The four dimensions of distance

Expanding business in other countries is an important decision for corporations because it will influence the corporations’ success or failure in the future. However, to expand business, setting up a strategy is the most important part because it is a direction or a map for the corporation to follow. A good strategy forces the company to do more analysis and research, such as analyzing the four dimensions of distance: Cultural, Administrative, Geographic and Economic (CAGE).
Four Dimensions of Distance
Knowing what does four dimensions of distance includes is very important. Christopher et al states that the four dimensions of distance are cultural, administrative, geographic, and economic. These four types of differences influence different business in different ways.
For example, the geographic will influence the company’s decision of how to design products. Understanding how to set a CAGE distance framework is important to every international company because it helps them to adjust the future strategy. “The CAGE distance framework helps managers identify and assess the impact of distance on various industries. The upper portio of the table lists the key attributes underlying the four dimensions of distance. The lower portion shows how they affect different products and industries." Every international company has to pay attention of analysis four dimensions of distance because it could help managers to identify and to set strategies to successful access into a new market in a foreign country.
Different people have different definition of the four dimensions. According to Pankaj, to modify the differences of cultural, administrative, geographic and economic dimensions between countries “not only helps identify the key differences in particular settings; it also affords insights into differences in differences by providing a basis for distinguishing countries that are relatively close, along the key dimensions, from those that are relatively fat.” It is means that different dimensions not only help company successful in the new market, but also help the company to create a new value or a new culture to into a foreign country.
Doing business in another country is harder than doing business in the domestic home country because of many uncertainties. However, to identify the geographic distance could help the corporation to get more information to access the new country.
Cultural Distance
Cultural differences not only affect how the business is perceived by other companies, but the understanding of these differences can mean the difference between having a successful business relation or not.
Language is one of the more evident barriers when dealing with trade between companies; though language is easily perceivable it can become a source of confusion when not chosen correctly. Words are easily misinterpreted, when dealing with other cultures it is important to be concise and avoid slang.Geert Hofstede identifies five major contributors that affect cultural differences. Being aware of these differences and not just acting upon the norms of one’s own country can prevent major misunderstandings.
Power Distance Index (PDI)
The first difference is Power Distance Index (PDI). This is the extent to which less powerful members or an organization expect that power is distributed unequally. Cultures that have a low power distance feel more confident to relate to their superiors as equals and feel they have the right to discuss work matters in a democratic way. Countries that experience a low PDI are Canada, Ireland, Austria, amongst others. Cultures with a high power distance accept inequality in the organization, there is a strict outline separating all levels of management in a hierarchy. It is not acceptable for subordinates to correct their superiors and must acknowledge that the distance is present. This formality is important when two highly different cultures in terms of PDI are dealing with each other, one company can be seen as too relaxed and inadvertently disrespect an organization with a very high PDI.
Individualism (IDV)
This dimension measures how much members of the culture define themselves apart from their group memberships. In individualist cultures, people are expected to develop and display their individual personalities and to choose their own affiliations on the one side versus its opposite, collectivism, that is the degree to which individuals are integrated into groups. Cultures that are highly individualistic have expectations that people are supposed to rely on themselves, and bonds are not normally deep between people that are not within immediate relations. In terms of an organization, this type would focus on individual goals and shy away from teamwork. Cultures that have low individualism are very group focused; people take care of each other, within an organization this is reflected as being highly focused on team work and aiming for a cohesive organization.
Masculinity (MAS)
This dimension measures the value placed on traditionally male or female values (as understood in most Western cultures). In so-called 'masculine' cultures, people (whether male or female) value competitiveness, assertiveness, ambition, and the accumulation of wealth and material possessions. In so-called 'feminine' cultures, people ( whether male or female)value relationships and quality of life. Cultures that possess a highly masculine culture will take on the traditional masculine traits and not generally feel comfortable working with other cultures that encompass female traits.

Uncertainty Avoidance Index (UAI)
This dimension measures how much members of a society are anxious about the unknown, and as a consequence, attempt to cope with anxiety by minimizing uncertainty. Cultures with low uncertainty avoidance experience a strong need for flexibility, informal rules, and are content with minimal security. A culture with a high UAI will appreciate having set rules in place, giving structure and feel the need for job security.
Long-Term Orientation (LTO)
This dimension describes a society's "time horizon," or the importance attached to the future versus the past and present. Cultures that hold a high value for long term orientation often people value planning and hold a high regard for the future in comparison to those cultures who value short term orientation the focus is on the presence.
Ignoring cultural differences can be detrimental; encompassing these 5 values before forming a relationship with another company will help prevent misunderstanding and aid in the formation of valuable relationships.
Administrative Distance
Administrative distance is the second dimension of distance in the CAGE framework. It also is another essential factor for managers to consider when expanding their Multi-National Enterprises (MNEs) into the global market. There are five factors that give rise to administrative distance: absence of colonial ties and shared monetary, political associations, hostility and government policies and institutional weakness.
Absence of Colonial Ties and Shared Monetary Associations
Countries can create administrative distance because of historical reasons with long-lasting influences, such as colonial upbringing, custom and education. For instance, Hong Kong used to be one of the colonies of the British Empire for over one century. It is not perhaps too surprising to find the Britain’s continuing ties with their effects on Hong Kong’s commonwealth legislation. To date, the business transitions between Mainland China and Hong Kong are still international, due to Hong Kong continuing to follow the English Common Law tradition established during British rule. Therefore, Hong Kong has developed both a traditional Chinese culture and a western British culture, which makes Hong Kong more attractive to MNEs to apply their expansion strategies in the Asian market. They plan to first operate their international business in Hong Kong and then use the accumulated knowledge and experience to start their business in Mainland China.
However, this kind of expansion strategy may fail, because of two reasons. Firstly, there are customs and regulations differences between Hong Kong and mainland China, which would unavoidably increase the difficulties when MNEs transfer their business from Hong Kong to mainland China. Secondly, the differences between Cantonese and Mandarin will shape the effectiveness of transmitting business ideas, as well as having brainstorming conference.
Political Associations, Hostility and Government Policies
International trade is inevitably influenced by the historical and political association of trading countries. Some host countries think that the Foreign Direct Investment (FDI) operates with the loss of national economic independence. The concern is that a foreign parent company without commitment to the host country could make key decisions, which can have effects on the host country’s economy. And circumstances can be worse since the host country’s government has no control over a foreign parent company’s each decisions.

