Expanding abroad allows domestic businesses to get out of a saturated market. It gives an organization access to new customers and in a market where its competitors do not operate. One of the reasons why businesses expand globally is to be able to provide a reliable service to their international clients. The Expansion through Internationalization is the strategy followed by an organization when it aims to expand beyond the national border.  

Companies habitually overestimate the attractiveness of foreign markets; they get dazzled by the sheer size of untapped markets, they lose sight of the difficulties while pioneering new, often very different territories. The problem is rooted in the analytic tools the most prominent being country portfolio analysis that managers use to judge international investments. By focusing on national wealth, consumer income, and people’s propensity to consume, managers emphasize potential sales, ignoring the costs and risks of doing business in a new market. Most of these costs and risks result from the barriers created by distance. Here “distance,” however, does not refer only to geography.

Pankaj Ghemawat is an international strategy guru who developed the CAGE framework to offer businesses a way to evaluate countries in terms of the “distance” between them. Pankaj Ghemawat’s “Distance Still Matters,” article in Harvard Business Review became world-famous. He explains distance is not only the physical geographic distance between countries but also the cultural, administrative, geographic and economic dissimilarities between them. The CAGE framework offers a broader view of distance and provides another way of thinking about location and the opportunities and affiliated risks associated with global arbitrage (taking advantage of price in two or more markets). 

Ghemawat provides an example of a North American fast-food company. In which he explains that on the basis for fast-food company to grow is per capita income. Countries like Germany and Japan would be the most attractive markets for the expansion for the North American fast-food company. However, when he plots the CAGE analysis using the CAGE framework, he shows that Mexico ranks as the second most attractive market for international expansion for the fast-food company, far ahead of Germany and Japan.

Another example provided by Ghemwat is of Dell Computers and its efforts to compete effectively in China. The vehicles it used to enter China were just as important in its strategy as its choice of geographic arena. For Dell’s corporate clients in China, the CAGE framework would likely have revealed relatively little distance on all four dimensions: Cultural, Administration, Geographical, Economical parameters. The fact that many personal computer components have been sourced from China by the mega computer manufacturing companies; however, for the consumer segment, the distance was rather great. For example, Chinese consumers don’t’ regularly buy over the Internet, which is the primary way Dell sells its products in the United States. One possible outcome could have been for Dell to avoid the Chinese consumer market altogether. However, Dell opted to choose a strategic alliance with distributors whose knowledge base and capabilities allowed Dell to bridge the CAGE gap in Chinese market

The impacts of the distances and differences figured out by the CAGE Framework between the countries have been demonstrated in a quantitative manner via gravity models. It is an excellent analytical tool for the various companies and organizations that develop international strategies with an intention of the global expansion of their businesses.

One most important parameter in CAGE framework explains that when looking to expand business into a foreign market, the cultural differences between the two countries are hard to change whereas differences due to the legal and economic structures can be changed easily.

Cultural Distance

It includes languages, different ethnicities, different religions, and different social norms.

Language

International business activities are always accompanied by language-related barriers as companies are confronted with multiple local languages and a multinational workforce. To increase the efficiency of corporate communication, documentation and cross-national teamwork, an increasing number of companies have implemented common language policies in both their headquarters and their foreign subsidiaries and made English their official corporate language.

Language differences present a common stumbling block in international business communication. It has been observed that whenever one party is using a second language or a translator, the potential for misunderstandings increases. Even if you’re bilingual, slang, jokes and figures of speech can cause problems. Try speaking slowly and clearly in these circumstances. If you’re giving an oral presentation, a clear hand out in simple language helps avoid misunderstandings. For example, BMW is easy to pronounce in English but say it like the Germans do – ‘bey-em-vey’. The ‘w’ is pronounced as ‘v’.

Ethnicities

Meaning traditions and mannerisms in ethnic groups.  For example, in Japan and the U.K. people tend to avoid the outward show of feelings, while the United States, France and Italy accept a stronger show of emotions, even in business. Some cultures have strict dress codes for business. For example, in Muslim countries, women must avoid sleeveless tops, short skirts and low necklines. In Japan, conservative business suits in dark colors are essential to make the best impression.

