Fundamentals of Global Strategy, v. 1.0

Cultural Distance

A country’s culture shapes how people interact with each other and with organizations. Differences in religious beliefs, race, social norms, and language can quickly become barriers, that is, “create distance.” The influence of some of these attributes is obvious. A common language, for example, makes trade much easier and therefore more likely. The impact of other attributes is much more subtle, however. Social norms—the set of unspoken principles that strongly guides everyday behavior—are mostly invisible. Japanese and European consumers, for example, prefer smaller automobiles and household appliances than Americans, reflecting a social norm that highly values space. The food industry must concern itself with religious attributes—for example, Hindus do not eat beef because it is expressly forbidden by their religion. Thus, cultural distance shapes preference and, ultimately, choice.The barrier to interpersonal interactions created by cultural differences in religious beliefs, race, social norms, and language.

Administrative or Political Distance

Administrative or political distance is created by differences in governmental laws, policies, and institutions, including international relationships between countries, treaties, and membership in international organizations (see Chapter 11 "Appendix A: Global Trade: Doctrines and Regulation" for a brief summary). The greater the distance, the less likely it is that extensive trade relations develop. This explains the advantage that shared historical colonial ties, membership in the same regional trading bloc, and use of a common currency can confer. The integration of the European Union over the last half-century is probably the best example of deliberate efforts to reduce administrative distance among trading partners. Bad relationships can increase administrative distance, however. Although India and Pakistan share a colonial past, a land border, and linguistic ties, their long-standing mutual hostility has reduced official trade to almost nothing.The barrier to international trade relations that is created by differences in the laws, policies, and institutions of different countries.

Countries can also create administrative and political distance through unilateral measures. Indeed, policies of individual governments pose the most common barriers to cross-border competition. In some cases, the difficulties arise in a company’s home country. For companies from the United States, for instance, domestic prohibitions on bribery and the prescription of health, safety, and environmental policies have a dampening effect on their international businesses. More commonly, though, it is the target country’s government that raises barriers to foreign competition: tariffs, trade quotas, restrictions on foreign direct investment, and preferences for domestic competitors in the form of subsidies and favoritism in regulation and procurement.

Geographic Distance

Geographic distance is about more than simply how far away a country is in miles. Other geographic attributes include the physical size of the country, average within-country distances to borders, access to waterways and the ocean, topography, and a country’s transportation and communications infrastructure. Geographic attributes most directly influence transportation costs and are therefore particularly relevant to businesses with low value-to-weight or bulk ratios, such as steel and cement. Likewise, costs for transporting fragile or perishable products become significant across large distances. Intangible goods and services are affected by geographic distance as well, as cross-border equity flows between two countries fall off significantly as the geographic distance between them rises. This is a direct result of differences in information infrastructure, including telephone, Internet, and banking services.The barrier to international trade relations that is created by the geophysical attributes of a country.

Economic Distance

Disposable income is the most important economic attribute that creates distance between countries. Rich countries engage in proportionately higher levels of cross-border economic activity than poorer ones. The greater the economic distance between a company’s home country and the host country, the greater the likelihood that it must make significant adaptations to its business model. Wal-Mart in India, for instance, would be a very different business from Wal-Mart in the United States. But Wal-Mart in Canada is virtually a carbon copy of the U.S. Wal-Mart. An exception to the distance rule is provided by industries in which competitive advantage is derived from economic arbitrage, that is, the exploitation of cost and price differentials between markets. Companies in industries whose major cost components vary widely across countries, like the garment and footwear industries, where labor costs are important, are particularly likely to target countries with different economic profiles for investment or trade. Whether or not they expand abroad for purposes of replication or arbitrage, all companies find that major disparities in supply chains and distribution channels are significant barriers to business. This suggests that focusing on a limited number of geographies may prove advantageous because of reduced operational complexity. This is evident in the home-appliance business, for instance, where companies—like Maytag—that concentrate on a limited number of geographies produce far better returns for investors than companies like Electrolux and Whirlpool, whose geographic spread has come at the expense of simplicity and profitability.The barrier to international relations created by differences in the wealth profiles and economic health of trading nations.