SAM
MPLE
2. Diffferences an
nd the CAG
GE Distancce Framewoork1
Pankaj Ghhemawat
Afteer analyzingg the casess in sectionn 1, the reallity of semiiglobalizatiion
and the importtance of crross-countryy differencees should be
b clear. Thhis
secttion introduuces the CAGE
C
distaance framew
work, whicch is used to
idenntify and prrioritize thee differencess between countries
c
thhat companiies
musst address when
w
develooping cross--border strattegies.2
Beggin by conssidering thee example summarized in exhibiit 2-1, whiich
plotts Walmartt’s operatinng margin by countrry in 20044 against tthe
distance betweeen each coountry’s cappital and Walmart’s
W
heeadquarters in
Benntonville, Arrkansas. Thhe impact off geographicc distance iss obvious, bbut
whaat other typees of differeence or distance can yo
ou identify that
t separatted
the markets thaat were proffitable for Walmart
W
from
m those thaat weren’t?
Exhibiit 2-1
Wallmart Internnational’s Operating
O
M
Margin
by Co
ountry (2004 estimates)
1
Thee CAGE disstance frameework disagggregates diistance or difference
d
innto
fourr major categories:
c
Cultural, Administraative, Geoggraphic, aand
Ecoonomic. Diff
fferences aloong these diimensions generally
g
haave a negatiive
effeect on manny cross-boorder interractions, although in some casees,
diffferences aloong a limited subset of
o CAGE dimensions
d
can actuallly
3
encoourage rathher than disccourage succh interactio
ons. Each of
o these brooad
typees of differeence or distaance is illusstrated by th
he Walmart example.

Culturaal distance:: Culture can be defin
ned as the collection of
beliefs, values, andd social norrms—the un
nwritten, unnspoken rulles
of the game—thhat shape the behaviior of inddividuals aand
organizzations. Cuultural distaance encom
mpasses differences
d
in
religiouus beliefs, race/ethnicit
r
ty, languag
ge, and sociial norms aand
values. Societies even diffeer in their social attittudes towaard
market power andd globalizaation in waays that haave importaant
effects, both form
mally via reegulation and
a
informaally, on hoow
4
businessses operate. Interesstingly, Waalmart’s foour profitabble
marketss share lingguistic, religious and ethnic simiilarities or, at
least, tiees through large
l
diaspoora.

Adminisstrative disstance: Historical an
nd political associatioons
betweenn countriess—colonial links, freee trade agrreements, tthe
tenor of
o current relationshhips—profou
undly affeect econom
mic
exchangge betweenn them—w
which is th
he same ass saying thhat
differennces along these dimeensions mattter a greatt deal. So, of
course, do adminnistrative attributes
a
specific
s
to a particullar
countryy such as auutarchic pollicies or weeak institutiions and high
levels of
o corruptionn. In the Waalmart exam
mple, note thhat two of tthe
profitabble countriees, Canada and
a Mexico
o, partner wiith the Unitted
States in
i a regionnal free tradde agreemeent, the Norrth Americcan
Free Trrade Agreem
ment (NAFT
TA). And a third profittable “counttry”
as classsified by Walmart,, Puerto Rico,
R
is officially an
unincorrporated terrritory of thee United Staates.

Geograaphic distannce: The geographic
g
dimensionn of distannce
involvees more thaan just how
w far two countries
c
arre from eaach
other: other
o
attribbutes to bee considereed include contiguity, a
countryy’s physicaal size, witthin-country
y distancess to bordeers,
2
access to
t the oceann, topographhy, and eveen time zonnes. Exhibit 21 makees it clear thhat the capital city off each of Walmart’s
W
foour
profitabble “countrries” is geeographicallly closer to
t Walmarrt’s
headquaarters than the capitalss of any of the unprofitable ones; in
additionn, Canada and
a Mexicoo share a co
ommon landd border wiith
the Uniited States.

