Distances in an Age of Globalization

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Distances in an Age of Globalization
Anneke Zwart, Student (University), Netherlands

Although globalization has increased global interconnectedness and interdependence of countries, and even if distances seem to vanish, in doing global business there are 4 types of distances that certainly still matter. Ghemawat clearly outlines these four types of distances:
1. Cultural Distance: This is about the way people interact with each other and with business and institutions. Cultural attributes can be very apparent such as religions, languages, races or more subtle such as norms and values deeply rooted in countries. All of these factors can greatly influence trade, because cultural distances that influence personal preferences affect the choice between substitute products. Minimizing cultural distance facilitates the trade process.
2. Political/Administrative Distance: Trade between countries is strongly influenced by both historical and political associations. One example is that of colonizers and its colonies: if this link exist, then trade is usually higher than if no political similarities are present. A great example of reduced political and administrative distance is the European Union, a deliberate effort to reduce the administrative and political distance between European countries. It must be mentioned here that friendly ties are required to create a positive effect on trade.
3. Economic Distance: Of course the most important one that should be considered is economic distance; it is the wealth or income of customers within a country. The richer the country, the higher the engagement in international activity across borders and vice versa. Furthermore, even the poor countries will mostly trade with rich ones. Economic distance also includes disparities in supply chains and distribution systems, which negatively affect trade between businesses as well.
4. Geographical Distance: This distance does not only imply the distance from one country to another. What also must be taken into account is the physical size of a country, but also the distances within a particular country. Furthermore, infrastructural factors such as access to rivers and oceans, transportation and communications are included in the term geographical distance. These factors have a great impact on the cost of transportation and as a result on trade costs. It is therefore of no surprise that research has proven that higher geographic distance parallels with reduced cross-border equity flows.
Source: Ghemawat, P. (2001) “Distance still Matters: The Hard Reality of Global Expansion.” HBR


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