Globalization and Strategy

We are cautiously adding this new chapter on international strategy in the wake of a prolonged era of rapid transformation. Beginning with the Great Recession of 2008, followed by the rise of cryptocurrency and blockchain technologies, the widespread adoption of cloud computing, the emergence of generative AI, and culminating in a COVID-19-driven, nationalism-fueled disruption of global supply chains and a realignment of post–World War II alliances, globalization may be the hottest business topic of the coming decade! But since 2012, global trade growth has slowed. Increasing trade wars, protectionist policies, global tensions, technological shifts, and supply chain disruptions make it feel like the end of globalization and international strategy.

However, the actual situation is more nuanced. Dutch futurist Adjiedj Bakas coined the term slowbalization to describe the deceleration of global integration and the rise of regionalization. His insights highlight how megatrends are reshaping international business strategies. By framing globalization as an evolving, fragmented process rather than a linear trajectory, Bakas underscores the need for firms to balance global ambitions with local resilience, making his perspective essential for understanding today’s international strategy landscape (APG, 2023).

Globalization is the shift toward a more interdependent and integrated global economy that creates greater availability of goods and services. Globalization happens when trade barriers fall and buyer preferences change, and when a company sources goods and services from countries outside its domestic market. Indeed, globalization opens doors to other countries’ ideas and cultures; provides access to ideas, services, goods, and relationships all over the world; and enables people to come together to raise opportunities and prosperity for everyone. Internationalization is the process of designing products, services, and internal operations to enter and grow in international markets. It’s a way to help businesses reach their globalization goals.

International strategy determines how to conduct business outside the borders of a firm’s home country. Lower trade barriers, improved communications, more efficient shipping via ship and airplane, and the internet have stimulated higher levels of international trade. Many companies shift manufacturing and supply chain activities to wherever labor is cheapest and overall costs are reduced, even when additional shipping costs are included. The COVID-19 pandemic illustrated some issues that emerge when an economy becomes dependent on other countries for the materials it uses in its final products. During the pandemic, the capacity for global supply chains to meet the sharp increase in demand for paper goods, cleaning supplies, as well as medications and other medical equipment and supplies, was immediately strained.

International strategy runs the gamut of buying resources for manufacturing a product in the home country to exporting products for sale in other countries to full manufacturing subsidiaries on foreign soil. There are multiple reasons why a firm would expand into international markets, and also multiple advantages and disadvantages for doing so.

Access to New Customers

Perhaps the most obvious reason to compete in international markets is to gain access to new customers. Although the United States enjoys the largest economy in the world, it accounts for only about 5% of the world’s population (Kose et al., 2017). Selling goods and services to the other 95% of people on the planet can be very appealing, especially for companies whose industry within their home market is saturated.

Few companies have a stronger “All-American” identity than McDonald’s. Yet McDonald’s is increasingly reliant on sales outside the United States. In 2006, the United States accounted for 34% of McDonald’s revenue, while Europe accounted for 32%, and 14% was generated across Asia, the Middle East, and Africa. More recently, in 2025 the U.S. accounted for approximately 40% of McDonald’s total revenues, with the remaining 60% generated across international markets (McDonald’s Corporation, 2026). With less than half of its sales being generated in its home country, McDonald’s is truly a global powerhouse.

China and India have been attractive markets to U.S. firms. The countries are the two most populous in the world. Both nations have growing middle classes, which means they have been building infrastructures, like education and transportation systems, that support increased purchasing power. In other words, individuals in these countries can buy goods and services that are not merely necessities of life. This trend has created tremendous opportunities for some firms. In 2019, for example, GM sold more vehicles in China than it sold in the United States (3.1 million vs. 2.9 million). This gap has continued from at least 2010 (Reuters, 2020).

Lowering Costs

Many firms that compete in international markets hope to gain cost advantages. Going international also has implications for dealing with suppliers. The growth of overseas expansion leads many businesses to purchase supplies in greater volume, leading to economies of scale. This can provide a firm with stronger leverage when negotiating prices with its suppliers.