The advice is, when new to a culture, observe what others wear for business. Start out with conservative outfits in neutral colors until you learn what’s respectful and appropriate,

You can unknowingly cause offence when meeting foreign clients one-on-one. In Japan, you should bow rather than shake hands unless the other party offers a hand first. The exchange of business cards is a requirement in many cultures.

In Arab countries, you should accept the card with your right hand, while in China and Japan you should use both hands. In China, you can show respect by taking a Chinese name. In Brazil, business acquaintances stand close to build trust, so backing away may be construed as a rebuff.

Gift-giving etiquette is a complex subject that can be difficult to master. In China, gifts are the norm and expected, while in other countries, the wrong gifts are insulting. Avoid bringing bad luck in China – don’t give a clock or a gift with blue, white or black wrapping paper. Keep offering your gift, because Chinese recipients usually refuse three times before accepting.

If you comply with a request for a bribe in any country, corruption charges are a likely complication. It’s illegal for US nationals to bribe foreign officials, although sometimes gifts legal in the host country are allowed.

Following local customs builds better relationships at business meetings. For example, Canadians are clock-watchers and expect everyone to arrive on time. In Japanese meetings, often only the most senior person for each side talks, while others typically remain silent.

In China, business dinners often include many toasts, so pace you’re drinking accordingly. To maintain the respect of Asian contacts, avoid etiquette mistakes that cause you to lose face.

Religion

Religious observance is widespread and continues to influence managerial behaviour in many parts of the world. However, its role in international business negotiations has not received much scholarly attention. Lot of research proves that some of the key ways in which religious belief shapes negotiation behaviour.

Administrative Distance

It includes political environment, money (Currency value) political relationship (either friendly or hostile relation) government policies and institutional weaknesses.

Political Environment 

The political environment can be studied in terms of the central government, the citizens of a country, rules, and regulations or international relations. Examples of political factors related to the central government of a country are levels of bureaucracy, corruption, and government stability.

Political risk in international business results from various factors that can negatively affect a company’s income or complicate its business strategy. These factors include macroeconomic issues such as high interest rates and social issues such as civil unrest. Since the past year Lebanon is protesting also known locally as the October Revolution, for a series of civil protests taking place in Lebanon. Trade between India and Lebanon during Jan-June 2019 stands at $ 181.00 million, with Indian exports to Lebanon being $ 171.00 million and Indian imports from Lebanon amounting to $ 10.00 million which is now hampered because of Pandemic and unrest in Lebanon.

Currency Value

The balance of trade is the value of a country’s exports minus its imports. It’s the biggest component of the balance of payments that measures all international transactions. It’s easy to measure since all goods and many services pass through the customs office. India imports goods from China priced in Yuan and imports goods from U.S priced in Dollars. Both currency price changes less frequently.

Political Relationship

India’s closest friends in world include the Russian Federation, Israel, Afghanistan, France, Bhutan, Bangladesh, and the United States. India is labelled globally for many things; a regional power, a nuclear power, a nascent global power, and a potential superpower, among others. With a growing international influence, by playing influential roles in various global matters, India has always held its head high when it comes to maintaining peaceful bilateral relationships with various countries, excepting its neighbouring countries in the subcontinent. Given the current scenario of the country’s relationships, it can be imagined that the farther away a country is, the more likely it is to have a strong relationship with India.

Geographical Distance

It includes parameters such as physical remoteness, lack of common border, lack of sea or river access, size of country, time zone, weak transportation reach or communication reach, differences in climate.

Physical Remoteness

All the great empires in the world have been based around trade routes, and these are almost always maritime transports (near the sea). There are notable exceptions; the medieval Mongol empire led by Genghis Khan was based on the Silk Road from China to the west. Many of the world’s poorest countries are severely hindered because they are landlocked; they are situated either in high mountain ranges; or lack passable rivers, long coastlines, or good natural harbours.

