CAGE Framework for Analyzing Market Entry Risks in China and US

This report analyzes the CAGE framework to understand the market entry risks in China and the US. It compares the cultural, administrative, geographic, and economic distances between the two countries. The report also discusses the challenges and risks faced by firms entering these markets, as well as the attractive options for entry. It concludes by highlighting the cultural and institutional frameworks in both countries.

International Business
Strategy

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Executive Summary
United States is a developed market while China is a developing market hence the nature of
both the markets differs. This report will highlight the CAGE framework for analysing the
difference in the aspects of the country that will have impact on the market entry of the
companies. Both the nations are culturally different. It was found that that labour market of
China is better at the same time Administrative distance of US is better. Risks such as
corruption, interventions from government and imposing sanctions on Chinese trade by US
are threatening their business. At the same time, high operational cost, stagnant performance
by US market is some of the risk that is confronting the business that are going to enter in
United States. Cultural and Institutional framework in U.S. are more focused towards
sustainability, CSR, management practices, responsible international strategy, and ethics
within the country while the Chinese cultural are have more impact on the ethics.

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Contents
Introduction...........................................................................................................................................3
Discussion Section................................................................................................................................3
CAGE framework..............................................................................................................................3
Challenges and risks confronting the firm’s market entry.................................................................7
Attractive option for entry.................................................................................................................8
Country’s attractiveness....................................................................................................................8
Cultural and institutional framework.................................................................................................8
Conclusion.............................................................................................................................................9
REFERENCES......................................................................................................................................9

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Introduction
Multinational Enterprise faces many kinds of challenges while they expand their boundaries
in foreign markets. This is having a negative impact on the pace of expansion as well as the
way in which they enter into the market. The risks are caused by the difference in the factors
that affect business environment in country. U.S. and China are the two biggest economies
and political powers in that region of the world. This report will compare and contrast U.S.
and China on the basis of risks and advantages it presents to a firm when they enter in these
nations. Joint Ventures are successful in China while wholly owned subsidiary is better way
of entering into US.
Discussion Section
CAGE framework
This framework helps the company to analyse different factors which is having impact on the
business in any country.
Bilateral terms
 Cultural distance: Both China and U.S. are culturally distinct nations. In U.S. most of
the people speaks English while in China people speaks Chinese language (Luo, Xue
and Han, 2010). This creates a challenge for the companies that aim to expand their
business in of the countries. People in both the nations belong to different ethnic
backgrounds and this creates a lack in the social and ethnic connectivity among the
people. People in both the nations follow different religion i.e. America is a Christian
dominated society while China is a Buddhist dominated society. Due to increasing
competitiveness between the two countries at different platforms, there is huge lack of
trust among the people of both the nations. Both the nations have different
dispositions, norms and values.
 Administrative distance: The administrative distance between the two nations is also
large. There is lack of colonial ties among both the nations. There is also a lack of
shared regional trading bloc which is having impact on the trade between the two
nations. For a company that aims to do business in these two countries have to face
many trade barriers. Apart from this there is lack of common currency as U.S. deals in

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dollars while China deals with Yuan. Due to this companies have to make currency
changes while doing their business. The biggest distance is in political hostility as
recently both the countries have imposed many trade barriers on each other. Both the
countries are confronting each other on many platforms as U.S. is worried about
increasing power of China (Rothaermel, 2015).
 Geographic distance: Both the nations are far away from each other as one lies in Asia
while the other lies in North America. Due to this there is lack of land borders. It also
creates difference in time zones which is having impact on the operations of Multi-
national firms. Both the nations are huge hence climate in both the nations differs
from region to region. Disease environment of US is better than China. This can be
understood by the fact that environment related disease are more common in China.
Cities like Beijing are high polluted and this is causing many types of air borne
disease to the people of China.
 Economic distance: The difference between the rich and poor is much larger in U.S.
as compared to China. U.S. has relatively lesser amount of people living under the
poverty line which attracts companies to enter into their market. There is also a
difference in cost and quality of natural resources, infrastructure, human resources,
information or knowledge and financial resources. America being a developed nation
has a better quality resources and infrastructure. They are the leaders in the IT
technologies which is the base of success in the modern day business. On the other
hand China is better in terms of cost as the resources as they are on the lower side.
This is also because of policies of the government and the currency value when
compared with gold. This enhances the cost of operations in United States which is
not generally liked by the company’s expanding into the country (Genda, Kondo and
Ohta, 2010).
Unilateral terms
Cultural distance
China United States
Insularity China is an insular country where
people are not very much open to
the other cultures as they believe
their culture to be superior and
America is a highly insular
nation especially in the ideology
and arrogance that people has in
them. Americans are more

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highly different from other cultures.
This is having impact on the
business of the organisations as
people demands for the business
model that is supported by Chinese
culture (Tmf-group, 2019).
materialistic and superficial and
are highly opinionated. People
have more cosmopolitan culture
where the people are more
professional and places
educational values at the top of
the society’s priority (Anderson
and Sutherland, 2015).
Traditionalism Chinese society is highly traditional
and people are carried away by the
business model that supports
traditional methodologies. They are
highly motivated by their
uniqueness but in the recent years
they have moved towards
westernisation. This is reflected
from their attires, eating habits and
their approach.
American society is not very
much traditional. They are highly
fashionable and are modernised.
Most of the times they tend to
influence the people in other
countries as well. This is evident
from the fact that the things done
in America become the trends in
other parts of the world.
Administrative Distance
China U.S.
Nonmarket/
Closed economy
China is not so much closed
economy as the amount of
foreign investment that this
country has done is the highest
in the world. It is rather
protectionist about the Chinese
interests. Right now it is a
foreign bias country that is
supporting FDI.
U.S. is a home bias country as the
US investors have invested only 8%
of their investments on the foreign
soil. America is also not closed
economy and supports all kind of
foreign investments.
Membership in
the international
organisations
They are the members of
different international
organisations and especially the
They are also the part of large
numbers of international
organisations and control most of

