1. Host country location advantages- problems
Chap 4

2. 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?

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

4. Implication of Cultural Distance

5. 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

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

8. 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

9. 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

10. 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

11. Does Distance Matter?

12. 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?

13. 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

14. 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

15. 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

16. 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

17. 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

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