The more two countries differ across these dimensions, the riskier the target foreign market. By contrast, similarities along these dimensions suggest great potential. Com- mon currency, for example, boosts trade more than 300%. Also, types of distance af- fect industries differently. Religious differ- ences, for instance, shape people’s food pref- erences but not their choices of cement or other industrial materials.
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).