Offshoring has become a popular yet controversial means for trying to reduce costs. Offshoring involves relocating a business activity to another country. Many American companies have closed down operations at home in favor of creating new operations in countries such as China and India that offer cheaper labor. While offshoring can reduce a firm’s costs of doing business, job losses in the firm’s home country can devastate local communities. For example, West Point, Georgia, lost approximately 16,000 jobs in the 1990s and 2000s as local textile factories were shut down in favor of offshoring (Copeland, 2010). Fortunately for the town, Kia’s decision to locate its first U.S. factory in West Point has improved the economy in the past few years.

Some U.S. companies have discovered that offshoring is not providing the benefits they had expected. This has led to a new phenomenon known as reshoring, whereby jobs that had been sent overseas are returning home. Carbonite, a seller of computer backup services, found that its call center in Boston was providing much stronger customer satisfaction than its call center in India. The Boston operation’s higher rating was attained even though it handled the more challenging customer complaints. As a result, Carbonite shifted 250 call center jobs back to the United States.

In other cases, the expected cost savings have not materialized. NCR has been making automated teller machines (ATMs) and self-service checkout systems in China, Hungary, and Brazil. These machines can weigh more than a ton, and NCR found that shipping them from overseas plants back to the United States was extremely expensive. NCR hired 500 workers to start making the ATMs and checkout systems at a plant in Columbus, Georgia, adding 370 more jobs (Isidore, 2011). Similarly, Apple, General Motors, Boeing, and Ford had brought back thousands of jobs each to the United States from abroad by 2019 (OneMonroe, 2018).

A growing alternative to traditional offshoring or reshoring is nearshoring, relocating a business activity to a nearby country, often one that shares a border or time zone with the home country. Rather than moving operations to distant locations such as China or India, U.S. firms increasingly partner with neighbors like Mexico and Canada, where proximity reduces shipping costs and lead times, shared time zones enable real-time coordination, and cultural similarities ease day-to-day collaboration. The automobile industry illustrates the logic well: major U.S. automakers depend on manufacturing partners in northern Mexico, where integrated cross-border supply chains allow components to move efficiently between plants during production. As supply chain disruptions in recent years have highlighted the hidden costs of distance, nearshoring has emerged as a middle path — capturing meaningful cost savings without the responsiveness penalties of far-off offshoring (Shih, 2020).

Diversification of Business Risk

A familiar cliché warns “don’t put all your eggs in one basket.” Applied to business, this cliché suggests that it is dangerous for a firm to operate in only one country. Business risk refers to the potential that an operation might fail. If a firm is completely dependent on one country, negative events in that country could ruin the firm. Just like spreading one’s eggs into multiple baskets reduces the chance that all eggs will be broken, business risk is reduced when a firm is involved in multiple countries.

Consider, for example, natural disasters such as the earthquakes and tsunami that hit Japan in 2011. If Japanese automakers such as Toyota, Nissan, and Honda sold cars only in their home country, the financial consequences could have been grave. Because these firms operate in many countries, however, they were protected from being ruined by events in Japan. In other words, these firms diversified their business risk by not being overly dependent on their Japanese operations.

The use of PESTEL (see Chapter 3: External Environment) can be a valuable tool in assessing the risk for a firm considering international diversification. Analyzing the industry within the target country could provide valuable insights on whether to enter that market or not. For example, following severe supply chain impact to a closed Chinese manufacturing sector and overreliance following the COVID-19 pandemic, Apple chose to shift some of its phone component manufacturing to India and Vietnam. Analysis apparently revealed it would be a positive move for Apple to manufacture batteries in India, and it encouraged major suppliers in Taiwan, China, and Japan to locate factories in India. One Chinese supplier, Luxshare, failed to secure approval from the Indian government and chose instead to locate a $330 million investment in Vietnam (Liu & Reed, 2023).

Risks to Global Strategies

Although competing in international markets offers important potential benefits, such as those mentioned above, capitalizing on these benefits also introduces potentially daunting challenges in terms of political, economic, and cultural risks.