Econom
mic distancee: Consumeer wealth an
nd income and
a the cost of
labor are
a
the most
m
obviouus (and reelated) determinants of
econom
mic distancee between countries. Others includde differencces
in availlability (or lack) of reesources, in
nputs, infraastructure aand
complements, andd organizattional capaabilities. It seems a bbit
harder for
f Walmarrt to do welll in poorer countries—
—although tthe
numberr of data points
p
is very
v
limited. Note, however,
h
thhat
econom
mic distancee has not been
b
entireely or evenn primarilyy a
liabilityy for Walm
mart. The company saves morre money bby
procurinng merchandise froom China—
—exploitinng econom
mic
distancee, particularrly in termss of labor co
osts—than it
i makes froom
its entiire internatiional store network. We
W will reeturn to suuch
strategies in sectionn 5, which discusses
d
arrbitrage.
Whaat the Numbbers Tell Uss
e
Inteernational economists
have adaapted Newtton’s law of universsal
gravvitation too describe trade annd other internationaal econom
mic
inteeractions. Thus,
T
the simplest graavity modeel of internnational traade
betw
ween two coountries preedicts that trade
t
will bee directly reelated to theeir
econnomic sizes (a unilateeral attribuute of each country) and
a inverseely
relaated to the physical
p
disttance betweeen them (aa bilateral orr country-paair
attriibute). Auggmented graavity modeels add meaasures of other
o
types of
diffferences as well
w as unillateral attribbutes. Exhib
bit 2-2 show
ws the resuults
of one
o such annalysis that evaluated cultural,
c
adm
ministrativee, geographhic,
and economic effects
e
on trrade.
Exh
hibit 2-2 Effeects of Simillarities Verssus Differences on Bilatteral Trade
3
D
Dimensions of
o
D
Distance/Proxximity
Determinaant
Channge in Trade
C
Cultural
Common laanguage
+42%
%
A
Administrativee
Common reegional tradingg bloc
Colony/coloonizer links
Common cuurrency
Differencess in corruptionn
+47%
%
+188%
+114%
–11%
%
G
Geographic
Physical disstance: 1% inccrease
Physical sizze: 1% increasse
Landlockeddness
Common laand border
–1.1%
%
–0.2%
%
–48%
%
+125%
E
Economic
Economic size:
s
GDP (1%
% increase)
Income leveel: GDP per caapita (1% incrrease)
+0.8%
%
+0.7%
%
Sourrce: Pankaj Ghemawat and
a
Rajiv Mallick,
Ma
“The Industry-Levvel Structure of
Interrnational Tradde Networks: A Gravity-Based Approacch,” working paper, Harvaard
Busiiness School Boston,
B
Februaary 2003.
The estimates corrrect for unobbserved threshholds for participation in trrade and are all
signiificant at the 1%
1 level but are,
a in a numbber of cases, smaller
s
than those
t
reportedd in
manyy other studiees, apparently due to the corrrection
Thee signs on most
m
of thee estimates in the table probablyy accord wiith
youur intuitions (althoughh they cannot be reeconciled with
w
a fullly
globbalized “flaat” world). What are probably more
m
surprrising are tthe
maggnitudes off some of the
t effects—
—for exam
mple, that countries wiith
coloonial ties arre apt to trrade almostt three timees as muchh as countriies
withhout them, or even moore if one allso accountts for the roole of colonnial
ties in generatting culturaal similaritiies! The peersistence of
o such larrge
effeects decadess and, in some instannces, more than a centtury after tthe
origginal coloniial relationsships were dissolved reinforce
r
thhe conclusion
thatt complete globalizatioon—as in the
t disappeearance of the
t effects of
suchh considerattions—is exxtremely unnlikely anytiime soon.
milarities verrsus differeences along many of th
he same dim
mensions allso
Sim
helpp explain fooreign direcct investmeent or comp
panies’ foreeign presencce.
Thuus, for U.S. companiess that operaate in just one
o foreign country, thhat
counntry is Canaada 60 perccent of the time
t
(and 10
0 percent off the time itt is
the United Kinngdom).5 Grravity modeels have also
o been adappted to explaain
4
crosss-border interactions as diverse as equitty trading, e-commerrce
trannsactions, patent citatioons, immiggrant flows, air traffic,, phone callls,
and even the inncidence of wars! The basic
b
conclu
usion from this literatuure
is thhat differennces betweeen countriess—and diffferences in differences—
—
mattter in signifficant, prediictable wayys.
