CAGE Framework

Abstract

The CAGE distance framework introduced by Pankaj Ghemawat is a model for identifying the cultural, administrative, geographic, and economic (CAGE) differences between countries, for use in developing international business strategies or to shed light on patterns of the international flow of capital, information, and people. The framework is one of several components for better crafting international business strategies, including the AAA strategies. Ghemawat's work is in direct contradiction to the work of Thomas Friedman and others who promote the "flat world" theory, emphasizing the incompleteness rather than the realization of globalization.

Overview

The CAGE Framework is a model for considering measures of difference in comparing two countries for the purpose of developing international business strategy. The distances measured by the CAGE Framework are similar to the idea of psychic distance that has been used in international business research since the 1950s and was developed more fully in the 1970s as multinational businesses spread. Psychic distance is a measure of perceived differences between countries, usually grouped into linguistic, cultural, economic, and political/legal differences, and has been used to explain and quantify the tendency of countries to initiate trade sooner with countries with which they have more things in common—countries a low psychic distance away. The benefit of such frameworks is that they quantify and categorize important elements of international business relations, which makes strategies better informed.

Pankaj Ghemawat (b. September 30, 1959) was born in India and raised in India and Indiana, where his father was a doctoral student at Purdue University. After graduating from Harvard University at 19, he proceeded to earn his PhD in business economics from Harvard Business School three years later. He briefly worked at the management consulting firm McKinsey and Company before becoming the youngest ever full professor at Harvard Business School, where he taught for the bulk of his career before becoming the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona in 2006. Most of Ghemawat's work has dealt with international business strategies, of which the CAGE framework is a key component, along with the idea of AAA strategies, the concept of semiglobalization, and the DHL Global Connectedness Index.

Ghemawat's CAGE Framework was developed over the 2000s and fully articulated in 2007's Redefining Global Strategy and 2011's World 3.0. Ghemawat allows paid subscribers to use the CAGE Comparator on his website, in which they may select a country and an indicator (from the categories of trade, capital, information, people, trade by product, and trade by service) in order to see a report about the CAGE distances between the selected country and other countries. Free users are limited to reports on export trade for Algeria, Australia, Indonesia, and Spain, to demonstrate the service.

The CAGE Framework is a model for considering four types of distance—measures of difference between two countries that have an impact on international business strategy. Each category of the framework can be considered in either a bilateral or unilateral/multilateral context.

Cultural distance speaks to the degree of cultural difference between two countries, as represented by specific traits (language, ethnic groups, religion, cultural values and norms), and the level of trust between the countries in a bilateral context, or alternatively, insularity and traditionalism in a multilateral context.

Administrative distance represents the differences at the administrative/governmental level between two countries. These include colonial ties, regional trading blocs, common currency, or existing political hostility in a bilateral case; in a multilateral case, these include corruption, institutional weakness, membership in international organizations, and whether a country has an open or closed economy.

Geographic distance is the most clear cut, but still has important international business ramifications. In a bilateral context, physical distance between countries, difference in time zones or climates, and lack of a land border all contribute to the difficulty of trade; in a multilateral context, landlockedness, internal navigability, remoteness, and transportation and communication infrastructure are all important. This is often the easiest dimension for people to understand: When all else is equal, it is more difficult to conduct regular trade with a country that is farther away or is hard to get to. It is similarly more difficult to conduct trade with countries that lack harbors or a robust transportation infrastructure (making it harder to transport goods to their destination).

Economic distance is clearly key in trade as well. In a bilateral context, there are differences in two countries' resources, including natural resources, human capital, infrastructure, as well as in labor costs and income demographics; in a multilateral context, different countries have different per capita incomes and economies of different sizes. Economic distance has historically played a key role in international business as businesses based in high-income, high-wage countries have outsourced labor to countries where wages are lower (an arbitrage strategy, in the AAA framework discussed below), whether that outsourcing has been in the form of factory relocation or contracting white-collar work, such as technical support, customer service, or paralegal work, through an outsourcing firm.

Further Insights

AAA Strategies. The CAGE Framework is not a strategy, but a tool for crafting strategy. The complementary model describing international business strategies is Ghemarat's AAA Strategies framework, which identifies three types of strategy in international business: adaptation, aggregation, and arbitrage. Adaptation strategies change elements of a company's business to suit the local market. These changes may be mandated by law or regulation—there are many food additives used in the United States that are banned by EU regulations, for example. Or they may simply reflect local market tastes.

For example, Coca-Cola has a large brand portfolio, and most of its sodas are not sold in the United States. Fruit-flavored sodas tend to be more popular in Latin American countries, while the flagship cola product dominates in the United States. In India, Coca-Cola purchased its main competitor, Thums-Up; and while most individual portions in the United States are 12, 16, or 20 ounces, the norms of soft drink portions in other countries differ, as does the measurement system; Coca-Cola products in Germany are typically sold in 330ml bottles (about 11.15 ounces).