Recent events underscore the possibility of hazards to internationalization such as health risk factors like bird flu (H5N1) and COVID-19; extreme weather events like El Niño heatwave and the Canadian and Maui wildfires of 2023; hot conflicts like Ukraine and Israel; cool conflicts like United States-China and maritime disputes in the sea between China, Japan, Southeast Asia, Malaysia, and Philippines; or even a ship getting stuck in the Suez Canal, declining navigability of the Mississippi River, or pirates attacking cargo ships in the Red Sea.

We can roughly classify these and other similar business hazards into political, economic, and cultural risks.

Political Risks

The potential for government upheaval or interference within a country to cause harm to a business’s operation amounts to political risk. For example, the term “Arab Spring” has been used to refer to a series of uprisings in 2011 within the countries of Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Libya, Morocco, Sudan, Syria, Tunisia, and Yemen. Unstable governments associated with such demonstrations and uprisings make it difficult for firms to plan for the future. Over time, a government could become increasingly hostile to foreign businesses by imposing new taxes and new regulations.

In extreme cases of political risk, a firm’s assets in a country are seized by the national government. This process is called nationalization. In recent years, for example, Venezuela has nationalized foreign-controlled operations in the oil, cement, steel, and glass industries. U.S. oil companies were expelled from the country.

Countries with the highest levels of political risk tend to be those whose governments are so unstable that few foreign companies are willing to enter them because of the potential for physical violence and harm to life or property. High levels of political risk are also present, however, in several of the world’s important emerging economies, including India, the Philippines, and Indonesia (Figure 8.4). This creates a dilemma for firms in that these risky settings also offer enormous growth opportunities. Firms can choose to concentrate their efforts in countries such as Canada, Australia, South Korea, and Japan that have very low levels of political risk, but opportunities in such settings are often more modest (Kostigen, 2011).

Economic Risks

The potential for a country’s economic conditions and policies, property rights protections, and currency exchange rates to harm a firm’s operations within a country are its economic risk. Executives who lead companies that do business in many different countries have to take stock of these various dimensions and try to anticipate how the dimensions will affect their companies. Because economies are unpredictable, economic risk presents executives with tremendous challenges.

Consider, for example, Apple’s international performance in fiscal year 2024. While the company reported revenue growth in Europe (+7%) and the Americas (+3%), its Greater China segment declined 8% year-over-year, a result driven in significant part by the weakening Chinese yuan against the U.S. dollar, which reduced the value of Chinese revenues when converted back to dollars (Gurman, 2024). Apple executives must continuously assess how local inflation, consumer purchasing power, and shifting exchange rates across Japan, Europe, and China will affect reported revenues in each market, even when underlying demand remains stable.

Cultural Risks

The phrase “When in Rome, do as the Romans do” is used to encourage travelers to embrace local customs. An important part of fitting in is avoiding behaviors that locals consider offensive. The list below illustrates a few activities that would go largely unnoticed in the United States but could raise concerns in other countries.

• If you want to signal “Check please!” to catch the attention of your garçon in France and Belgium, remember that snapping your fingers is vulgar there.
• Provocative dress is embraced by many Americans, but many people in Muslim countries consider a woman’s clothing to be inappropriate if it reveals anything besides the face and hands.
• Do you pride yourself on your punctuality? You may be wasting your time in Latin American countries, where the locals tend to be about 20 minutes behind schedule.
• Do not eat with your left hand in India or Malaysia. That hand is associated with unclean activities reserved for the bathroom.
• In many Asian and Arabian countries, showing the sole of your shoe is considered rude.
• If everything is OK when you’re in Brazil, avoid making the “OK” hand signal. It’s the equivalent to giving someone the middle finger.
• Do not clean your plate in China. Leaving food on the plate indicates the host was so generous that the meal could not be finished.
• In Japan, direct eye contact is viewed as impolite.