Haier’s political implication in the U.S. is one case in point. Haier is an MNE from China, and ranks as the best Chinese brand that is positioned to become a global success. Acquisitions are part of Haier's growth plan, according to Dr. Philip Carmichael, the president of Haier’s Asia-Pacific operations. He claims that “In the last 25 years, there had been a string of acquisitions both in and outside of China ... we're also always looking for strategic collaboration ... it could be joint use of resources or cross marketing of brands. It equity ownership.”
However, the U.S. started forcing its antidumping laws and supporting non-Chinese manufacturers. These implications disturbed Haier´s development in the U.S., and put Haier in a real dilemma. Haier will have to solve these problems in a relatively short time while they will have to deal with the frequently changing U.S. government's policies at the same time.
Institutional Weakness
The relationship with the host country and its environment are also essential to MNEs’ expansion blueprint. Flagged-market access restrictions, custom duties, and unfamiliarity with the business culture could enlarge the administrative distance.
Disney in Mainland China in the late 1990s is one case in point. “In late 1996, China’s leaders vehemently objected to Disney’s plans to distribute the movie ‘Kundun,’ Martin Scorsese’s film that told the story of Tibet’s exiled spiritual leader, the Dalai Lama, and China’s brutal occupation of that nation. Following the film’s release in 1997, China’s leaders made threatening statements concerning Disney’s future in their markets."
Geographic Distance
Christopher et al states that geographic distance is not only about the physical distance from the target country to domestic country. It also includes other attributes, such as “the physical size of the country, average within-country distances to borders, access to water ways and the ocean, and topography.”
Attributes Creating Distance
What does the meaning of the attributes creating distance? Christopher et al states that the size of the country, natural phenomena, weak transportation, communication links, lack of sea or river access, physical remoteness and lock of a common border are the major factors that could creating geographic distance. For example, if a Chinese trade company wants to export stone to Canada, the Chinese company has to decide to choose to go across Pacific Ocean or to go across Atlantic Ocean. Choosing which one to go across will affect the costing of the shipping products.
Industries or Products Affected by Distance
What does the meaning of that products affected by distance, and how does it affected by the business decisions? In any specific industry, geographic distance influences the value of products, choosing material of the product, communication and quality of the services. For example, if a water bottle company wants to access into Tibet area, they may need to choose of using plastic material to instead of using glass. Glass bottle are more expensive than plastic. Also, glass bottle is easy to break and plastic bottle is easy to keep for a long time.
Economic Distance
The economic distance is the fourth dimension of distance in the CAGE framework. The economic distance focuses on differences that have influence on cross-border economic activity. Important economic aspects are the wealth and income of consumers in the host country compared with the wealth and income of consumers in the home country.
Wealth and Income
Expanding companies in rich nations which are looking to increase their market size are relatively more expanding to countries with the same economic wealth than expanding to countries with less economic wealth. By expanding to a similar economic environment the company can duplicate there business model into the host-country and use the companies competitive advantage. In countries where the economic wealth and consumer income is lower, companies could have difficulties using their competitive advantage. For example a Wal-Mart in India would be operating differently than a Wal-Mart in the United States. In Canada on the other hand, Wal-Mart is operating very much the same as in the United States. Companies from less wealthy countries often expand to richer countries instead of countries with the same economic wealth and consumer income. These companies want to sell their product for a higher price than is possible in the home market.
Other companies from rich countries which are looking to secure resources and reduce cost might specifically look to expand to poorer countries. Poorer countries like India, usually offer cost benefits in the form of labour and regulations. In Europe more and more factory plants are closed and reopened in South East Asia for cost benefits.
So depending if companies are expanding to increase market size or expanding to secure resources and reduce cost there are different key factors that create economic distance. If a company is expanding to increase market size than the differences in consumer incomes are the most important factor. If a company is expanding to secure resources and reduce cost than most important factor is the differences in cost and quality of;
*Natural resources
*Financial resources
*Human resources
*Infrastructure
*Intermediate inputs
*Information of knowledge
Industry Sensitivity
According to Pankaj Ghemawat and research associate Rajiv Mallick from Harvard Business School different industries are more or less sensitive to economic distance. If an industry is more sensitive to economic distance it will decrease trade between countries. If an industry is less sensitive to economic distance it will increase the trade between two countries. By comparing 70 industries with every pair of countries in the world they were able to group industries which are more or less sensitive to economic distance. Industries which are more sensitive to economic distance are; nonferrous metals, manufactured fertilizers, meat and meat preparations, iron and steel, pulp and waste paper. Industries that are less sensitive to economic distance are; coffee, tea, cocoa, spices, Animal oils and fats, office machines and automatic data processing equipment, power-generating machinery and equipment and photographic apparatuses, optical goods and watches.
See Also
*International Business Entry Modes
*Foreign Direct Investment
*Transnational management strategies
*Haier
*Disney
*Geert Hofstede

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