Market Forces in the Global Environment

Degrees of Separation: What Exactly is Distance?

Georg Schaur Department of Economics gschaur@utk.edu

March 6, 2013

W HY DON T ALL FIRMS EXPORT ?

What makes domestic business different from international business Degrees of separation: Apply to all forms of integration
1. Political Separation 2. Physical Separation 3. Relational Separation 4. Environmental Separation 5. Developmental Separation 6. Cultural Separation

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P OLITICAL S EPARATION
Movement of Goods: Customs, Tariffs Movement of People: Immigration Movement of Money: Currency exchange Movement of Capital: Regulation, Taxation Movement of Ideas: Censorship, Firewalls Anderson and van Wincoop: Border reduces trade 44%
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P HYSCIAL S EPARATION
Oceans Mountains Physical Distance Costs of:
Transport (Goods) Travel (People) Communication (Information)

Time

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P HYSCIAL S EPARATION : T RADE L ANES

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R ELATIONAL S EPARATION
Transactions rely on trust
Between buyers and sellers Of public ofcials Of intermediaries Trade within Networks: e.g. Keiretsu in Japan

International transactions undermine trust

Lack of information about reputations More unforeseen contingencies make contracts incomplete Unfamiliar legal systems Distant and possibly biased courts
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E NVIRONMENTAL S EPARATION
Opportunities for trade due to differences in
Climate Seasons Natrual resources

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E NVIRONMENTAL S EPARATION

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D EVELOPMENTAL S EPARATION

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D EVELOPMENTAL S EPARATION

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D EVELOPMENTAL S EPARATION

Income is distributed unevenly across the world Countries that may give you cheap inputs, may not be able to afford the products you are selling A huge amount of the global population has relatively little income
Does this impact product development? Think about pharmaceutical companies that develop AIDS drugs!

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C ULTURAL S EPARATION

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C ULTURAL S EPARATION

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C ULTURAL S EPARATION

What exactly is culture? I am not sure, but here are some differences:
In Germany mostly guys play football, in the US mostly girls play football
What does that mean for ADIDAS?

Gun ownership in Europe versus gun ownership in the US

Who builds the highest quality guns? Germany or the US?

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D OMESTIC VERSUS F OREIGN S ALES

6 degrees of separation combine to make foreign business challenging In particular, these broad themes result in detailed costs Example: World Banks Doing Business Data

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E XAMPLE : C HILE

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E XAMPLE : C OST TO IMPORT (US$ PER CONTAINER )

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E XAMPLE : T IME TO I MPORT

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W HAT S THE P ROBLEM

We understanding what makes international business different We need a coherent framework that takes account of the relative importance of all these factors to guide our decisions? Answer: Adjusted country portfolio analysis Idea: Use worldwide international trade data to gure out how different degrees of separation impact trade ows:
Suppose you nd that GDP per capita has very little impact on how much countries trade with each other Conclude that developmental separation is maybe not that important Suppose that you nd that physical distance is very important Everything that is correlated with distance such as transportation are important degrees of separation
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S OME N UMBERS

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E XAMPLE FOR I NTERPRETATION

You have narrowed your potential export destinations to 2 countries, A and B

A has a 10% greater GDP per capita, but is 10% farther away in distance Everything else is the same The 10% greater GDP per capita increase trade by about 7% The 10 increase in distance lowers trade by about 11% Which country do you chose based on trade potential?

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A R EAL E XAMPLE

Tricon: Pizza Hut, Taco Bell, KFC

Focus on a limited number of Markets Question: Which markets?

Goal:
Develop Market Potential According to Country Portfolio Analysis

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C OUNTRY P ORTFOLIO A NALYSIS

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C OUNTRY P ORTFOLIO A NALYSIS

Which country do you choose as your export market?
Japan has really high income, but they dont eat much fast food Germany has high income and they eat more fast food Canada eats a lot of fast food, but they have low income and its a small market (size of the bubble) Problem: The gure does not account for the degrees of separation Solution: Lets weigh the size of the bubbles with the number from the table Countries with larger GDP and GDP per capita that are also closer get a larger bubble than countries that have low GDP per capita, GDP and are far away etc. Weigh the bubbles with the numbers from the table
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C OUNTRY P ORTFOLIO A NALYSIS

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W HAT IS YOUR JOB ?

Does this work the same for everybody?

Suppose you are selling ice cream versus wooden furniture Is it the same every day of the year: Storms result in delays, ports are blocked in August Is this the same for every rm? Are we missing some important information in the table that is really important for your particular rm You are the manager, you have to decide!

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