Cultural risk refers to the potential for a company’s operations in a country to struggle because of differences in language, customs, norms, and customer preferences. The history of business is full of colorful examples of cultural differences undermining companies. For example, a laundry detergent company was surprised by its poor sales in the Middle East. Executives believed that their product was being skillfully promoted using print advertisements that showed dirty clothing on the left, a box of detergent in the middle, and clean clothing on the right. A simple and effective message, right? Not exactly. Unlike English and other Western languages, the languages used in the Middle East, such as Hebrew and Arabic, involve reading from right to left. To consumers, the implication of the detergent ads was that the product could be used to take clean clothes and make them dirty. Not surprisingly, few boxes of detergent were sold before this cultural blunder was uncovered.

A refrigerator manufacturer experienced poor sales in the Middle East because of another cultural difference. The firm used a photo of an open refrigerator in its print ads to demonstrate the large amount of storage offered by the appliance. Unfortunately, the photo prominently featured pork, a type of meat that is not eaten by the Jews and Muslims who make up most of the area’s population (Ricks, 1993). To get a sense of consumers’ reactions if you were born in the United States, imagine you saw a refrigerator ad that showed meat from a horse or a dog. You would likely be disgusted. In some parts of the world, however, horse and dog meat are accepted parts of diets. Firms must take cultural differences such as these into account when competing in international markets.

Cultural differences can cause problems even when the cultures involved are very similar and share the same language. RecycleBank is an American firm that specializes in creating programs that reward people for recycling, similar to airlines’ frequent-flier programs. When RecycleBank expanded its operations into the United Kingdom, executives at RecycleBank became offended when the British press referred to RecycleBank’s rewards program as a “scheme.” Their concern was unwarranted, however. The word scheme implies sneakiness when used in the United States, but a scheme simply means a service in the United Kingdom (Maltby, 2010). Differences in the meaning of English words between the United States and the United Kingdom are also vexing and can affect how firms do business internationally. A few examples are provided in the “Watch your Language, Examples of Cultural Differences in English-speaking Countries” box.

Nationalism

Nationalism has re-emerged as a powerful force shaping international business environments, posing significant risks to global strategies. Governments increasingly prioritize domestic industries, enact protectionist trade policies, and impose restrictions on foreign investment to safeguard national interests. These measures can lead to tariffs, regulatory barriers, and localization requirements that disrupt global supply chains and limit market access. For multinational firms, nationalism amplifies geopolitical uncertainty and challenges the assumption of seamless global integration. Strategic responses include diversifying supply chains, adopting regionalized operating models, and strengthening compliance with local regulations to mitigate exposure to nationalist-driven disruptions.

The trade war between the United States and China illustrates economic nationalism in action. Beginning in 2018, the United States imposed tariffs on Chinese goods to protect domestic industries and address concerns over intellectual property theft and trade imbalances. The dispute has intensified to reflect a broader struggle for technological and geopolitical superiority.

China responded to the United States with retaliatory tariffs and creating a cycle of protectionist measures that have disrupted global supply chains and increased costs for multinational firms. Even universities are feeling the effect as the number of international students, especially those from China, have declined as stricter visa policies, reduced research collaboration, and uncertainty in funding have grown. Students in STEM fields, particularly those in semiconductor and AI research, face limited access to cross-border internships. Indeed, international student enrollment in 2018 exceeded 1 million and made up 6% of total U.S. higher education enrollment (Mowreader, 2025). However, despite overall growth, new international student enrollment dropped by 17% in Fall 2025 (Wood, 2025).

These actions reflect a nationalist agenda prioritizing domestic economic security over global integration, forcing organizations of all types to reconsider sourcing strategies, diversify suppliers, and reconfigure entire markets.

Strategy Integration Framework

Global companies, multinational companies, and international companies operate at different levels around the world. There are fewer global companies that truly operate everywhere than multinational corporations (MNCs) with very large bases of operations. International companies expand to many countries but are in one place and negotiate in other countries. International companies are importers and exporters but have no investments outside of their home country.

