The Idea in Brief
Why did U.S. media giant Star TV lose $500 million trying to deliver TV programming to Asia? Like many companies, it was so dazzled by the foreign market’s immensity that it ignored the difficulties of pioneering new territories. For example, it assumed—wrongly—that Asian viewers wanted English-language programming.
How to avoid this fate—and select the right targets for your firm’s global expansion? Look beyond a country’s sales potential (as expressed by national wealth or propensity to consume)—and analyze the probable impact of distance.
But don’t focus only on distance’s geographical dimension. Consider three other dimensions as well: cultural factors (religion, race, social norms, language); administrative factors (colony-colonizer links, currencies, trading arrangements); and economic factors (income, distribution-channel quality).
The more two countries differ across these dimensions, the riskier the target foreign market. By contrast, similarities along these dimensions suggest great potential. Common currency, for example, boosts trade more than 300%. Also, types of distance affect industries differently. Religious differences, for instance, shape people’s food preferences but not their choices of cement or other industrial materials.
By analyzing the possible impact of distance—in all its dimensions—you sweeten the odds of investing in profitable foreign markets.
The Idea in Practice
How to decide whether to expand into a particular foreign country? Consider distance’s four dimensions—and ask how they might affect your industry. The table provides examples.
By considering the potential impact of distance on your industry, you may identify highly promising global-investment opportunities. Example:
Suffering limited cash flow and high debt-service obligations, Dallas-based Tricon Restaurants International (TRI) had to select its global-expansion investments carefully. An analysis of per-capita income and fast-food consumption suggested Japan, Canada, and Germany as the most promising countries in which to invest—with Mexico ranking 16th among 20 possibilities. But when TRI included the four dimensions of distance in its analysis, Mexico leapt to 2nd place.
Why? Mexico’s geographic proximity to TRI’s headquarters, the common land border, and membership in a trade agreement with the U.S. reduced geographic and administrative distance between the two countries. If TRI hadn’t considered these dimensions of distance, it might have neglected this core market.