Discuss Critically the Opportunities and Risks of Distance in International Expansion
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Globalization has certainly made the world a smaller and interconnected place. The reduction in trader barriers and technological advancements in communication and transportation have given firms the opportunity to expand internationally by accessing untapped markets and resources. However, companies routinely exaggerate the attractiveness of foreign markets, which leads to expensive mistakes. This essay shall discuss the opportunities and risk associated with distance in international expansion.
According to Ghemawat (2001), distance between two countries can manifest itself along four basic dimensions: cultural, administration, geographic and economic. Geographic distance, for instance, affects the costs of transportation and communications and is particularly importance to companies that deal with heavy or bulky products. Cultural distance, by contrast, affects consumer’s product preferences. It is a crucial consideration for any consumer goods or media company but it is much less important for a cement or steel business. Administrative distance involves historical and political associations shared by countries that greatly affect trade between them. Economic distance states that the wealth or income of consumers is the most important economic attribute, which creates distance between countries and has a marked effect on the levels of trade and types of partners a country trades with.
The opportunities and risk associated with distance are based on the four dimension stated above where differences in each dimension can either be an opportunity to exploit or a risk to consider when companies decide to globally expand. For example, large economic distances between two countries can be an opportunity for companies to gain competitive advantage from economic arbitrage, which is the exploitation of cost and price differential between markets. Companies in industries whose major cost components vary widely across countries are particularity likely to target countries with different economic profiles. Differences in economic distance however, can be a risk for companies that rely on economies of experience, scale and standardization. These companies should focus more on countries that have similar economic profiles as they have to replicate their existing business model to exploit their competitive advantage. This can be difficult to achieve in a country where customer incomes and cost/quality of resources are different.
A country’s culture attributes determine how people interact with one another and with companies and institutions. Countries with high cultural distances are likely to pose risks that could affect the perception and sales of the product being introduced. For example, Mattel’s inability to recognize the cultural distance in China led to the business failure of their House of Barbie store in Shanghai, which result in losses of approximately $30 million. Similar cultural distances,