The largest MNCs are major players within the international arena. Walmart’s annual worldwide sales, for example, are larger than the dollar value of the entire economies of Austria, Norway, and Saudi Arabia. Although Walmart tends to be viewed as an American retailer, the firm earns 35% of its revenues outside the United States. Walmart owns significant numbers of stores in Mexico, Central America, Brazil, Japan, the United Kingdom, Canada, Chile, Botswana, and Argentina. Walmart also participates in joint ventures in China and India. Even more modestly sized MNCs are still very powerful. If Kia were a country, its current sales level of approximately $21 billion would place it in the top 100 among the more than 180 nations in the world.

Multinationals such as Kia and Walmart must choose an international strategy to guide their efforts in various countries. There are four main international strategies available: (1) international, (2) multidomestic, (3) global, and (4) transnational (Figure 8.6).

Each strategy involves a different approach to trying to be sensitive to (1) costs and efficiencies on one hand and trying to be responsive to (2) variation in customer preferences and market conditions across nations. Responding or not responding to these two pressures of cost and local cultural conditions determines which of the four types of international strategies will be pursued.

International Strategy

Firms pursuing an international strategy are neither concerned about costs nor adapting to the local cultural conditions. They attempt to sell their products internationally with little to no change. When Harley Davidson sells motorcycles abroad, they do not need to lower their prices or adapt the bike to local motorcycle standards. People in other countries buy a Harley particularly because it is different from the local motorcycles. Buyers want the American look and the sound and power of a Harley and will pay for that differentiation. Belgium chocolate exporters do not lower their price when exporting to the American market to compete with Hershey’s, nor do they adapt their product to American tastes. They use an international strategy. Starbucks and Rolex watches are other examples of firms pursuing the international strategy.

Multidomestic Strategy

A firm using a multidomestic strategy does not focus on cost or efficiency but emphasizes responsiveness to local requirements within each of its markets. This means companies decentralize decision making and allow subsidiaries in each country to tailor products, marketing, and operations to local needs. While this boosts competitiveness in diverse markets in terms of cultural, regulatory, and consumer differences, it sacrifices standardization and cost advantages that global strategies offer.

Rather than trying to force all its American-made shows on viewers around the globe, Netflix customizes the programming that is shown on its channels within dozens of countries, including New Zealand, Portugal, Pakistan, and India. Similarly, food company H. J. Heinz adapts its products to match local preferences. Because some Indians will not eat garlic and onion, for example, Heinz offers them a version of its signature ketchup that does not include these two ingredients. Outback Steakhouse uses a multidomestic strategy in the multiple countries where it operates, adapting to local eating preferences but not lowering prices significantly.

Global Strategy

A firm using a global strategy sacrifices responsiveness to local requirements within each of its markets in favor of emphasizing lower costs and better efficiency. This strategy is the complete opposite of a multidomestic strategy. Some minor modifications to products and services may be made in important markets, but a global strategy stresses the need to gain low costs and economies of scale by offering essentially the same products or services in all markets. Global strategy works best when customer needs are similar across markets and cost efficiency is critical (e.g., electronics, luxury goods). The trade-off is reduced flexibility and potential cultural misalignment.

Microsoft, for example, offers the same software programs around the world but adjusts the programs to match local languages. Similarly, consumer goods maker Procter & Gamble attempts to gain efficiency by creating global brands whenever possible like Pampers, Pantene hair care products, and Dawn dish soap. Global strategies also can be very effective for firms whose product or service is largely hidden from the customer’s view, such as silicon chip maker Intel. Lenovo also uses this strategy. For such firms, variance in local preferences is not very important, but pricing is.

Transnational Strategy

A firm using a transnational strategy seeks a middle ground between a multidomestic strategy and a global strategy. Such a firm strives not only to balance cost efficiency with local responsiveness but also to leverage global learning—the ability to share best practices, ideas, and innovations across markets. This approach creates a dynamic network where insights from one region inform improvements in others. The trade-off, as with an integrated cost leader and differentiation business-level strategy, is increased complexity and higher operating cost structure. Additionally, the difficulty aligning diverse teams under a shared global vision that still respects local autonomy can strain resources. Only a firm that values global knowledge diffusion can pull it off.

