Doing business abroad is fraught with peril. Even Target failed when it opened stores in Canada—a move that one would think was easy. A firm must assess the risks and the likelihood of success before taking the leap. One way to do this is to analyze the political, economic, and cultural risks discussed earlier in this chapter. Another tool to assist in this evaluation is the CAGE framework.
The CAGE framework (Mariadoss, 2017) helps a firm gauge the distance that the target country is from the firm’s home country on four dimensions. The greater the distance or difference, the more risk exists and the less opportunity there is for success.
The four CAGE dimensions are:
- Cultural Distance
- Administrative Distance
- Geographic Distance
- Economic Distance
Cultural Distance: This refers to the differences of cultures between the target and home countries. The history of relationships between nations provides one source of explanation for the closeness (similarity) or distance (difference) between cultures. For instance, many countries suffered under the domination of imperial rule during colonial times with effects that are evident in their contemporary culture and influencing national relationships. For example, as a former colony of Great Britain, there is a smaller cultural distance between the US and the United Kingdom than there is between the US and Spain. However, this is not always the case. Western European countries have a significant cultural distance with many Asian countries despite having colonized many of those same territories. Therefore, history provides a partial insight into cultural distance.
Societal customs and values also play a key role in cultural distance. Language differences also increase or decrease cultural distance. At first glance, it would appear that the US and India would have a large cultural distance, but this is reduced because much of business in India is conducted in English, and both countries were colonies of Great Britain.
Administrative Distance: The legal and political systems of the home and target countries determine the administrative distance between the two. In countries where the political systems are different, for example, democracy versus communism, there is a greater distance and more uncertainty. Different laws between countries can make compliance and doing business more difficult. For example, in some countries, laws governing contract compliance are not enforced. In some nations if a buyer fails to make payment for purchases, the seller can sue, but it may take years before a court will even hear the case. Also, labor laws can be quite different among nations. In the Dominican Republic, for instance, companies are required to pay employees a thirteenth month of salary at the end of the year, as a bonus. Alternatively, some nations protect the civil rights of people who fall within protected categories in the US (e.g., age, race, sex, class, gender, sexual orientation, etc.), but other nations may not. This raises particularly tricky questions for firms who must abide by US laws, but seek to expand abroad,
Geographic Distance: The literal physical distance between the home and target country are a key consideration of this dimension. The more miles the countries are apart, the longer and more costly it is to go there or to ship from one to the other. But mileage is not the only factor. The ease of communication between countries is another. Advances in telephone and internet communications have made this almost a non-issue in most countries. However, when two countries are twelve time zones apart, like the US and China, communication can be hampered when work schedules are twelve hours out of sync. Geographic distance can also be affected by the infrastructure of a country in other ways other than communication and internet capabilities. For example, Haiti is physically close to the US, but its lack of adequate port facilities make it a poor target for outsourcing manufacturing.
Economic Distance: International business between two countries is also impacted by the differences in their economic factors. The greater the differences in the two economies, the more difficult it is to be successful. One way to measure the difference is by GDP per capita. Countries with a similar GDP per capita have a greater opportunity for success. If the purchasing power and disposable income of the target country are quite different from the home country, working in the target country is more challenging.
Suppose Chipotle believes there are great opportunities if they go international. Executives have narrowed the countries down to two—Canada and Spain. Canada made the list because they are close and more like the US. But Spain has 10 million more inhabitants, is not spread out like Canada is, and Spaniards should have a great attraction to Chipotle’s menu, since it’s Mexican cuisine. The CAGE framework can be used to help make a decision. The four dimensions for each country are measured on a 10 point scale, with the higher numbers indicating greater distance. Therefore, the country with the lower score is the better choice. Table 9.5 illustrates the process.
|3 Oh, there is the French speaking part of Canada
|2 Parliamentarian with Prime Minister vs US
|2 Very close, but cities very spread out
|2 About the same except for currency
|7 Language difference, and they don’t eat much Mexican food
|5 Member of EU, similar to US, some laws different
|5 Easy 6 hour plane flight, 6 hour time difference.
|6 US GDP per capita twice Spain’s.
As can be seen from the CAGE scores, the Chipotle executives’ hunches about Spain proved incorrect, and Canada is the best location to first go international.
CAGE Framework for International Trade-Global Matters [02:24]
The video for this lesson discusses the CAGE framework and how it can be used to evaluate international trade opportunities.
You can view this video here: https://youtu.be/7FpUJaG7uMk
- Success with implementing an international strategy starts with selecting the correct country to enter. Using the CAGE framework allows a firm to compare target countries to help make this critical decision. Understanding the distance between the home country and the target country as it relates to differences in culture, administrative functions, geographic barriers, and economic disparities will assist the firm in making the best decision.
- Tesla wants to explore going into Europe or South America, and has narrowed down the countries to Germany or Chile. Use the CAGE framework to decide which would be the better choice.
- Divide up into groups of 4 or 8 and discuss some of the cultural differences that exist across countries that cultural distance shows should be taken into consideration. Report out.
Mariadoss, B. J. (2017). Global Market Opportnity Assessment – Cage Analysis. Core principles of international marketing [Pressbooks edition]. CC BY NC SA 3.0. Washington State University. https://opentext.wsu.edu/mktg360/chapter/6-3-selecting-target-markets-and-target-market-strategies.
Carlson School of Management. (2015, March 12). Pankaj Ghemawat: CAGE framework for international trade – global matters [Video]. YouTube. https://youtu.be/7FpUJaG7uMk.