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2.2.3 Global Strategies and Differences in Internal and External Business Environments

To adopt a global strategy as part of a corporation's management strategy, it is first necessary to analyze the differences in internal and external business environments. In doing so, we must be cognizant of countries and regions that are important to the global strategy. This is particularly important when considering business in countries such as China and India that have significantly different business environments from those in developed nations. In reality, some countries already have production centers and must be examined from the perspective of existing overseas networks. Moreover, in the case of parts manufacturers, it may be necessary to examine entry into specific countries because of key customer demands. In our discussion, we assume that the important countries have already been decided upon when contemplating a global strategy.

First, we must understand the differences in business environments that exist between the domestic market and the countries in question. National barriers exist even in a “flattened world”; therefore, we must first grasp the significance and types of barriers, and move on to examine the strategies to overcome them. In proposing the CAGE framework to explain the differences in domestic and foreign business environments, Ghemawat states four kinds of distances between a home and a foreign country (Ghemawat 2007). We explain the CAGE framework as follows:

Cultural distance: differences in language, customs, religion, etc.

Administrative distance: differences in foreign investment policy, regional economic blocs (the existence or absence of free trade agreements), political proximity, currency, lack of colonial ties, etc.

Geographic distance: differences in transportation costs and times, time zones, etc. Economic distance: differences in income levels and wages, transparency in com-

merce practices, characteristics of corporate systems, etc.

Each of these principles is explained with specific examples. We use Ghemawat's examples that examine the distance between China and India from the perspective of a US corporation (Table 2.1).

Low language barriers make India very attractive (short cultural distance). India was formerly a British colony, and English is widely spoken, this is not so in the case of China. In addition, a significant portion of India's elite are westernized, and have been to the UK and more recently to the US for further education. The founder of the CAGE framework, Ghemawat, is of Indian origin; he was employed at the Harvard Business School which also has several Indian professors. Moreover, there exist strong US–India elite class connections. On the other hand, China's cultural attractiveness lies in its homogenous language and people; moreover, there are many Chinese-Americans. In contrast, language and customs vary greatly in India by region, making it difficult to take a one-size-fits-all approach across the Indian region in terms of expanding business operations there.

Table 2.1 CAGE analysis: favorable conditions of China and India for US firms

Cultural aspects

Administrative aspects

Geographical aspects

Economy aspects

India

English-speaking, westernized elite

Common ruler

(from the colonial era)

Specialized labor

Legal customs

High profitability

Political familiarity

Westernized business customs

Low political risk

China

Standardized language

Ease of doing business

Proximity to west coast of US

Large market

ChineseAmericans

Economic zones

Ports and road infrastructure

Access to abundant labor and capital

East Asian manufacturing network

Supply chain network of foreign firms

Source: Compiled from Ghemawat (2007), Table 2.2 (p. 46)

In terms of administrative distance, India and the US have similar legal systems, as the economic systems were built by a common colonizer—the UK. Moreover, India's political system is said to be somewhat pro-American. Conversely, relations between China and the US have been somewhat strained in the past. From the Indian perspective, a further attraction is the “low long-term risk” that the country poses, although some may argue that point. An Indian characteristic is its entrenched democratic political system, which contrasts with the one-party rule of communist China. India follows a democratic political process to bring about major policy changes, while China most likely does so through a top–down approach. Therefore, in China, companies must always conduct business with an awareness of this inherent political risk.

Alternatively, the ease with which businesses can be created is a major attraction of China. In addition, it also provides incentives to foreign investments, such as the economic zones. China is said to be a country not of the “rule of law” but of the “rule of men,” thereby making the dealing of several business procedures simple and at the discretion of civil servants. India, however, has several business regulations, which need to be adhered to strictly. For such purposes, conducting business operations in China is certainly more attractive. In addition, economic zones in China were first created in the 1980s, and this program has been a success, with many zones existing today, particularly along the coast. However, recently the Chinese government imposed stringent regulations toward foreign firms that build simple production centers within its borders; India has taken cues from China's model of economic zones and has implemented a similar program.

In terms of geographical attractiveness, compared with India, China is relatively closer to the west coast of the US, and has the necessary infrastructure-support, such as harbors, in place. This deems China as more attractive than India. In assessing these regions as manufacturing centers, geographical proximity is an important factor. Southeast Asia has well-developed infrastructure and a production network of component and product manufacturers that extend beyond national borders. Vietnam, Laos, and Myanmar neighbor China, and are connected via expressways. For example, the Pearl River Delta area of Shenzhen and Guangzhou has manufacturing agglomerations in electronics and textiles. Moreover, travel routes are available from these areas to Bangkok via continental expressways. While India's major cities are situated along the coast, the traffic network between the major cities remains incomplete because of the central mountain region, thus hindering the creation of manufacturing centers.

In terms of economic attractiveness, India has many engineers in software and other fields. In addition, the market is not as competitive as China, making profitability relatively higher for companies doing business there. Furthermore, managements in India are familiar with the Western style of business, perhaps because of westernization of the elite class. Conversely, China's corporate system is built on nationalized companies, and corporate governance is often not transparent. As illustrated, India has superior soft-business infrastructure, while China has a large market with high wage levels. Moreover, the Chinese labor force is far superior to that of India and has more capital. Another benefit of conducting business operations in China is the relatively greater number of foreign firms in the domestic supply chain system and in other business activities, thereby making it easier to form local partnerships.

 
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