The cultural, administrative, geographic, and economic (CAGE) distance framework helps managers identify and assess the impact of distance on various industries.
By analyzing the possible impact of dis- tance—in all its dimensions—you sweeten the odds of investing in profitable foreign markets.
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Application of the CAGE framework requires managers to identify attractive locations based on raw material costs, access to markets or consumers, or other key decision criteria. For instance, a firm maybe most interested in markets with high consumer buying power, so it uses per capita income as the first sorting cue. This would result in some type of ranking. Any international expansion strategy would still need to be backed up by the specific resources and capabilities possessed by the firm, regardless of how rosy the CAGE analysis paints the picture. Think of international expansion as a movement along a continuum from known markets to less-known markets; a firm can move to more CAGE-proximate neighbors before venturing into markets that are portrayed as very different from a CAGE-framework perspective. Each dimension of CAGE is described below.
Cultural Distance. Culture happens to be the first facet of CAGE, in terms of the acronym, but it also can be the most practically perplexing facet for managers. Culture is sometimes referred to as the software of the mind, in that it has a sometimes invisible but indelible influence on people`s values and behaviors.Cultural distance, then, has to do with the possible differences existing in relation to the way individuals from different countries observe certain values and behaviors.
A number of researchers have identified significant cultural differences among countries. Distinct cultural differences are observed around the following dimensions: power distance (the extent to which individuals accept the existence of inequalities between subordinates and superiors within a hierarchical structure); uncertainty avoidance (individuals` willingness to coexist with uncertainty about the future); individualism (how the individuals in a society value individualistic behaviors as opposed to collective ones); predominant values (regarding quantity or quality of life, that is, whether more importance is given to material aspects or a stronger emphasis is laid on interpersonal relationships); and long-term or short-term orientation (the focus on future rewards or the concern about the maintenance of the stability related to the past and the present).
Administrative Distance. Administrative distance reflects the historical and present political and legal associations between trading partners; for example, colonial ties between trading partners, or participation in common trading blocs. This facet of CAGE asks you to examine whether there are historical or current political factors that might favor or impede a business relationship between a company and a new country market. NAFTA, for instance, decreased the administrative distance between U.S. firms and Mexico and Canada. Similarly, historical political hostilities between the United States and Cuba make it virtually impossible (and illegal) for most U.S. firms to do business there. Trade practices between countries can be significantly affected by laws and regulations enacted at the national or international level. Because they affect fundamental business practices, they often affect the competitive position of firms as well.
Geographic Distance. How far apart are trading partners in physical terms: the size of the country, differences in climates, and nature of transportation and information networks? You can think of geographic distance as absolute, in terms of the miles or kilometers that separate a firm from another market or supplier. Technology and the Internet, however, has shrunk distance in terms of transportation time, and now with digital products and services, almost entirely eliminated geographic distance as a constraint of trade between some markets.
Economic Distance. Finally, economic distance captures fundamental differences relating to income, the distribution of wealth, and the relative purchasing power of segments of a geographic market. This has been one of the biggest barriers, for instance, in the way of U.S. firms` success selling products in emerging markets. In global terms, this is the four billion people who live on less than $2 per day. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately target that market, typically using new technology. An example of a product that is designed with the needs of the very poor in mind is that of a shampoo that works best with cold water. Such a product is marketed by Hindustan Lever (part of the Unilever family of firms).
Reference : How to choose foreign countries