Climate

One of the most important factors in development is geography, where the country is in the world, and climate. It’s no coincidence that the poorest countries are in the tropics, where it is hot, the land is less fertile, and water is scarcer, where diseases flourish. Conversely, Europe and North America profit from huge tracts of very fertile land, a temperate climate, and good rainfall. In extremes of climate, either hot or cold, too much energy goes into the simple business of survival for there to be much waste of energy for development.

Lack of common borders

China has three of the world’s busiest ports, and so does the US. With ports you can raise money through tolls and shipping services. If you have no access to the coast, not only do you miss out on these services, you have to transport everything by land, which is much more expensive. And what if your neighbours don’t like you? Ice-bound on its northern coastlines, Russians have quarrelled for centuries over access to a warm water port, the Crimean War being the most serious one. Countries like Afghanistan, Rwanda, Malawi, or Bolivia are all hindered by access to ports. Other countries, like Ethiopia or Lesotho, are not only landlocked, but mountainous as well, making trade even more expensive.

Economic Distance

It consists of parameters such as consumer income, natural resources, financial resources, human resources, infrastructure, intermediate inputs, information or knowledge.    

Consumer Income  

Money per capita can refer to income per capita, money supply per capita, gross domestic product (GDP) per capita, or even net worth per capita. Countries like USA, Luxembourg, Switzerland, Germany, and Australia are always an attraction in International Business. There is plentiful evidence that tradable goods are more expensive in countries with high per capita incomes.

Natural Resources

Natural resources have made countries richer. It takes infrastructure to capitalise on these, but some places have a distinct advantage over others. Oil is the most obvious. Nobody is any doubt about how Saudi Arabia or UAE make their money. Among other advantages, gold and diamonds have helped South Africa build the most successful economy on the continent. These are all non-renewable resources; once they’re gone, they’re gone, but while stocks last there is wealth to be made.

Besides these there are renewable resources; forests, fish, stocks that, if correctly managed, will refresh themselves. Much South American development has been based on the Amazon rainforest in natural rubber and then timber.

Finally, there is what is sometimes called ‘flow resources’. These are renewables that need no management, wind, tide and solar resources. The Earth Policy Institute describes the American Great Plains as ‘the Saudi Arabia of wind energy’, while sunshine-rich places like California, Sicily and Portugal are able to invest in solar power. No natural resource is a license to print money, and there are plenty of poor countries who are rich in resources, but then the fact is that have not been able to manage it.

I want to illustrate my point here with one of relevant examples how corporate invest for growing in new markets, found on Internet: when McDonald’s tried to enter the Russian market, it found an institutional void: a lack of local suppliers to provide the food products it needs. Rather than abandoning market entry, McDonald’s decided to adapt its business model. Instead of outsourcing supply-chain operations like it does in the United States, McDonald’s worked with a joint-venture partner to fill the voids. It imported cattle from Holland and russet potatoes from the United States, brought in agricultural specialists from Canada and Europe to improve Russian farmers’ management practices, and lent money to farmers so that they could invest in better seeds and equipment. As a result of establishing its own supply-chain and management systems, McDonald’s controlled 80% of the Russian fast-food market by 2010. The process, however, took fifteen years and $250 million in developing its Russian market.

Human Resources

Globalization forces companies to go international and enter new markets. All the corporate values and strategies change after internationalization. Human resource management (HRM), as a part of key business functional dimensions, faces a high level of development as well. Globalization has had far-reaching effects in business but also in strategic HRM planning. The signing of trade agreements, growth of new markets such as with India and Malaysia is because of young, trained and English speaking labour.

An example of dealing with an institutional void and changing the institutional context is by the “Big Four” audit firms (i.e., Ernst & Young, KPMG, Deloitte Touché Tohmatsu, and PricewaterhouseCoopers) when they entered Brazil. At the time, Brazil had a untried audit services market. When the four firms set up branches in Brazil, they raised financial reporting and auditing standards across the country, thus bringing a dramatic improvement to the local market. The Big Four invested in training and development the accountants in Brazil.   

