it ignored cultured distance. They should have localized the TV for the contents for English, and edited to suit the audience. Similarly Red color means beautiful in Russia where as in rest of world it has different connotation.
For Coco Cola, Neville had stressed on the importance culture plays in success of company. He hired a local leader who could relate to the consumer.
Administrative or Political Distance: In olden days historical and political associations shared by countries greatly affect trade between them. Colony-colonizer had different bonding amoung countries which has given a soft corner for companies expanding in these countries. In recent years the integration of European Union is a classic example of the effort to diminish administration and political distance. Common currency and political union can also increase trade by more than 300% each. Barriers to foreign competition by: tariffs, trade quotas, restrictions on foreign direct investment, and preferences for domestic competitors in the form of subsidies and favoritism in regulation and procurement are implemented to protect domestic industry if they meet the following criteria: 1) It is a large employer, 2) It is seen as a national champion, 3) It is vital to national security, 4) It produces staples, 5) It produces an "entitlement" good or service, 6) It exploits natural resources, 7) It involves high sunk-cost commitments.
Star TV’s mistake was to bypass government controlled news source and broadcasted. TATA have significant presence in Africa because England ruled India and some part of Africa as a result it was easy for Indian company to get a foot hold in Africa.
Geographic Distance: The rule of thumb is farther you are from a country, the harder it will be to conduct business in that country.
Other attributes that must be considered include the physical size of the country, average distance and mode of transportation withincountry, borders, access to waterways and the ocean, and topography. This influences the cost of transportation. Watch out are companies that find geography a barrier to trade are often expected to switch to direct investment in local plant and equipment as an alternative way to access target markets. Current research suggests that this approach may be flawed because of the advancement in global communication and shrinking world : it is important to keep both information networks and transportation infrastructures in mind when assessing the geographic influences on cross-border economic activity.
Economic Distance: The economic condition of consumers have impact on level of trade it does business with other countries.
Typically it depends on size of per capita GDP. Companies that rely on economies of experience, scale, and standardization should focus more on countries that have similar economic profiles. That's because they have to replicate their existing business model to exploit their competitive advantage as it depends on cost and quality of recourses. For example set up of Wal-Mart in India is different business than setting up in Canada. Factors that contribute to major disparities are supply chains and distribution channels; these are significant barrier to business.
Take Away: This article provides interesting research data on how different distance attribute affects international trade, most of which gets factored in while setting up a distribution network for business. It gives a CAGE tools to measure industry sensitivity and impact of distance on business. This tool would have been of great help for Beckman Coulter for analyzing the effectiveness to expand in Japan.