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part of the nations that is having
Veto power in UN.
the operations of UN.
Institutions and
Corruption
In spite of having strong
institutions, China has failed
into stopping corruption.
Bureaucratic corruption is the
biggest threat in the expansion
of the companies in China
(Zheng, 2010).
America has strong institutions and
has stopped corruption to be a
major threat for the society and the
companies that aims to enter into
the country (Gershon, 2013).
Geographic distance
China U.S.
Landlockedness It is not landlocked It is also not landlocked
Internal
navigability
Easy to move within the nation as
they have invested a huge amount
of money on infrastructure
development.
Being a developed nation,
internal navigability of the
country is on the higher side.
Geographic size It is having large geographic size
i.e. 9.597M square Km.
Its geographical size is bigger
than China but not by much. It is
around 9.834M square km.
Geographic
remoteness
They are not facing geographical
remoteness.
They are also not facing
geographical remoteness.
Transportation
and
communicational
link
The transportation and
communicational link of the
China is strong (Nee and Opper,
2012).
They also have a strong
transportation and
communicational linkage in the
country.
Economic Distance
China U.S.

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Economic size China is having the second
largest economy in terms of
GDP.
U.S. is having the biggest
GDP in the world (Skilton
and Bernardes 2015).
Per capita income The per capita income of
China is 16,760 PPP dollars.
Its per capita income is very
high i.e. 60,200 PPP dollars.
Challenges and risks confronting the firm’s market entry
The risks and the challenges that businesses have to face while they enter into China and
United States are:
 Cross cultural: It is more difficult to work in China in the cross-cultural environment
when it is compared with the U.S. This is because China has a unique type of culture
which is different from most parts of the world.
 Political: Political condition of both the nations is strong. The policies made by the
Chinese government is attracting huge amount of FDI.
 Financial: US is a developed country hence provides a more secure environment for
the companies to do their business (Heathcote, Storesletten and Violante, 2010). The
chances of business failures in US are lower than that of China.
 Legal: Legalities related to business is more strictly followed in US as compared to
China. Consumer related laws are highly strict and it empowers people to get the best
value product from the producers.
 Government interventions: Government interventions in China are higher (Holtbrügge
and Baron, 2013). This was reflected in the way in which policies of government has
resulted in downfall of the stock market of China. In United States there is no direct
invention from the side of the government. Government has an indirect form of
intervention in the business model.
 Competitiveness: United States market is highly competitive. Being a developed
nation, the competitiveness in the market is much cut throat as for the new companies
it is not easier to enter into the nation (Boeh and Beamish, 2012). On the other hand
China is a developing nation and it is inviting a lot of investment in the nation hence
the competitiveness is increasing but still it is better than U.S.
 Partner selection: In China, Joint Ventures have been successful over the years as
there are large numbers of internal investors available in China that are ready to make
partnership with external companies. Since there is cultural difference in China and

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most parts of the world hence taking the help of local partners is essential (Cui and
Jiang, 2010). On the other hand US have more freedom in terms of selecting partners.
 Timing of entry: This is best time to enter into China as they are investing a lot on
building infrastructure in the rural areas which will support expansion of countries.
On the other hand US are facing economic stagnation hence this is not a good for
investment.
 Operational issues: Habits of local customers, local distribution networks and
regulatory requirements makes China a very difficult market to access. Along with
this bureaucracy and corruption is also producing operational issues for the companies
operating in China. On the other hand, U.S. has high demanding workforce and the
overall cost of operations is higher. This is reducing the profit margins of the
companies.
 Strategy execution issues: In US, strategy execution issues are higher than China. This
is because there is less flexibility in the US market as compared to China. Since China
is developing hence the nature of the market is changing rapidly which is having
impact on implementing strategies.
Attractive option for entry
The most attractive option for entry into China is Joint Venture. This allows a company to
understand the local culture and design their business model accordingly. This will give
companies access to local suppliers and investors, which is beneficial for the firms to
improve its business operations. On the other hand Wholly Owned Subsidiary will be the best
strategy to enter into the US market (De Beule, Elia and Piscitello, 2014).
Country’s attractiveness
 Product market: Product market of China is larger than U.S.
 Labour market: The labour market of China is cheaper when compared with U.S. but
U.S. has more skilled workforce when compared with China (Cavusgil, Ghauri and
Akcal, 2012).
 Capital market: U.S. is a bigger capital market when compared with China.
Cultural and institutional framework
Both in China and U.S. cultural and institutional framework within the nation has an effect on
the sustainability, CSR, management practices, responsible international strategy, and ethics
within the country. The impact is more in the US market as companies are forced by the
government to follow ethical guidelines while performing their operations as well as ensure

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the sustainability of the environment. At the same time, Chinese culture supports that
companies should work for CSR activities (Li and Zhou, 2010).
Conclusion
From the above based report, it can be concluded that China and US both are good market for
doing investments. Government of China is supporting all kinds of Investments in the
country. It can also be concluded that China is having larger scope of development which
provides a better platform to the companies to enter at this time. Problem that company will
face in the Chinese market will be that the Chinese culture is unique and to understand this
culture, company needs to adopt market entry strategy like Joint Venture to become
successful in the market. It might also face the challenges related to corruption and
bureaucracy problems which will have negative impact on the success of the business.

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Nee, V. and Opper, S., 2012. Capitalism from below: Markets and institutional change in
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[Accessed on 20th April 2019]
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