This chapter explores Ghemawat's idea that, even in the contemporary era of advanced communications technology and enormous international trade, senior managers still need to take into account ‘distance’ when assessing host country location advantages and making decisions about global expansion. As Ghemawat uses the term, the ‘distance’ between two countries includes differences in culture, societal institutions, physical location and economic status. According to Ghemawat, senior managers often overestimate the attractiveness of foreign markets because they fail to take into account the risks and costs associated with distance. Ghemawat concludes that higher inter-country distances correspond with lower inter-country trade levels, implying a lower probability of success. This idea will be examined and then criticized using the framework presented in Chapter 1.

Significance

In 2001, Pankaj Ghemawat wrote an insightful HBR article, ‘Distance still matters: the hard reality of global expansion’, demonstrating that distance still matters: ‘Technology may indeed be making the world a smaller place, but it is not eliminating the very real – and often very high – costs of distance.’

Ghemawat convincingly demonstrates that companies often overestimate the attractiveness of foreign markets, focusing solely on macro-level measures of market size and growth, while neglecting to address the risks and additional costs associated with entering a new market.