Companies that sell electric appliances are similarly forced to change their products: The type of electric outlet (and voltage) varies by country, but norms of space also vary, such that household appliances such as dishwashers and washing machines tend to be larger in the United States and Canada than in Asia or Europe. Many of these adaptations are not necessarily strategic: they are changes the company is forced into. They suggest the importance of actively seeking out other adaptations that would increase the appeal of a company's products, rather than reactively changing in accordance to necessity.

Aggregation and Arbitrage both handle CAGE distances differently, rather than adapting products. Aggregation strategies use economies of scale in order to maximize the benefits of similarities between markets. For example, elements of a business can be centralized. Centralization is especially common in companies that outsource aspects of production to low-cost regions, where the products produced in those regions are sold in markets in other regions.

Media companies rely on cultural aggregation. Hollywood blockbusters are distributed across the world; that is, American studios do not produce a movies tailored specifically for China or France but rather seek to make high budget films palatable to large overseas audiences. Publishers routinely translate their best-sellers in order to sell them in other countries. Many companies aggregate research and development—while different models of Ford cars may be sold in the United States and France, for example, they may both make use of the same innovation in power steering or antilock brakes.

Arbitrage exploits differences in markets and is an old business strategy. Arbitrage on the foreign currency market has long exploited pricing discrepancies in exchange rates in order to profit from large-scale currency exchanges. Many American companies depend on what Ghemarat calls cultural arbitrage, making the "Americanness" of a product—its difference from the local culture—a selling point rather than a drawback. This is the case for many of the aforementioned media exports, while American restaurant franchises trade on the popularity of elements of American cuisine like pepperoni pizza or fast-food hamburgers.

The AAA framework doesn't call for segregating these strategies, and encourages multiple concurrent strategies. Coca-Cola and McDonald's both use adaptation and arbitrage in the internationalization of their products. Each benefits from the American associations of their brand, while tailoring their specific product offerings from country to country to reflect local tastes.

Issues

Much of Ghemawat's work contradicts that of Thomas Friedman, the journalist who popularized the idea of a "flat" or "flattening" world in his 2005 book about globalization, the World Is Flat. Since Friedman's publication and the popularity of his ideas, Ghemawat has directly addressed the conflict, not only in his books (notably 2011's World 3.0) but in short works like his 2009 Foreign Policy article "Why the World Isn't Flat" and a 2012 TED Talk, "Actually, the World Isn't Flat." Friedman's notion of "flatness" refers to what he considers a level playing field in international commerce, as the result of outsourcing, the Internet, advances in transportation, and other factors. In the Flat World view, historical geographic divisions are increasingly irrelevant.

Friedman's book received the Financial Times and Goldman Sachs Business Book of the Year award, and has proved influential, but has also been criticized. It is fundamentally the work of a journalist, not a theorist, consisting primarily of personal opinion and anecdote rather than theory grounded in quantitative and qualitative analyses. As examples of "flatteners" that have contributed to globalization, Friedman points to phenomena as diverse as the collapse of the Berlin Wall (and by extension, the end of the Cold War and Eastern European communism), the development of web browsers and workflow software, and the use of collaborative online projects like Wikipedia. Previously best known for his Golden Arches theory of conflict—which stated that no two countries with McDonald's franchises had ever gone to war with each other—Friedman updated this to the Dell theory of conflict prevention, which states that no two countries that are part of a global supply chain will go to war against one another.

Ghemawat's primary objection to Friedman and the discussion of flatness he inspired is not in his descriptions of globalization so much as his assertion that globalization has actually been achieved. According to Ghemawat—and other critics, including Nobel Prize-winning economist Joseph Stiglitz, who along with Ghemawat became the most prominent "flat world skeptic"—Friedman cherry picks his examples in order to exaggerate the perception of flatness. For instance, in the aforementioned Foreign Policy article, Ghemawat pointed out that 90 percent of phone calls, text messages, and web traffic are local, as are the vast majority of investments. He called Friedman's book an attempt at a Gordian knot solution—a simple solution that cleaves through ambiguity and complexity; the problem, of course, is that such solutions are appealing more often than they are actually effective. Numerous geographers concurred with Ghemawat's and Stiglitz's conclusion that Friedman depicted as fait accompli a process that was still ongoing, uneven, inconsistent, and in some cases declining or reversing. The complexity that Friedman sought to wish away is actually the most important element of the problem.

In 2003, two years before publication of The World Is Flat, Ghemawat coined the term "semiglobalization" in an article in the Journal of International Business Studies, to refer to the position he later reasserted in contradiction to Friedman. While globalization refers to the flatness Friedman describes—an interconnectedness as the flow of people, commerce, ideas, and culture becomes freer and more frequent among countries and regions—semiglobalization describes the global situation as it actually exists in the twenty-first century, a condition in which borders have become more porous to such flow but nevertheless remain borders. In the semiglobalized world, international commerce and cultural flow is indeed critical, but location-specific enterprises also play a major role, and different strategies are used in international business than would be employed in a truly globalized market.