For example, large fast-food chains such as McDonald’s and KFC maintain consistent brand names and core menu items worldwide, while adapting to local tastes. In France, McDonald’s offers wine, and in Saudi Arabia, it serves a McArabia Chicken sandwich with a pork-free breakfast menu. Beyond these adaptations, global learning ensures that successful innovations—such as new menu concepts, supply chain efficiencies, or digital ordering technologies—are diffused throughout the organization, enhancing competitiveness everywhere. This ability to combine local sensitivity with worldwide knowledge sharing is what makes the transnational strategy particularly powerful and interesting.

Market Entry Mechanisms

Some companies opt to purchase an existing company in the foreign country outright to get into a foreign market quickly. When acquiring, due diligence is important—not only on the financial side, but also on the side of the country’s culture and business practices.

Cultural knowledge is very important for those companies that desire to conduct business outside their country. On the other hand, regardless of what approach a company wants to take, effective relationships are essential, along with good training of employees and knowledge of political and economic issues.

Exporting

Exporting is the selling of products produced in one country to customers in another country. Without exporting, we wouldn’t have the access we have currently to things like metals, computers, and electronics. Without exporting, you wouldn’t even dream of taking a road trip. The price of oil and gasoline would be out of your budget.

Pros: Avoids costs associated with setting up manufacturing facilities in another country. Less expensive way of gaining experience in a foreign market (reducing pioneering costs).

Cons: May miss out on efficiencies and economies of scale. High transport costs. Trade barriers such as tariffs.

Licensing

Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment. Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual property in exchange for a percentage of revenue or for a fee. An international licensing agreement allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor’s product for a fixed term in a specific market.

Disney owns and operates theme parks in the United States, Hong Kong, Shanghai, Seoul, and Paris. However, the theme park in Tokyo is licensed by Disney to the Oriental Land Company (OLC), a subsidiary of the Keisei Electric Railway Company. Tokyo Disneyland is the most profitable of the Disney resorts; OLC operates two separate parks using the Disney name and pays royalties and licensing fees to The Walt Disney Company (“Tokyo Disneyland,” 2024).

Pros: The licensee puts up most of the operating capital so it’s an inexpensive way for a licensor to enter the market. Can allow the licensor to avoid trade barriers.

Cons: The licensor loses tight control over manufacturing, marketing, and strategy. Complicates the flow of money when investing in other countries.

Franchising

Franchising is purchasing the rights to use a trademark, business model, and processes. The purchaser does business under the franchisor’s name and has the benefit of operating as a company that has already developed a relationship with the public.

Pros: Like those of licensing: low cost for the franchisor and avoids trade barriers.

Cons: Challenges in maintaining quality standards (exasperated by physical distances). Must follow franchiser dress code, operating rules, and values. May inhibit the ability to take funds from one country to another.

Joint Ventures

As discussed earlier in Chapter 6: Corporate-level Strategy, joint venture (JV) is a business agreement in which parties agree to develop a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses, and assets. A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major JVs include Dow Corning, MillerCoors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.

If the JV does not create a new entity, it is referred to as a strategic alliance. Such alliances can either be open-ended or have a specific ending date. Alliances can be less formal than a JV and may or may not include a binding contract.

Pros: Benefit from a local partner’s knowledge and expertise. Share costs and risks. Politically preferable in many countries.

Cons: May have to give up control of competitive advantage and technology to a partner. Lack of tight control over the newly created company.

Wholly Owned Subsidiaries

Lastly, wholly owned subsidiaries are when a firm owns 100% of the stock of a foreign entity by way of foreign direct investment (FDI), either greenfield (a new enterprise) or brownfield (purchase of an existing enterprise). Companies like Google and eBay are perfect examples. Google is one of the most common search engines worldwide and Google maps are ubiquitous. Their original operation began organically as a new enterprise.