Idenntifying andd Prioritizinng Differencces
Havving highligghted the peersistent imppact of crosss-country differences
d
or
distances, the rest
r of this section foccuses on ussing the CA
AGE distannce
fram
mework to identify and
a
prioritiize the diffferences that
t
must be
accoounted for in developiing global strategies.
s
Exhibit
E
2-3 helps in thhis
regaard by identtifying bilatteral and unnilateral facctors to conssider for eaach
of thhe CAGE categories.
c
Exh
hibit 2-3 Thee CAGE Fraamework at the Country Level
Cultural
Distance
Couuntry pairs
(bilaateral)
Couuntries
(uniilateral)
 Different
languages
 Different
ethnicities;
lack of
connective
ethnic or
social
networks
 Different
religions
 Lack of truust
 Different
values, norrms,
and
dispositionns
 Insularity
 Traditionallism
Adminnistrative Geographicc
Distannce
Distance
Econom
mic
Distance
 Lack of
o colonial
ties
o shared
 Lack of
regional trading
bloc
o common
 Lack of
currency
 Political hostility
 Physical
distance
 Lack of land
border
 Differences inn
time zones
 Differences inn
climates /
disease
environmentss
 Rich/pooor
differennces
 Other
differennces in
cost or qquality
of naturral
resourcees,
financiaal
resourcees,
human
resourcees,
infrastruucture,
and infoormation
or know
wledge
 Nonmaarket/closed
econom
my (home
bias vss. foreign
bias)
o
 Lack of
membeership in
internaational
organizzations
 Weak institutions,
corruption
 Landlockedneess  Econom
mic size
 Lack of internnal  Low peer capita
navigability
income
 Geographic siize
 Geographic
remoteness
 Weak
transportationn
or
communicatioon
links
5
Thee most disstinctive feeature of the
t
CAGE
E frameworrk is that it
encoompasses the
t bilateraal attributess of countrry pairs ass well as tthe
unillateral attrributes of individuall countriess. Most of
o the othher
fram
meworks that have beeen proposedd for thinking about thhe differencces
acrooss countriees (or locatiions) focus on just uniilateral attributes; that is,
theyy assume thhat countriess can be asssessed one by
b one againnst a comm
mon
set of yardsticcks. Note that
t
this chharacterizatiion appliess not only to
carddinal indicces such as the World
W
Econ
nomic Foruum’s Globbal
Com
mpetitiveness Index or Transparency Intternational’ss Corruption
Percceptions Inddex but also to ordinaal ranking schemes succh as Michaael
Portter’s “diamoond” framework for diiagnosing th
he (relative)) internationnal
com
mpetitivenesss of diffeerent counttries as home basess in speciffic
induustries. Butt indexicalitty of this sort
s
is restriictive sincee it can’t deeal
withh ideas suchh as “The U.S.
U is closeer to Canadaa than it is to
t Indonesiaa.”
Morre generallly, indexiccality is incapable of capturring bilaterral
diffferences of the
t sort neccessary to ennvision cou
untries as exxisting in (aand
evenn occupyinng) space inn relation too each otheer, that is, as
a nodes inn a
6
netw
work insteadd of as an array along a common yardstick.
y
Havving drawn that distincction betweeen unilateraal and bilateeral influencces,
it iss useful to add
a that theey can be fitted
f
togeth
her into the same overrall
struucture. Speccifically, unnilateral meeasures of isolation
i
(oor integratioon)
captturing counntry-specificc attributes that
t generallly decreasee (or increasse)
a country’s innvolvement in cross-bborder econ
nomic activvities can be
treaated as a common
c
coomponent of that co
ountry’s disstances along
variious dimenssions from all
a other couuntries. Forr example, really
r
isolatted
counntries (chharacterizedd by uniique, ingrrown cultuures, clossed
adm
ministrative policies, phhysical rem
moteness, orr extremelyy high or loow
incoomes) can be
b thought of as beingg relatively distant from
m everywheere
elsee. That saidd, one needs to add biilateral indicators to suuch unilaterral
conceptions too capture thhe idea thaat a compaany’s homee base affeccts
whiich countriees are close and which ones
o
are farrther away.