In a sense, Friedman argued that because markets and cultures are not isolated, they must perforce be integrated; Ghemawat, Stiglitz, and others rejoin that there is a state that is neither complete isolation nor complete integration. Even in the case of Canada and the United States, which share a common language, an enormous border, similar cultures and demographics, and which have always been at peace in their modern history—conditions ideal for cross-border trade—trade within each country greatly exceeds trade between the countries. Further, semi-globalization need not necessarily be a transition state prefatory to globalization; it may be stable as is. While Friedman's flat-world model leads to one-size-fits-all strategies, semi-globalization implies the need for multiple strategies, which is what the CAGE Framework addresses.

Terms & Concepts

AAA Strategies: Pankaj Ghemawat introduced the idea of the AAA strategies, or AAA Framework, to differentiate approaches to global value creation: adaptation, in which elements of a company's offerings are adapted to the local market; aggregation, in which economies of scale are used to exploit similarities across markets; and arbitrage, in which differences across markets are exploited.

Cultural Distance: Cultural distance is a measure of the differences in values, norms, unstated assumptions, and communication styles that result from culture, whether regional or organizational.

Flat World, Flattening World: "Flatness" is the metaphor popularized by Thomas Friedman for the level playing field of international commerce enabled by globalization, the Internet, outsourcing, and other factors; in the view of Friedman and others, cross-cultural communication will be increasingly necessary to business success.

Globalization: Globalization is the interaction of people and organizations across cultures via commercial transactions and the exchange of ideas and cultural products, especially with reference to the acceleration of such interactions in the twenty-first century and the resulting political, economic, and cultural interdependence.

Pankaj Ghemawat: Pankaj Ghemawat is an Indian-American economist known for his work on globalization and international business strategy, including the CAGE framework.

Psychic Distance: Similar to cultural distance, psychic distance is the measure and impact of perceived cultural differences between an individual's home culture and a foreign culture, which can result in stress, confusion, and errors in judgment as the result of conflicting norms, values, and expectations.

Semiglobalization: Semiglobalization is the state of incomplete cross-border or cross-cultural integration with respect to markets, a state in which markets are neither fully isolated nor fully integrated; the term was coined by Ghemawat to describe the prevailing global condition, and to explain why international business strategy is distinct from conventional business strategy.

Bibliography

Beugelsdijk, S., Maseland, R., Onrust, M., van Hoorn, A., & Slangen, A. (2015). Cultural distance in international business and management: From mean-based to variance-based measures. International Journal of Human Resource Management, 26(2), 165–191. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=99572670&site=ehost-live

Bücker, J. J., & Korzilius, H. (2015). Developing cultural intelligence: Assessing the effect of the Ecotonos cultural simulation game for international business students. International Journal of Human Resource Management, 26(15), 1995–2014. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=103167861&site=ehost-live

Ghemawat, Pankaj. (2009). Strategy and the business landscape. Boston, MA: Pearson.

Ghemawat, Pankaj. (2011). World 3.0 global prosperity and how to achieve it. Cambridge, MA: Harvard Business Press.

Hasegawa, A., Daub, C., Carninci, P., Hayashizaki, Y., & Lassmann, T. (2014). MOIRAI: A compact workflow system for CAGE analysis. BMC Bioinformatics, 15(1), 1–13.

Jing, Z., & Yeli, S. (2017). The application of vague language in international business negotiations from a cross-cultural perspective. Theory & Practice in Language Studies, 7(7), 585–589.

Miloloža, H. (2015). Distance factors and Croatian export obstacles in the EU15: CAGE approach. Interdisciplinary Description of Complex Systems, 13(3), 434–449. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=asn&AN=108747094&site=ehost-live

Morrell, D. D., Ravlin, E. C., Ramsey, J. R., & Ward, A. (2013). Past experience, cultural intelligence, and satisfaction with international business studies. Journal of Teaching in International Business, 24(1), 31–43. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=89239699&site=ehost-live

Paulson, S. K. (2005). Teaching international business concepts through the exchange of cultural metaphors. Journal of Teaching in International Business, 16(4), 81–96. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=19815613&site=ehost-live

Ramsey, J. R., Barakat, L. L., & Aad, A. A. (2014). Commitment to the study of international business and cultural intelligence: A multilevel model. Journal of Teaching in International Business, 25(4), 267–282. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=99363025&site=ehost-live

Sizoo, S., & Serrie, H. (2004). Developing cross-cultural skills of international business students: An experiment. Journal of Instructional Psychology, 31(2), 160–166.

Taylor, R. R., & Brodowsky, G. G. (2012). Integrating cross-cultural marketing research training in international business education programs: It's time, and here's why and how. Journal of Teaching in International Business, 23(2), 145–172. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=eue&AN=82153262&site=ehost-live

Suggested Reading

Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8), 137–147. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=5134712&site=ehost-live

Miloloža, H. (2015). Differences between Croatia and EU candidate countries: The CAGE distance framework. Business Systems Research, 6(2), 52–62. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=110526631&site=ehost-live

Olusegun Stober, E. (2014). CAGE analysis of China's trade globalization. European Journal of Interdisciplinary Studies, 6(1), 39–54.

Thomas, M. (2016). Lenovo's successful acquisition of the IBM PC division. Strategic Direction, 32(9), 32–35. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118260956&site=ehost-live