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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title The CAGE framework and the influence of market potential in a world where differences still matter
Organization Unit
Authors
  • Ivan Sabato
Supervisors
  • Michel Habib
  • Jacqueline Haverals
Language
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Number of Pages 70
Date 2015
Abstract Text We tend to view the world we live in today as 'globalized'. Although the spread of Internet and the tendency of some industries to concentrate seem to prove that the globalizing process has in fact happened, it is worth asking whether this is an accurate description. Can we properly call our world globalised? Pankaj Ghemawat, Anselmo Rubiralta Professor of Global Strategy at the IESE Business School, has conducted various surveys on this topic. In his book Redefining global strategy, he came to the conclusion that the current state of the world is still a transitory phase towards full globalization. In contrast with the conventional wisdom of a globalized economy, Ghemawat (2007) argues that the world is 'semi-globalized'. In other words, what this management guru is suggesting is that differences still matter and that in order to be successful, multinational corporations have to take into account supplementary aspects, beside the usual ones that could emerge from a Porter 5+1 forces analysis1 or a SWOT analysis for instance. Based on that, businesses that still suppose the whole world as a flat marketplace, ignoring specific political, cultural, and economic differences are set up to fail (Ghemawat, 2001, 2007). The general idea is that analyzing the level of competition within an industry or trying to gain a better understanding of the competitive advantage of a company and its potential is often not enough. It is necessary to consider an additional framework, especially if we plan to cross borders. Ghemawat (2007) devised a new framework, namely the CAGE distance framework, which aims to provide a better understanding of the differences between countries along cultural, administrative, geographic and economic lines. With this new tool it should be easier for a decision-maker to choose correctly, since in theory it enables him to identify the underlying risks, in terms of distance, of any decisions envisaged. In other words, the CAGE framework considers distances between home and target country as risk factors. 1 See Rugman and Verbeke (2000) Notice that this framework takes into account not only the unilateral effects of a specific country but also the bilateral ones, which can arise from the comparison of two distinct nations. This feature is one of the novelties of this tool. In the past, the illusion of a flat marketplace led many international businesses to overlook specific cultural, economic and political differences when making their decisions. The consequences were significant, for the companies themselves as well as for their CEOs. One of the most striking events in this sense is what happened to Coca Cola in the nineties. The Chairman and Chief Executive M. Douglas Ivester of then, because of its decisions but mainly because of its one size fits all strategy2, was held responsible for the stock valuation declination suffered by Coca Cola in the same period. In 1999, when the equity losses amounted to approximately $70 billion, Ivester was fired as a result (Ghemawat 2001, 2007). History teaches us that often valuation errors are mainly the result of overestimating the market potential of the target country, which ideally overshadows almost any type of risk. The goal of this master's thesis was therefore twofold: first, we wanted to measure the empirical impact of the different distance factors of the CAGE framework on a sample of cross-border acquisitions. Secondly, we wanted to verify the influence of an additional variable, namely the market potential of the target country, in order to measure the interaction impact affecting each single variable. This helped us, in broad terms, to understand: which risks/distance factors carry more weight; which risks/distance factors are compensated by the market potential of the target country; and which risks/distance factors are even overshadowed by the market potential of the target country in our sample. In other words, looking at a market entry decision as a trade-off between risks and returns, where the differences or the distance degree between nations are seen as risks and the market potential of the target country as the underlying opportunities or returns, with this analysis we tried to show, if and to what extent the latter could effectively overshadow the risks. 2 See Ghemawat (2007), p. 21. Let it be clear that the author of this thesis agrees with Ghemawat on the definition of distance, defined as "[…] not only geographic separation, though that is important. Distance also has cultural, administrative or political, and economic dimensions that can make foreign markets considerably more or less attractive."3 In an earlier study, using observations of cross-border acquisitions from 18 emerging countries around the world for the years 1990–2006, Malhotra, Sivakumar, and Zhu (2009) highlighted the following observations: (a) cultural and geographic distance factors have a significant negative impact on the number of cross-border acquisitions; (b) administrative and economic distances have a significant positive effect; and (c) the market potential of target countries significantly moderates the relation between the distance factors and the number of cross-border acquisitions. This thesis differs from previous research in that it analyzes observations of cross-border acquisitions from 20 developed countries around the world, covering the period 2000–2013. The information was sourced from the SDC Platinum database of Thomson Reuters. Although consequential findings obtained ought to be seen as complementary, a number of criticisms made to the methodology adopted by the former researchers, have obviated the possibility of a reliably confrontation between developed and developing realities. The main criticism that the author of this paper makes to Malhora et al. (2009) is to not have considered the 0 observations in computing the dependent variable. The basic reasoning is that leaving aside the 0 cases (0 cross-border acquisitions between country i and j in year t for instance) would significantly reduce the representativeness of reality, and as consequence could lead to misleading conclusions. It is for this reason that we abstained from making cross considerations. Because the acquiring nations, in which to gather the observations, were selected in such a way as to ensure a common basis for a crucial aspect such as taxation, we picked the original member states (20) of the Organization for Economic Co-operation and Development (OECD). Indeed, the OECD can pride itself on over 3 See Ghemawat (2001), p. 3. 50 years of activity in the interest of its members. Offering a standard for bilateral double-tax agreement negotiations between states, for example, the OECD model was able to reduce, albeit marginally, the administrative distance between them4. After having defined and computed all different variables of interest, we proceeded with modeling, where diverse estimators (Ordinary Least Squares and several General Linear Models) and a moderated regression analysis have been used. In line with our expectations, we found that each distance dimension exercised a significant negative influence on the number of cross-border acquisitions. That is to say that with increasing differences between two countries, regardless of whether on a cultural, administrative, geographic or economic base, the number of economic interactions, designed in this case as acquisitions, has dropped. The introduction in our model of the market potential of the target country showed a significant positive effect of this variable on the entry mode analyzed. A moderated regression analysis and a graphical inspection helped us then to ascertain the influence of the target country's market potential on the relationship between the distance dimensions and the number of cross-border acquisitions. In the end, none of the analysis carried out showed support for a moderating role of the market potential of the target country. Having covered a wide variety of countries5 as well as a large number of industries, we were able to provide not only more generalizable findings, but also an empirical validation for a more comprehensive measure of distance. This more general character of our results proved to be one of the strengths of our theoretical contribution; and yet it failed to highlight possible nuances between different industries, or to show us any connections existing between the parameters analyzed and the business performances. It is therefore mainly in these research directions that we would recommend it to any researchers interested in pursuing this line of inquiry. Taking into account industry-specific factors and/or performance indicators would definitely contribute to expanding the findings related to market entry strategies even further. 4 See Haverals (2014, October), pp. 40-42. 5 With the data of the final dataset we examined cross-border acquisitions from 19 developed countries across 70 target countries. Finally, not only did we expand the findings related to market entry strategies, but we also provided, to the best of our knowledge, the second empirical validation of Ghemawat's (2001, 2007) distance framework; not to mention the first with regard to developed countries. And this is, we believe, where the strength – and the originality – of our contribution lies.
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