Thee other poinnt worthy off even moree emphasis is that diffe
ferent types of
distance matterr to differennt extents in
i different industries. For instancce,
sincce geographhic distancee affects thhe costs off transportaation, it is of
partticular impoortance to companies
c
d
dealing
in heavy
h
or buulky produccts.
6
Culttural distannce, on thhe other hand,
h
shapes consum
mers’ produuct
prefferences andd should bee a crucial consideratio
c
on for a connsumer gooods
or media
m
comppany—but is much leess importan
nt for a cem
ment or steeel
busiiness. Exhibbit 2-4 provvides a sum
mmary of th
he characterristics that aare
likeely to makee an industrry particularrly sensitive to a partiicular kind of
distance.
Exhibiit 2-4 The CAGE
C
Fram
mework at th
he Industry Level
L
Culttural
Disttance
Culturral differences
matterr the most
when::
 Products have highh
lingguistic content
(TV
V programs)
 Products matter to
culttural or nationall
idenntity (foods)
 Product features
varyy in terms of
sizee (cars) or
stanndards
(eleectrical
equuipment)
 Products carry
couuntry-specific
quaality
assoociations
(winnes)
Adminisstrative
Distancee
Governmentt
involvementt is high in
industries thhat are:
 Producerss of staple
goods (eleectricity)
 Producerss of other
“entitlemeents” (drugs)
 Large empployers
(farming)
 Large supppliers to
governmeent (mass
transportaation)
 National champions
c
(aerospacee)
 Vital to naational
security
(telecomm
munications)
 Exploiterss of natural
resources (oil, mining)
 Subject too high sunk
costs (infrrastructure)
Geographiic
Distance
Geography plaays a
more importan
nt role
when:
 Products hav
ve a low
value-to-weiight or
bulk ratio (ceement)
 Products aree fragile
or perishablee (glass,
fruit)
vision
 Local superv
and operatio
onal
requirementss are
high (servicees)
Economic
Distance
Econnomic differencces
makke the biggest
impaact when:
 Naature of demandd
vaaries with incom
me
(caars)
 Ecconomics of
staandardization oor
scale are limited
(ceement)
 Laabor and other
facctor cost
diffferences are
salient (garmentss)
 Diistribution or
buusiness systems
aree different
(innsurance)
 Coompanies need to
bee responsive andd
aggile (home
apppliances)
E Distance Framework
F
Appplications off the CAGE
Thee CAGE fraamework, onnce it is takken down to
o the industrry level, lennds
itsellf to a veryy broad arraay of appliccations. Lett’s focus heere on four of
the most imporrtant ones.
Makking Differeences Visible
7
Onee applicatioon of the CAGE distance fram
mework is to
t make kkey
diffferences vissible. Whilee this appliccation may seem too obvious
o
to be
worrth belaboriing, most notable
n
inteernational business
b
debbacles can be
tracced back too a failuree to apprecciate a key
y type of cross-counttry
diffference or distance.
d
Fuurthermore, in a very diverse
d
worrld, manageers
cannnot simplyy fall back on personnal experien
nce to enssure adequaate
senssitivity to differences. Checklists
C
o the sort embedded
of
e
inn exhibits 22-3
and 2-4 can help evenn experienced peoplee avoid errrors due to
forggetfulness annd cognitivve overload in a compleex environm
ment.
Undderstanding the Liabilitty of Foreiggnness
A second
s
appplication off the CAG
GE framew
work is to pinpoint tthe
diffferences accross counntries thatt might handicap multinationnal
com
mpanies rellative to local comppetitors—thee so-calledd liability of
foreeignness—oor more gennerally affect their relaative positioons. This ccan
be a useful exeercise for both
b
multinaationals and
d their locall competitors.
When there aree substantiaal liabilities of foreignn
ness, multinnationals oftten
lookk to acquire or set upp joint venttures with local
l
firms to overcom
me
thesse barriers.
