CAGE

Framework

Dr. Purvi Pujari

© 2009 Pankaj Ghemawat

•The CAGE Distance Framework identifies Cultural,
Administrative, Geographic and Economic differences or distances
between countries that companies should address when crafting
international strategies.It may also be used to understand patterns
of trade, capital, information, and people flows. The framework was
developed by Pankaj Ghemawat, a professor at the University of
Navarra - IESE Business School in Barcelona, Spain.

•The impacts of CAGE distances and differences have been

demonstrated quantitatively via gravity models. Such models
"resemble Newton's law of gravitation in linking interactions
between countries to the product of their sizes (usually their gross
domestic products) divided by some composite measure of
distance."
 Administrative Geographic Economic
Cultural
Distance Distance Distance
Distance
•Different •Rich/poor
languages differences
•Different •Lack of colonial •Physical distance •Other differences
ethnicities; lack of ties •Lack of land in cost or quality
connective ethnic •Lack of shared border of natural
Country Pairs or social networks regional trading •Differences in resources,
(Bilateral) •Different bloc time zones financial
religions •Lack of common •Differences in resources, human
•Lack of trust currency climates / disease resources,
•Different values, •Political hostility environments infrastructure,
norms, and information or
dispositions knowledge
•Nonmarket/
•Landlockedness
closed economy
•Lack of internal
(home bias vs.
navigability
foreign bias)
•Geographic size
Countries •Lack of •Economic size
•Insularity •Geographic
(Unilateral / membership in •Low per capita
•Traditionalism remoteness
Multilateral) international income
•Weak
organizations
transportation or
•Weak
communication
institutions,
links
corruption
 Use of CAGE Framework
 It makes distance visible for managers.
 It helps to pinpoint the differences across countries that might handicap
multinational companies relative to local competitors.
 It can shed light on the relative position of multinationals from different
countries. For example, it can help explain the strength of Spanish firms in
many industries across Latin America.
 It can be used to compare markets from the perspective of a particular
company. One method to conduct quantitative analysis of this type is to
discount (specifically, divide) raw measures of market size or potential with
measures of distance, broadly defined.
 CAGE framework
Cultural Distance: language, customs, religion,
cultures etc.
Administrative Distance: regional integration
administration, currency, political dispute
Geographic Distance ： physical distance, time
zone, etc.
Economic Distance ： per capital GDP, wages,
living costs

• Pankaj Ghemawat (Harvard Business School Press)

 . Institutional Voids
CAGE Analysis and
While you can apply CAGE to consider some first-order
distances (e.g., physical distance between a company’s
home market and the new foreign market) or cultural
differences (e.g., the differences between home-market
and foreign-market customer preferences), you can also
apply it to identify institutional differences. Institutional
differences include differences in political systems and in
financial markets. The greater the distance, the harder it
will be to operate in that country. Emerging markets in
particular can have greater differences because these
countries lack many of the specialized intermediaries
that make institutions like financial markets work.
 Institutional Voids

If an institution lacks these specialized

intermediaries, there is an institutional void. An
institutional void refers to the absence of key
specialized intermediaries found in the markets of
finance, managerial talent, and products, which
otherwise reduce transaction costs.
For example, 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 percent of the Russian
fast-food market by 2010. The process, however, took
fifteen years and $250 million in investments.
 Three Strategies for Handling Institutional Voids

When a firm detects an institutional void, it has three

choices for how to proceed in regard to the potential
target market:
(1) adapt its business model
(2) change the institutional context
(3) stay away.
 The Way Forward
1. Understanding how global we
really are

2. Understanding all the barriers

that constrain trade

3. Thinking broadly about the

gains from trade

© 2010 Pankaj Ghemawat

 The CAGE Distance Framework

Cultural Administrative
Distance Distance

Economic Geographic
Distance Distance

© 2010 Pankaj Ghemawat

 Expanded Conception of Policy Levers
The Case of Catalonia

CULTURAL ADMINISTRATIVE GEOGRAPHIC ECONOMIC

• Exploit language bridges • Harmonize: • Improve regional • Improve interregional

market linkages
-foreign investment transportation/communications
• Encourage interregional promotion to avoid races infrastructure -employee mobility
networks/exchanges to the bottom
-capital markets
-public procurement
-students
processes -information about

• Promotional efforts -health, safety, • Create an efficient energy interregional flows

environmental standards
network • Exploit scale/scope
• Simplify cross-border
regulations and -business networks/ events
paperwork
-joint embassies
• Bilateral/multilateral • Coordinate infrastructural
summits
investment -process for upgrading
-share best practices in cross-border clusters
government operations

-review regional • Collect and disseminate

institutions information about
interregional flows
 Strategic Headroom

© 2010 Pankaj Ghemawat

© 2010 Pankaj Ghemawat Source: www.cartoonstock.com