Host country location advantages- problems Chap 4

Key questions Why do MNEs face bounded rationality problems? Why is it not possible to successfully use all transferable FSAs from home in host country? What are the barriers to developing host country location advantages? How could the barriers be converted into opportunities for MNEs?

The CAGE framework (Ghemawat) Cultural distance Administrative and political distance Geographic distance Economic/ wealth distance

Implication of Cultural Distance

Understanding Cultural Distance Two different approaches to looking at culture: the psychic or psychological level, which focuses on the “internalized” norms, attitudes and behaviour of individuals from a particular culture; Hofstede cultural framework Trompenaar the institutional level, which looks at national (or group) culture embodied in institutions (government, education, economic institutions as well as in business organizations). Keiretsu of Japan Chaebol of Korea Guanxi of China

Understanding Administrative Distance Political idealogies Legal system Regulatory laws Government – business cooperation Institutional weakness

Understanding Geographic Distance Physical geographic distance Infrastructural differences (transportation, communication) play an important part in geographic distance Size of country produces variety Lack of common borders

Understanding Economic Distance Differences in consumer wealth, income and distribution Differences in costs and quality of Natural resources Financial resources Human resources Infrastructure Intermediate inputs

Factors for CAGE Categories   Cultural Distance Administrative Geographic Economic Country pairs (bilateral) · Different languages · Different ethnicities; lack of connective ethnic or social networks · Different religions · Lack of trust · Different values, norms, and dispositions · Lack of colonial ties · Lack of shared regional trading bloc · Lack of common currency · Political hostility · Physical distance · Lack of land border · Differences in time zones · Differences in climates / disease environments · Rich/poor differences · Other differences in cost or quality of natural resources, financial resources, human resources, infrastructure, and information or knowledge Countries (unilateral) · Insularity · Traditionalism · Nonmarket/closed economy (home bias vs. foreign bias) · Lack of membership in international organizations · Weak institutions, corruption · Landlockedness · Lack of internal navigability · Geographic size · Geographic remoteness · Weak transportation or communication links · Economic size · Low per capita income

Does Distance Matter?

The impact of CAGE factors on industries Are all industries affected equally by all the distance dimensions? How sensitive are industries to different CAGE factors?

Implication for MNEs Quantum of transferrable FSA that could be transferred is inversely related to the CAGE distance Distance is directly related to how much effort is required to develop location bound FSAs in the host country to complement the transferrable FSAs from host country Different strategies to overcome distance

Impact on MNE Strategic Archetypes Centralised exporter and international projector will be affected more as their strategy is based on replication of home FSAs For international coordinator, these distances could provide opportunities to support their strategy A and E distances could translate into lower cost for international projector operation in host country e.g. supply sourcing

International Projector International Coordinator Impact of distances Distance Dimension Centralised exporter International Projector International Coordinator C - Product usage negatively - Positive arbitrage of country of origin Product usage as well as knowledge transfer Working relationship with local players A Faces product regulatory laws and trade barriers Mostly all factors of administrative law would impact Laws related to starting a business G Transportation cost would go up Infrastructure differences Infrastructure difference would impact business setup E - Impact demand negatively - Exchange Rate Consumer demand as well as input cost Input cost difference could be used as arbitrage

Implication for MNE Strategy To have multiple host country destinations to reduce the risk arising due to CAGE distances Need to consider the overall cost impact due to distance differences rather than focus on specific benefits of host location in making decision Applicable more for resource seeker MNEs than market seeker MNEs

Impact of distance could be different on different parts of the value chain Operating across distances could develop new recombination capabilities due to access to different knowledge and abilities and which could create new opportunities e.g. GE Research Centre in Bangalore, India

Usefulness of CAGE framework Make differences visible Assessing liability of foreignness Comparing foreign competitors Comparing markets and discounting by distance

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