M21-S2 - Article - Distance Still Matters

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• Cultural Distance
• Administrative Distance
• Geographic Distance
• Economic Distance

The summary of the article is captured in this table:

	Cultural Distance	Administrative Distance	Geographic Distance	Economic Distance
Distance between two countries increases with. . .	• Different languages, ethnicities, religions, social norms • Lack of connective ethnic or social networks	• Absence of shared monetary or political association • Political hostilities • Weak legal and financial institutions	• Lack of common border, waterway access, adequate transportation or communication links • Physical remoteness • Different climates	• Different consumer incomes • Different costs and quality of natural, financial, and human resources • Different information or knowledge
Distance most affects industries or products. . .	• With high linguistic content (TV) • Related to national identity (foods) • Carrying country-specific quality associations (wines)	• That a foreign government views as staples (electricity), as building national reputations (aerospace), or as vital to national security (telecommunications)	• With low value to- weight ratio (cement) • That are fragile or perishable (glass, fruit) • In which communications are vital (financial services)	• For which demand varies by income (cars) • In which labor and other cost differences matter (garments)

The CAGE Distance Framework is a framework to define distance between groups in terms culture, administration rules, geographic distance and economic distance:

	Cultural Distance	Administrative Distance	Geographic Distance	Economic Distance
Attributes creating distance	different languages different ethnicities lack of social networks different religions different social norms	absence of colonial ties absence of shared monetary or political association political hostility government policies institutional weakness	physical remoteness lack of a common border lack of sea or river access size of country weak transportation or communication links differences in climates	differences in consumer incomes differences in costs and quality of: • natural resources • financial resources • human resources • infrastructure • intermediate inputs • information or knowledge
Industries&Products affected	products have high linguistic content (TV) products affect cultural or national identity of consumers (foods) product features vary in terms of: • size (cars) • standards (electrical appliances) • packaging products carry country specific quality associations (wines)	government involvement is high in industries that are: • producers of staple good (electricity) • producers of other “entitlements” (drugs) • large employers (farming) • large suppliers to government (mass transportation) • national champions (aerospace) • vital to national security (telecommunications) • exploiters of natural resources (oil, mining) • subject to high sunk costs (infrastructure)	products have a low value-to-weight or bulk ratio (cement) products are fragile or perishable (glass, fruit) communications and connectivity are important (financial services) local supervision and operational requirements are high (many services)	nature of demand varies with income level (cars) economies of standardization or scale are important (mobile phones) labor and other factor cost differences are salient (garments) distribution or business systems are different (insurance) companies need to be responsive and agile (home appliances)

Common currency, for example, boosts trade more than 300%.

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Distance Attribute	International Trade (%)
income level: GDP per capita (1% increase)
economic size: GDP (1% increase)
physical distance (1% increase)
physical size (1% increase)*
access to ocean*
common border
common language
common regional trading bloc
colony-colonizer relationship
common colonizer
common polity
common currency