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Distance concepts and their effects on bilateral FDI flows
Definition of distance
Distance is an important aspect to note in business. It is the difference in perspective of several aspects between two or more parties in any business. Distance is more significant in an international business platform than in a local or domestic set up. As developed by Pankaj Ghemawat (2011), the CAGE framework is used to define the different concepts of distance between countries in international business. CAGE, an acronym standing for Cultural, Administrative, and Economic distances. The definitions of this concept in the perspective of bilateral factors are as follows below.
Cultural distance
Whenever a pair of countries is involved in the trade, there is a likelihood to have distinguishing factors based on the diverse cultures of each party. This may include differences in; languages, ethnicities (this includes lack of social or connective ethnic networks), religious beliefs, norms, dispositions and values. Cultural distance is also often characterized by the lack of trust. The cultural background of customers affects their tastes and preferences that maybe much more significant especially when it comes to consumer goods.
Choices are often determined by individual’s social norms, for instance in the Chinese have a liking copyright violations, and this is deep in their history. Ceteris paribus, trade between two countries with a common language, e.g., the USA and Canada is likely to boom unlike where there is no common language. The cultural aspects also create a distance through impelling the decision made on substitute goods. Research reveals that tastes and colour are also linked to culture. Japan natives have a preference for small house appliances and automobiles, and this is their social norm (Berry et al., 2010).
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Administrative distance
Administrative distance is characterized by hostility in politics, lack of a common regional trade bloc, the disparity in the currency, differences in colonial history and other administrative matters. Policies created by individual governments may create a barrier to their cross-border trading. In the USA, bribery is illegal for companies and individuals, this has impacts the nation’s multinational business.
Barriers may also be raised through the creation of trade quotas, tariffs, restrictions on FDI and local enterprises preference regarding favoritism, subsidies, and regulations. A target nation’s institutional stability also influences their trade activities across the borders. Corporations shun from investing in corrupt nations (Siegal et al., 2012).
Geographic distance
It encompasses the physical distance between countries. How far a country is from another physically really impacts their trading activities. Differences may include lack of a clear land border, different zones in time due to the longitudes and different environments, whether and climatic conditions. The physical distance directly affects the transportation cost of goods and services.
For instance, the cost of oil in America may be higher if it was being imported from the Middle East. Geographic distance has a direct impact on the trade and FDI flows between any two given countries. It is, therefore, vital for an enterprise to consider the transport networks and information before engaging in any trade (Siegal et al., 2012).
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Economic distance
Every country in business has its unique economic factors. The poverty/ rich levels between countries are never similar. The more prosperous a country is, the more their involvement in the cross-border economic activities, unlike their poorer counterparts. Other differences may include the quality of the resources as well as their cost, for instance financial, natural and human resources.
The infrastructure, knowledge or information levels may also differ between two or more countries. Corporations tend to invest in foreign countries with similar economic patterns to that of their home country a good example is Indonesia and south Korea where Nike inc. and Reebok have heavily invested (Berry et al., 2010).
References
Berry, H., Guillén, M.F. and Zhou, N., 2010. An institutional approach to cross-national distance. Journal of International Business Studies, 41(9), pp.1460-1480.
Siegel, J.I., Licht, A.N. and Schwartz, S.H., 2012. Egalitarianism, cultural distance, and FDI: A new approach. Organization Science, Forthcoming.
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