Advanced Corporate Strategy

ST104x

Where (CAGE framework)

In order to make decisions around distances between countries, Professor Pankaj Ghemawat
has suggested a very useful framework – called the CAGE distance.

CAGE stands for the four dimensions of distances between countries – cultural,
administrative, geographic, and economic.

Cultural distance refers to the differences between the countries in terms of race/ ethnicity,
languages, social norms and values, and religious beliefs. Think of cultural similarities
between countries like the USA and Canada; or India and Nepal. However, in spite of being
neighbours, Bhutan is much more culturally similar to Thailand or Myanmar than it is with its
larger neighbour, India. Maybe the prevalence of Buddhism in these countries explain the
cultural similarities.

Have you wondered how easy it would be for businesses from India to enter the Caribbean
islands or Australasia? Or England? Administratively, having been former British colonies,
these markets share a common administrative and legal framework, probably derived from
the English rule. Administrative distance refers to the links between countries bound together
on the basis of political associations, free-trade agreements (like the NAFTA, the SAARC, or
the ASEAN), or historical links. By this distance, it would be very easy for an Indian firm to
enter a country that was a former British colony than another country in continental Europe.

Geographic distance includes factors like the presence of contiguous borders, access to
oceans and ports, size of countries, and even distances between the capital cities of the two
countries. When countries are geographically closer to each other, business benefit from
easier mobility of people and goods across borders.

Economic distance refers to the differences between the countries in terms of income and
wealth distribution, cost of labour, managerial capabilities, and organizational capabilities.

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 Advanced Corporate Strategy

ST104x

The industrial revolution of the early 20th century brought similar economic status to
countries like the UK and the USA that industrialised together. Firms regularly exploit large
economic distances between countries by sourcing components and manufacturing products
and services in countries like China and India for consumption in high-income nations.

Put together these four distances – cultural, administrative, geographic and economic
distances make the CAGE framework an effective tool for deciding/ decoding market entry
strategies of firms.

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