Pros: Tight control of a firm’s competitive advantage and technology. Rigid oversight of operations (quality, strategy, use of profits, and similar). Allows a firm to take advantage of economies of scale, comparative advantage, and other efficiencies.

Cons: The costliest option. Entails a great deal of risk.

Toolkit: CAGE Framework

When identifying where to internationalize, the CAGE framework helps a firm gauge the distance that the target country is from the firm’s home country in four dimensions. The greater the distance or difference, the more risk exists and the less opportunity there is for success.

The four CAGE dimensions are (1) cultural, (2) administrative, (3) geographic, and (4) economic distance.

Cultural Distance

The differences of cultures between the target and home countries creates cultural distance. The history of relationships between the people of nations provides one source of explanation for the closeness (similarity) or distance (difference) between cultures. For instance, many countries suffered under the domination of imperial rule during colonial times with effects that are evident in their contemporary culture and influencing national relationships. As a former colony of Great Britain, for example, the United States has a smaller cultural distance between it and the United Kingdom than there is between the United States and Spain.

However, this is not always the case. Western European countries have a significant cultural distance with many Asian countries despite having colonized many of those same territories. Therefore, history provides a partial insight into cultural distance. Societal customs and values also play a key role in cultural distance. Language differences also increase or decrease cultural distance. At first glance, it would appear that the United States and India would have a large cultural distance, but this is reduced because much of business in India is conducted in English, and both countries were colonies of Great Britain.

Administrative Distance

The legal and political systems of the home and target countries determine the administrative distance between the two. In countries where the political systems are different, such as democracy versus communism, there is a greater distance and more uncertainty. Different laws between countries can make compliance and conducting business more difficult. For example, in some countries, laws governing contract compliance are not enforced.

In some nations, if a buyer fails to make payment for purchases, the seller can sue, but it may take years before a court will even hear the case. Also, labor laws can be quite different among nations. In the Dominican Republic, companies are required to pay employees a 13th month of salary at the end of the year, as a bonus. Alternatively, some nations protect the civil rights of people who fall within protected categories, such as age, race, sex, class, gender, sexual orientation, and other classifications in the United States. Other nations, however, may not enforce these restrictions. This can raise particularly tricky questions for firms who must abide by U.S. laws but seek to expand abroad.

Geographic Distance

The literal physical distance between the home and target country is a key consideration of geographic distance. The more miles the countries are apart, the longer and more costly it is to go there or to ship from one to the other. But mileage is not the only factor. The ease of communication between countries is another. Advances in telephone and internet communications have made this almost a non-issue in most countries. However, when two countries are 12 time zones apart, like the United States and China, communication can be hampered when work schedules are 12 hours out of sync. Geographic distance can also be affected by the infrastructure of a country in ways other than communication and internet capabilities. For example, Haiti is physically close to the United States, but its lack of adequate port facilities makes it a poor target for outsourcing manufacturing.

Economic Distance

International business between two countries is also impacted by the differences in their economic factors. The greater the economic distance between the two countries, the more difficult it is to be successful. One way to measure the difference is by GDP per capita. Countries with a similar GDP per capita have a greater opportunity for success. If the purchasing power and disposable income of the target country are quite different from the home country, working in the target country is more challenging.

CAGE Applied

Suppose Chipotle believes there are great opportunities if they go international. Executives have narrowed the countries down to two—Canada and Spain. Canada made the list because it is close and more like the United States. But Spain has 10 million more inhabitants, is not spread out like Canada is, and Spaniards should have a great attraction to Chipotle’s menu, since it’s Mexican cuisine. The CAGE framework can be used to help decide. The four dimensions for each country are measured on a 10-point scale, with the higher numbers indicating greater distance. Therefore, the country with the lower score is the better choice (Table 8.2).

As suggested from the CAGE scores, the Chipotle executives’ hunches about Spain proved incorrect, and Canada is the best location for international expansion.

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