Labour law

The legal system in labour law practiced in a country has a great effect on the types of compensation; union issues, how people are hired, fired, and laid off and safety issues. Rules on discrimination, for example, are set by the country. In China, for example, it is acceptable to ask someone their age, marital status, and other questions that would be considered illegal in the United States. In another legal example, in Costa Rica, known as a thirteenth month salary is required to be paid in December. In Costa Rica, All rank-and-file employees who have worked for at least one (1) month during the calendar year, are entitled to receive 13th month pay regardless of the nature of their employment and irrespective of the methods by which their wages are paid. This perilous labour law distracts many firms from starting business in Costa Rica.

Infrastructure

Infrastructure matters to trade mainly because it decreases the cost of trade and ensure the ease of doing business in host economies. Lower trade costs raise the potential for increased export markets. Firms can choose the strategy of staying away from a market with infrastructural voids. For example, Home Depot Inc. the largest home improvement retailer in the United States, supplying tools, construction products, and services requires institutions like reliable transportation networks to minimize inventory costs and the practice of employee stock ownership which motivates workers to provide great service. The Home Depot has decided to avoid countries with weak logistics systems and poorly developed capital markets because the company would not be able to attain the low cost–great service combination that is its hallmark.

A PESTLE analysis (formerly known as PEST analysis) is a frame or a managerial tool in strategic management used to analyze and monitor the macro-environmental factors that may have a profound impact on an organization’s performance. This tool is especially useful when starting a new business or entering a foreign market. In PESTLE P stands for politics, E stands for Economics, S stands for Social, T stands for Technology, L stands for legal and the last E stands for Environment factors.

Politics

Spanish oil giant Repsol had to face a downsizing due to political intervention in Argentina.  It started an above average profitability operations in Argentina. But the business was later impounded by the Left Wing government. So the decade long profits didn’t materialize in the end. Certain factors create Inter-linkages in many ways. US-based Google had to deal with the Chinese government’s restrictions on the freedom of speech in order to do business in China. China’s different set of political and legal guidelines made Google choose to cease its mainland Chinese version of its site and direct mainland Chinese users to a Hong Kong version.

Political system is basically the system of politics and government in a country. It governs a complete set of rules, regulations, institutions, and attitudes. A main differentiator of political systems is each system’s philosophy on the rights of the individual and the group as well as the role of government. Each political system’s philosophy impacts the policies that govern the local economy and business environment. There are more than thirteen major types of government, each of which consists of multiple variations.

Political decisions affect the economic environment for example the taxation system in the country, political decisions influence the country’s socio-cultural environment for example the LGBT; few countries are gay friendly, while most are not. Politicians can influence the rate of emergence of new technologies, politicians can influence acceptance of new technologies. Political factors relate to how the government in a country mediates in the economy. Political factors are government regulations that influence business operation positively and negatively. Managers must keep a bird’s eye view over political factors. These factors can be current; they can be impending legislation, political stability and changes, freedom of speech, protection and discrimination laws etc. Political factors are inclusive of tax policies, labor law, environmental law, trade restrictions, tariffs and the most important of all political stability.

Economics

Nike has invested largely on their women’s footwear, clothes and equipments for women in Pakistan since the women are getting more liberal in Pakistan. Pakistan is already one of the primary suppliers for the Nike’s sports items. The rich Pakistanis are brand conscious and spend conspicuously on themselves.  Another good example of economic factor is of Coca-Cola operations in countries because of wages. Wages influence the company’s production costs; in countries like the UK they are quite high, whereas in Asian countries the salaries are low. Therefore, Coca Cola manufacturing is on higher side in Asian countries.

There are two great economic factors affecting business models they are demand and supply. Demand is how willing and able a consumer is to purchasing what a business offers and supply is how able the business is to make available what the consumer needs. Economic factors include economic growth, interest rates, exchange rates and inflation rates. These factors greatly affect how businesses operate and make decisions. For example, interest rates affect a firm’s cost of capital and therefore to what extent a business grows and expands. Exchange rates can affect the costs of exporting goods and the supply and price of imported goods in an economy.

