8/13/2025
International Business
Management
WEEK 4
Wal-Mart International’s
Operating Margin by Country
(2004)
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Effect of similarities vs.
differences on bilateral trade
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The CAGE frame
Tool to measure the closeness of countries across
four dimensions
•(C)ultural
•(A)dministrative
•(G)eographic
•(E)conomic
Applicable at both industry and country level
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Cultural Difference
Different languages
Different ethnicities
Lack of connective ethnic or social networks
Different religions
Different Values, norms and dispositions
• Example - The QWERTY keyboard is prevalent in the Americas and in
several regions of Europe. The QWERTZ keyboard, also called Swiss
keyboard, is used in German-speaking countries, while in France and
Belgium, AZERTY is the norm.
• A Confucian Principle – “I transmit, rather than create; I believe in and
love the Ancients” – encourages replication of past intellectual endeavors.
In a way promotes copyright infringement.
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Administrative Difference
The Administrative Dimension refers to –
• Laws
• Policies
• Government run institutions
• International organizations, eg. OECD
• Treaties the country either support or has created
Factors Impacting trade
• Quality of Infrastructure
• Country’s Political Stability
• Tariffs
• Non-Tariff Barriers
• Quotas
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Administrative Difference
Factors effecting Administrative Difference
• Colonial ties
• Shared regional trading bloc
• Common currency
• Political hostility
• Example
◦ Closed economy
◦ Extent of home bias
◦ Lack of membership in international organizations
◦ Weak institutions
◦ corruption
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Geographic Distance
As distance increases, chances of a profitable economic relationship
decrease.
• Transportation costs increase
◦ The concept of geographic distance not only includes physical distance
but other attributes of a country’s geography as well
Businesses tend to opt for FDI as Geographic Distance increases
However, the greater the distance, the less likely countries are to invest
overseas since communication costs increase as well.
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Geographic Distance
Geographic distance drivers –
• 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
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Economic Distance
Drivers of economic distance
• Rich-poor differences
• Differences in cost and quality of –
o Natural Resources
o Financial Resources
o Human Resources
o Infrastructure
o Information or knowledge
◦ At the country level –
• Economic Size
• Low per-capita income
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Summary
China seems to be more attractive to India for a general purpose US
investor on mostly economic and geographic grounds
Indian seems to be more attractive on a number of cultural and
administrative grounds
The choice of perspective is the key –
• For eg. For a Western European investor, China is farther in terms of Geography,
India’s language capabilities are not so relevant
o East Europe and North Africa may be more attractive offshoring alternatives than India and China
Countries vary “intranationally’ as well.
• CAGE framework can be separately applied to different regions within the same
country
• For eg. North vs. South; coastal vs. plain region in India
CAGE dimensions are also sensitive to the Industry
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CAGE at the
Industry Level
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Cultural Sensitivity
Cultural differences matter most in industries sensitive
to language, religious differences, and ethnic
differences
• Example TV programs
• Food items (beef and pork are not tolerated in some
countries)
• Ethnic differences – (eg. Clothings, Japanese prefer smaller
cars)
◦ In some cases, cultural sensitivity can be overcome
when country of origin signals very high quality
• Eg. French champagne, Disney, Denims, American pop music
• Typically luxury and youth segment
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Administrative Sensitivity
Industries with a high government involvement are
sensitive to administrative distance:
Industries that -
• Produce staple goods (electricity)
• Producers of other “entitlements” (drugs, medical stents)
• Exploit natural resources
• Large employers (railways, textiles)
• Large gov’t suppliers
• Are national champions (eg. Boeing and Air Bus)
• Vital to national security (Defense, Oil Drilling)
• Subject to high sunk costs
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Geographic Sensitivity
Geography effects industries in which:
• Products have a low value-to weight or value-to-bulk
ratio (cement)
• Products are fragile/perishable (fast foods)
• Local supervision and operational requirements are high
(services)
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Economic Sensitivity
Economic differences have the biggest impact
when:
• Nature of demand varies with income level (cars)
• Economics of standardization or scale are limited
(cement)
• Labour and other factor cost differences are salient
(garments)
• Companies need to be responsive and agile (home
appliances)
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CAGE Framework - Usage
Makes differences visible
Helps assess costs of doing business in a foreign
country
• Allows firms to assess foreign market strategies
oLocalization
oLocal content in products
oRequirement of adaptation
oChoosing between entry modes
oStaffing strategies
Compare different markets in terms of viability of
operations
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Overcoming
Distance – The
AAA framework
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Adaptation – Aggregation -
Arbitrage
Adaptation Aggregation Arbitrage
• Tailoring • Achieving • Exploiting
products and economies of differences
services to scale or rather than
suit local scope adapting to
preferences through them
and regional or
requirements global
efficiencies
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Adaptation
Levers and sublevers for adaptation
Innovation:
Focus: reduce Externalization:
Design: cost of improve
Variation need for reduce burden
variation effectiveness of
variation of variation
variation
• Products • Products • Strategic • Flexibility • Transfer
• Policies • Geographies Alliances • Partitioning • Localization
• Repositioning • Verticals • Franchising • Platforms • Recombination
• Metrics • Segments • User • Modularity • Transformation
adaptation and
Networking
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Aggregation
Identify ways of introducing economies of scale and scope into the
global business model without compromising local responsiveness.
Cultural Publishing a book in a few languages
Fulfilling regulatory requirement to introduce a product in
Administrative
EU
Geographic Adjacent markets, Regional Purchases
Choosing to focus on either developed or developing
Economic
countries, not both
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Arbitrage
Locating separate parts of the value chain in different countries based
on country benefits in terms of CAGE factors
Cultural Association of fashion items with French or Italian culture
Administrative Holding companies in Cayman Islands or Mauritius
Scattered R&D, manufacturing and assembly activities in
Geographic
electronic industry across the globe
Leveraging differences in costs of labor and capital
Economic
(offshoring)
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Which “A” to use
The goal is to create global value
Many companies usually focus on just one “A”
Most likely all of them will be considered at some
point
• Strong marketing focus – adaptation
• R&D – aggregation
• Labor intensive industries - arbitrage
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Thank You………..
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