What are some of the Key Factors in International Expansion?
International expansion provides a great opportunity for an organization to grow and potentially differentiate from the competition. Carpenter and Sanders (2008) explains the four key factors in international expansion: economies of scale and scope, location, multipoint competition, and learning. The Ted Talk video was quite fascinating and provided some alarming statistics. Ghemawat (2012) stated that in 2010, not quite ten percent of all real investment in the world was accounted for by foreign direct investment. Ghemawat discussed how people have a vastly different perception of these globalization statistics than what is reality.
For a business to be successful when expanding internationally, they must do their research and adjust their business strategy. Internationalization is now considered an essential strategy for an increasing number of US franchise firms (Aliouche & Schlentrich, 2011). Larger markets have a higher potential for sizable returns and may offer economies of scale. Lafontaine and Leibsohn (2005) concluded that franchisors favor countries with greater market potential, such as a higher GDP, a larger population, and greater purchasing power.
In our SAAS business, we have been exploring international expansion options. For our business, which markets race kart tracks and family entertainment centers, the abundance of those type of businesses are an important factor. Another important factor for us is economic conditions in the location. If there is an economic downturn on the horizon, facilities like our target market are considered luxuries and often close. We discovered in an industry analysis that Brussels has a significant number of these race kart tracks and family entertainment centers; however, they also have a lack of technology. We determined it may be worth the cost to pursue expanding into this region.
How does the CAGE Distance Framework assist in identifying attractive locations?
Ghemawat (2016) explains that the CAGE distance framework is used to identify and prioritize the differences between countries which companies must address when developing cross-border strategies. This framework disaggregates distance or difference into four categories: cultural, administrative, geographic, and economic. In my research, I found another interesting example from Ghemawat regarding CAGE framework at the industry level.
Ghemawat (2007) points out that the software services industry is more sensitive to cultural or administrative distance. An example provided as to how the CAGE framework would help would be in an instance where a software company may be deciding between expanding into China or India. In this case, India should look more attractive than China, because according to Ghemawat, “Culturally, this is a business in which speaking English is particularly important and in which the Indian diaspora in the United States – variously reported to account for more than a third of the workforce of technology companies in Silicon Valley and run to 10 percent of new technology ventures there – has been directly helpful” (p. 17).
For our SAAS company, it is also incredibly helpful to evaluate the geographic distance factors. Local supervision and operational requirements are high in certain areas, and with all of the data security regulations, our company needs to be sure we are in compliance. Also, since we are a software company, the language differences would play a significant part in our decision making process as it may be more costly to alter our software than the benefit we’d receive from expanding.
Aliouche, E.H. & Schlentrich, U.A. (2011). Towards a Strategic Model of Global Franchise Expansion. Journal of Retailing, 87(3), pp. 345-365.
Carpenter, M.A. & Sanders, Wm., G. (2008). Strategic management: A dynamic perspective. Upper Saddle River, NJ: Pearson Prentice Hall.
Ghemawat. P. (2007). Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter. Harvard Business School Publishing Corporation.
Ghemawat, P. (2012). Actually, the world isn’t flat [Video]. Retrieved from https://www.ted.com/talks/pankaj_ghemawat_actually_the_world_isn_t_flat
Ghemawat, P. (2016). Differences and the CAGE Distance Framework. Retrieved from https://www.ghemawat.com/wordpress/wp-content/uplo…
Lafontaine, F. and Leibsohn, D. (2005). Beyond Entry: Examining McDonald’s Expansion in International Markets. International Society of Franchising Conference Proceedings.
Rothaermel, F.T., Kotha, S. & Steensma, H.K. (2006). International Market Entry by U.S. Internet Firms: An Empirical Analysis of Country Risk, National Culture, and Market Size. Journal of Management, 32(1), pp. 56–82.
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