Social

Because Pepsi is no-alcoholic drink, it has to maintain the strict differences in cultures around the world. It is essential for Pepsi to communicate its image as a global brand to change people’s perception. Pepsi values all the festivals in order to relate to their market.  Reacting to the social factor has helped Pepsi cash upon the opportunity of increasing sales during festive seasons around the world. Since June 1, 2011 a smoking ban in all of Argentina prohibits smoking in workplaces, all public indoor areas, schools, hospitals, museums and libraries, theatres, and all public transport. However, smoking is still allowed in balconies, terraces and patios. The law also included the prohibiting of advertising and sponsoring of tobacco. The fine for breaking the law is equivalent to 250 to 1,000,000 packets of the most expensive cigarettes in the market. Imagine, how cigarette companies could advertise in Argentina?

This measurement of the general environment represents the demographic characteristics, norms, customs and values of the population within which the organization operates. This includes population trends such as the population growth rate, age distribution, income distribution, career attitudes, safety emphasis, health consciousness, lifestyle attitudes and cultural barriers. These factors are especially important for marketers when targeting certain segments. It also includes the local workforce and its willingness to work under certain conditions.

Technology

Apple, Google, Blackberry and Microsoft have changed the information technology scene completely. Google is the most widely used search engine on the internet today. It receives over 3 billion online searches on a daily basis. It was created in 1997 by American computer scientists Larry Page and Sergey Brin.

Technological factors pertain to innovations in technology that may affect the operations of the industry and the market favorably or unfavorably. The progress in technology refers to technology incentives, the level of innovation, automation, research and development (R&D) activity, technological change and the amount of technological awareness that a market possesses. These factors may influence decisions to enter or not enter certain industries, to launch or not launch certain products or to outsource production activities abroad. By knowing what is going on technology-wise, the management of organizations may be able to prevent its company from spending a lot of money on developing a technology that would become obsolete very soon due to disruptive technological changes elsewhere. Technological Factors are linked to innovation in the industry, as well as innovation of the overall economy. Not being up to date to the latest trends of a particular industry can be extremely harmful to operations.

Legal

The foremost criteria include ease of starting a business, ease of obtaining construction permits, access to electrical utilities, ease of registering property, availability of credit, protection for minority investors, tax rates and collection methods, capacity for trade to occur across borders, and ease of enforcing contracts and declaring insolvency. Labor market regulation is also considered in compiling these rankings. It takes few hours to start a business in New Zealand. Thanks to a simple online procedure! High standards of living combined with one of the world’s most skilled labor forces are among the many factors that make Sweden an excellent country within which to carry out business and trade. Its strong infrastructure and well-developed social programs are strong incentives as well.

Although these factors may have some overlap with the political factors, they include more specific laws such as discrimination laws, antitrust laws, employment laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is clear that companies need to know what is and what is not legal in order to trade successfully and ethically in a country.

Environment

Through 2011, Bhutan experienced accelerated economic activities pressured natural resources such as land, air, and water. Development activities increased urbanization, industrialization, mining and quarrying, agriculture, and solid waste management projects. Land degeneration, biodiversity and habitat loss, high fuel-wood consumption, and human-wildlife conflicts are some of Bhutan’s environmental challenges. Notwithstanding these problems, Bhutan remains overall carbon-neutral.

Environmental factors have come to the forefront recently. They have become important due to the increasing scarcity of raw materials, increased pollution and carbon footprint. Environmental factors include ecological and environmental aspects such as weather, climate, environmental offsets and climate change which may especially affect industries such as tourism, farming, agriculture and insurance. Furthermore, growing awareness of the potential impacts of climate change is affecting how companies operate and the products they offer. This has led to many companies getting more and more involved in Corporate Social Responsibilities (CSR) practices and sustainability.