Dr. Ghemawat suggests that in addition to the CPA, companies ought to look at the CAGE Distance Framework. As suggested by the title, distance between two nations is important in establishing trade with another country. Distance in no way is confined to geographic location. Even then geographic location cannot be considered solely on the mileage between two places, since there can be physical barriers that make that mileage more significant. As an example, I think of a student of mine who lived in Pucalpa, Peru. Although only a 30 minute flight to Lima, Pucalpa represented a 24 hour bus drive due to the slow climb up the Andes. One would question the management of any business who wouldn’t realize that the miles between them was not indicative of the time spent trading heavy volume to weight items.
So there are four other “distances” that need to be considered: Cultural distance, Administrative or Political Distance, Geographic Distance, and Economic Distance.
Cultural Distance is obvious to anybody who has traveled to a foreign country. Even the difference between the US and Canada is obvious when one has spent significant time with both cultures. This becomes more distinct with Asian, Arab, Latino, African and European cultures. Europe is great example of this. Although joined by a short geographic distance, the cultural differences between France and Germany are very significant. Germans companies would fail greatly to not account for these when marketing to the French. I recall the shock when in Geneva, the cashier called the client in front of me “stupid” to his face. Customer service is not at all seen with the same importance around the World.
Administrative Distance. Some countries share historical affiliation. Colony-colonizer nations have a 900% increase in trade. Just recently, Latin America was able to get the European Union to drop some of their quotas on bananas, while giving preference to colonies or former colonies (this is especially interesting, judging from the fact that historically Latin America was a colony of Spain and Portugal, but didn’t share the same status in the EU. Perhaps it is more indicative of a lack of political voice for Spain.) Tariffs, quotas, government control and even corruption can be a barrier to entry into a foreign market.
Geographic Distance. Enough mention was made above as to how geographic distance amounts to more than the actual mileage between two markets, but the ease of trade between those to locations. Countries that can trade by just reaching over the border will be more likely to do so. Countries that require extensive or costly travel, will be less likely. Interestingly, services are being traded in spite of these distances. My friends at Global Pueblo Solutions have recently announced the expansion of their offices in India, to outsource computer programming to the US (very simply put). Granted they serve as liaisons for companies unable to bridge the other gaps. Some businesses are revisiting nearshore solutions, because despite the fact that the internet has allowed to bring these countries closer for services, travel is still necessary and at times exhausting.
Economic Distance. This one is often tackled by the CPA. The wealth of a nation, the choice of what that wealth is spent on, the volatility of their currency, the stability of their economy, all these items are significant factors to consider in evaluating a foreign market. The macro and micro economic factors are important considerations for any business looking to invest in a foreign market.
At Permo Opportunities, we look to be able to help businesses evaluate foreign markets when determining their future growth. At times we have done this when businesses have considered expanding or outsourcing their operations, at others we have helped companies evaluate foreign markets when looking to increase their revenues. Either one, a thoughtful and thorough analysis is worth its weight in gold.