Asssessing Natuural Ownerss and Compparing Foreiign Competiitors
Eveen if multinnationals caan be confiddent that th
hey are goiing to prevvail
overr local com
mpetitors in a particularr market, th
he CAGE frramework ccan
be used
u
at a finner level of resolution to
t shed ligh
ht on the rellative position
of multinationa
m
als from diffferent counntries. For example,
e
CA
AGE analyssis
can help explaain why Spaanish firmss do well in
n many induustries acrooss
Latiin Americca, but allso why success in
n Mexico has provved
com
mparatively easier for U.S. firm
ms. 7 Again, such anallysis is moost
valuuable whenn conductedd at the inddustry level and is inddicative rathher
thann decisive. Thus,
T
particcularly goodd or bad glo
obal strategiies can mattter
morre than “nattural ownersship” advanntages.
mparing Maarkets and Discounting
D
Com
by Distancce
Thee CAGE fraamework caan also be used to com
mpare markkets from tthe
persspective of a particularr company. One method to conducct quantitatiive
anallysis of thiss type is to discount (sppecifically, divide) raw
w measures of
8
marrket size orr potential with meassures of disstance, broadly defineed.
While such discounting
d
involves numerous
n
approximati
a
ions, making
som
me adjustmeents of markket potentiaal for distan
nce is a betteer idea, givven
how
w much distance
d
m
matters,
thaan refraining from making aany
adjuustments at all. Some companies
c
d formally
do
y use methods of this soort
in deciding
d
to enter or exiit markets (as
( describeed in the firsst case in thhis
secttion, on Groolsch).
Connclusion
Thee CAGE fraamework heelps identify
fy the most important cross-counttry
diffferences andd their impllications foor strategy. However, understandi
u
ng
diffferences is not a suffiicient basis for setting
g global strrategy. Think
backk to the AD
DDING valuue scorecardd from the previous seection and aask
youurself how each
e
type off difference or distance affects the six levers ffor
valuue addition and subtracction. Is it a challengee that must be accountted
for and addresssed? Or doees it offer an
a opportunity to improove econom
mic
proffitability? The
T next thhree sectionns help add
dress these questions by
introoducing thrree types off strategies for creatin
ng and claim
ming value in
the presence of
o cross-borrder differennces: adaptation, agggregation, aand
arbiitrage.
1
Pankajj Ghemawatt And Jordan
n I. Siegel, “Cases
“
on Reedefining Global
Strategy” , (Harv
vard Business Review Preess, 2011):59
9-69
2
For a more extendeed treatment of this mateerial, see Pannkaj Ghemaw
wat,
“Disstance Still Matters:
M
The Hard
H
Reality of Global Ex
xpansion,” Harvard
Ha
Business
Reviiew, Septembeer 2001. This topic is also addressed at substantially
s
g
greater
lengthh in
chappter 2 of Pankkaj Ghemawatt, Redefining Global Strateegy (Harvard Business
B
Schoool
Press, 2007), andd chapter 3 off Pankaj Ghem
mawat, World
d 3.0: Globall Prosperity aand
How
w to Achieve It
I (Harvard Buusiness Revieew Press, 2011). For a colllection of maaps
that highlight distaance effects, see
s www.ghem
mawat.com.
3
For furtther discussionn of the ways in which CAG
GE differencees can encouraage
ratheer than discouurage cross-boorder activity, see the discussion of arbitrrage in sectionn 5
and the
t referencess cited therein.
4
For an original disccussion of cultural distance and how itt affects foreiign
direcct investmennt, see Jorddan Siegel, Amir Lich
ht, and Shaalom Schwarrtz,
9
“Egaalitarianism, Cultural Disttance, and FDI: A New Approach,” working papper,
Harvvard Business School, Bostoon, October 2008.
2
5
Susan E. Feinberg
g, “The Expansion and Location Paatterns of U
U.S.
Mulltinationals,”” unpublished working paper,
p
Rutgerrs University
y, 2005.
6
For a more
m
extendedd discussion of
o indexicality
y in a broadeer social sciennce
context, see Andrrew Abbott, Chaos of Dissciplines (Chiicago: Univerrsity of Chicaago
Press, 2001).
7
Subram
manian Rangaan and Aldem
mir Drummon
nd, “Explaininng Outcomes in
Com
mpetition amoong Foreign Multinationaals in a Foccal Host Maarket,” Strateggic
Mannagement Jourrnal 25, no. 3:: 285–293.
10