1. L5: CAGE Framework www.lecturenotes638.wordpress.com
BBK3363 | International Management
Prepared by Khairul Anuar
L5: CAGE Framework

2. Agenda Introduction to Cage Distance Framework Gravity Model
China and India Using CAGE
Cage at the Industry Level
Application of the CAGE framework

3. 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.

4. The 4 Dimensions C (cultural distance) A (administrative distance)
G (geographic distance)
E (economic distance)

5. Cultural Dimension
Attributes of a society sustained by interactions among people (Not the State)
Greater Cultural Differences
Leads to lower Amount of International Trade.

6. Long lasting economic interactions
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.

7. Examples of CAGE - Culture
Different languages
Different ethnicities
Lack of connective ethnic or social networks.
Different religions
Different Values, norms and dispositions

8. Administrative Dimension
Refers to:
Laws
Policies
Government run institutions
International organizations
Treaties the country either support or has created.

9. Administrative Dimension
Factors Impacting FDI
Quality of Political Infrastructures
Country’s Political Stability.
Tariffs
Non-Tariff Barrier
Quotas

10. Examples of CAGE - Administration
Colonial ties
Shared regional trading bloc
Common currency
Political hostility

11. Examples of CAGE - Administration
Closed economy
Extent of home bias
Lack of membership in international organizations
Weak institutions
corruption

12. 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.

13. 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.

14. 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

15. Economic mechanisms that affect international trade.
Economic Dimension
Economic mechanisms that affect international trade.
High per capita income
Leads to high labour costs

16. Examples of CAGE - Economy
Rich-poor differences
Natural resources, financial resources, human resources, infrastructure, information or knowledge
Economic size
Low per-capita income

17. More success in similar countries than in very different ones.
Wal-Mart
More success in similar countries than in very different ones.
Most profitable international markets:
Canada, U.K., Mexico and Puerto Rico

18. U.K. and Canada Canada and Mexico Profitable Countries Common language
Colony-colonizer ties
Canada and Mexico
NAFTA members
Share a common land border with the U.S.

19. Trade is directly related to economic sizes
Gravity Models
Trade is directly related to economic sizes
And inversely related to physical distance
1% size of the economy
Leads to % in Trade
1% in distance
Leads to 1% in Trade

20. Frameworks for Country Analysis
Unilateral attributes
Only look at one particular country and ignores its link with other ones
Examples:
Finance
Technology
Labour
Management
Institutions

21. Frameworks for Country Analysis
Multilateral attributes
Takes into account the differences between the home and foreign country.
Examples:
Openness
Tariffs
Hidden import barriers

22. 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

23. India & the United States
Economic Dimension:
Specialized labour
Profitability
Firm strategy and upgrading
Soft infrastructure

24. 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

25. China and India Using CAGE
China & the United States
Administrative Dimension:
Ease of doing business
Economic Dimension:
Larger markets
Labour inputs and productivity
Capital availability
Supply chains
Foreign companies as export bridges

26. 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.

27. Cultural difference matter most when:
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)
Image source:

28. CAGE at the Industry Level
Different product are sensitive to different dimensions.
Industry characteristics need to be taken into consideration.

29. Administrative Sensitivity
Government involvement is high in industries that:
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

30. Geographic Sensitivity
Geography plays a more important role when:
Products have a low value-to weight or value-to-bulk ratio (cement)
Products are fragile/perishable
Local supervision and operational requirements are high

31. Economic differences have the biggest impact when:
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

32. 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

33. 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.

34. 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

35. 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.

36. Administrative Disadvantages of MNCs
High government involvement, domestic resistance to displacement
National patrimony effects
Constraints by home government, multiple regulatory requirements

37. Geographical Disadvantages of MNCs
High transport costs
Lack of required infrastructures
Communications
Transportation
Intense local supervision requirements
Local performance requirements

38. 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

39. 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.

40. Companies can use the CAGE framework to choose where to invest.
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.

41. 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.

42. Global Generalizations
In a semi-globalized world, differences and similarities between countries must be accounted for.
Effects of differences and similarities on cross-border economic activity are enormous.
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.