BBK3363 | International Management
Prepared by Khairul Anuar
L5: CAGE Framework
www.lecturenotes638.wordpress.com
Agenda
• Introduction to Cage Distance Framework
• Gravity Model
• China and India Using CAGE
• Cage at the Industry Level
• Application of the CAGE framework
CAGE Distance Framework
• Tool to measure the closeness of countries among
themselves along 4 dimensions.
– Applicable at the Country and Industry level.
– Not for Cross-industry Analysis because influenced
by industry characteristics.
The Idea Behind the Concept
The world is semi-globalized (not globalized).
Frontiers still matter a great deal in international trade.
The 4 Dimensions
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C (cultural distance)
A (administrative distance)
G (geographic distance)
E (economic distance)
Cultural Dimension
• Attributes of a society sustained by
interactions among people (Not the State)
– Greater Cultural Differences
• Leads to lower Amount of International Trade.
Cultural Dimension
• Long lasting economic interactions
– Leads to weakening effect of cultural differences.
• More malleable over the long-run than
differences in language, ethnicity and
religion.
Examples of CAGE - Culture
• Different languages
• Different ethnicities
– Lack of connective ethnic
or social networks.
• Different religions
• Different Values, norms and dispositions
Administrative Dimension
• Refers to:
– Laws
– Policies
– Government run institutions
– International organizations
– Treaties the country either support or has
created.
Administrative Dimension
• Factors Impacting FDI
– Quality of Political Infrastructures
– Country’s Political Stability.
– Tariffs
– Non-Tariff Barrier
– Quotas
Examples of CAGE - Administration
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•
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Colonial ties
Shared regional trading bloc
Common currency
Political hostility
Examples of CAGE - Administration
• Closed economy
• Extent of home bias
• Lack of membership in international
organizations
• Weak institutions
– corruption
Geographical Dimension
• As distance increase, chances of a
profitable economic relationship decrease.
• Communication and Transportation
Infrastructures can either be interpret as
geographic or economic attributes.
Geographical Dimension
• As distance Increase,
– Transportation costs increase
– Businesses tend to opt for FDI.
• However, the greater the distance, the less likely
countries are to invest overseas since communication
costs increase as well.
Examples of CAGE - Geography
• Physical distance
• Differences in climates and disease
environments
• Differences in time zones
• Lack of land border
• Landlocked geography
• Lack of internal navigability
• Geographic size, remoteness
• Weak transportation/ communication links
Economic Dimension
• Economic mechanisms that affect
international trade.
• High per capita income
– Leads to high labour costs
Examples of CAGE - Economy
• Rich-poor differences
• Natural resources, financial resources, human
resources, infrastructure, information or knowledge
• Economic size
• Low per-capita income
Wal-Mart
• More success in similar countries than in very
different ones.
• Most profitable international markets:
– Canada, U.K., Mexico and Puerto Rico
Wal-Mart Sales
U.S
20%
Internation
al
80%
Profitable Countries
U.K. and Canada
– Common language
– Colony-colonizer ties
Canada and Mexico
– NAFTA members
Canada and Mexico
– Share a common land border with the U.S.
Gravity Models
• Trade is directly related to economic sizes
– And inversely related to physical distance
1% size of the economy
– Leads to
0.7-0.8% in Trade
1% in distance
– Leads to
1% in Trade
Frameworks for Country Analysis
Unilateral attributes
• Only look at one particular country and
ignores its link with other ones
– Examples:
•
•
•
•
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Finance
Technology
Labour
Management
Institutions
Frameworks for Country Analysis
Multilateral attributes
• Takes into account the differences
between the home and foreign country.
– Examples:
• Openness
• Tariffs
• Hidden import barriers
China and India Using CAGE
India & the United States
• Cultural dimension:
• English language
– Between 100M and 300M people
• Westernized elites
• Administrative dimension:
• Common colonizers
• Common law
• Political friendship
India & the United States
• Economic Dimension:
• Specialized labour
• Profitability
• Firm strategy and upgrading
• Soft infrastructure
China and India Using CAGE
China & the United States
• Cultural Dimension:
– Linguistic and ethnic homogeneity
– Diaspora
• Geographical Dimension:
– Closer to U.S. West Coast
– Superior ports and other infrastructure
– East Asian production network
China and India Using CAGE
China & the United States
• Administrative Dimension:
– Ease of doing business
• Economic Dimension:
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–
–
–
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Larger markets
Labour inputs and productivity
Capital availability
Supply chains
Foreign companies as export bridges
Conclusions
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.
Cultural Sensitivity
Cultural difference matter most when:
• Products have high linguistic content
– (TV programs)
• Products matter to cultural/national identity
– (Food)
• Product features vary in terms of size and/or standards
– (cars)
• Products carry country-specific quality associations
– (wine)
CAGE at the Industry Level
• Different product are sensitive to different
dimensions.
• Industry characteristics need to be taken
into consideration.
Administrative Sensitivity
Government involvement is high in industries
that:
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•
•
•
•
•
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Produce staple goods
Produce “entitlements,”
Exploit natural resources
Are large employers or large gov’t suppliers
Are national champions
Vital to national security
Subject to high sunk costs
Geographic Sensitivity
Geography plays a more important role when:
• Products have a low value-to weight or value-tobulk ratio (cement)
• Products are fragile/perishable
• Local supervision and operational requirements
are high
Economic Sensitivity
Economic differences have the biggest impact
when:
– Nature of demand varies with income level
– Economics of standardization or scale
are limited (cement)
– Labour and other factor cost
differences are salient (garments)
– Companies need to be
responsive and agile
Applications of the CAGE Framework
• Making Differences Visible
• Understanding the Liability of Foreignness
• Assessing Natural Owners and Comparing Foreign
Competitors
• Comparing Markets
• Discounting by Distance
Making Differences Visible
• Visible differences reduce the risk of bad
decisions
• Need to consider all 4 dimensions of
distance
– As the Star TV Case:
• Failing to consider all dimensions can lead to
erroneous decisions.
Cultural Disadvantages of MNCs
• Idiosyncratic tastes
– Different designs
– Different standards
• Entrenched taste for local products
• Local biases in demand (“buy local”)
• Lack of social connectivity or networks
Understanding the Liability of Foreignness
• People tend to believe that MNCs always triumph
over local companies.
• The CAGE framework suggests that MNCs are
often disadvantaged over local firms.
Administrative Disadvantages of MNCs
• High government involvement, domestic
resistance to displacement
• National patrimony effects
• Constraints by home government, multiple
regulatory requirements
Geographical Disadvantages of MNCs
• High transport costs
• Lack of required infrastructures
– Communications
– Transportation
• Intense local supervision requirements
• Local performance requirements
Economical Disadvantages of MNCs
• 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
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.
Comparing Markets
• Companies can use the CAGE framework
to choose where to invest.
– (e.g. Should they invest in China or India)
• The answer varies across industries.
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.
Global Generalizations
1.
In a semi-globalized world, differences and similarities between
countries must be accounted for.
2.
Effects of differences and similarities on cross-border economic activity
are enormous.
3.
Distance suggests a good set of metrics for capturing the degree of
difference vs. similarity between countries.
4.
Distance should be thought of as a multidimensional construct with four
types components (CAGE framework).
5.
CAGE framework is typically most fruitfully applied at industry level.
6.
Applications include making differences visible, understanding the
liability of foreignness, comparing competitors, comparing markets, and
discounting markets by size.