This thesis examines how cultural, administrative, geographic, and economic distances between countries, as well as target country market potential, influence the number of cross-border acquisitions made by developed countries. The author finds that all distance factors have a significant negative impact on acquisitions, while market potential has a significant positive effect. However, market potential does not moderate the relationship between distances and acquisitions. The thesis contributes to research on international strategy and target market selection by developed countries. It provides empirical support for considering a comprehensive measure of distances, as in Ghemawat's framework, but does not examine industry-specific or performance factors.

1. The CAGE framework and the
influence of market potential in a world
where differences still matter
Master's Thesis
Department of Banking and Finance
University of Zurich
Prof. Dr. Michel A. Habib
Supervisor: Dr. Jacqueline Haverals
Author: Ivan Sabato
Course of Studies: Business Administration
Student ID: 09-992-397
Address: Segnesstrasse 9
8048 Zurich
Switzerland
E-Mail: ivan.sabato@uzh.ch
Closing Date: December 1, 2015

3. I
Table of Contents
List of Tables ........................................................................................................ II
List of Figures....................................................................................................... II
Abbreviations ......................................................................................................III
Acknowledgments .................................................................................................V
Abstract.............................................................................................................. VII
Executive Summary ............................................................................................IX
Introduction........................................................................................................... 1
1 Theoretical framework and development of hypotheses........................... 6
1.1 Examination of the theoretical framework............................................... 6
1.2 Development of hypotheses ..................................................................... 9
1.2.1 Cultural distance.............................................................................. 12
1.2.2 Administrative distance................................................................... 14
1.2.3 Geographic distance........................................................................ 18
1.2.4 Economic distance .......................................................................... 20
1.2.5 Market potential .............................................................................. 24
2 Methodology ................................................................................................ 29
2.1 Sample.................................................................................................... 32
2.2 Dependent variable................................................................................. 35
2.3 Independent variables............................................................................. 37
2.3.1 Cultural distance.............................................................................. 37
2.3.2 Administrative distance................................................................... 41
2.3.3 Geographic distance........................................................................ 43
2.3.4 Economic distance .......................................................................... 44
2.3.5 Moderating variable ........................................................................ 45
2.3.6 Dummy variables ............................................................................ 46
3 Results .......................................................................................................... 47
3.1 Diagnostics and Data Screening............................................................. 47
3.2 Linear models 1 and 2: Ordinary least-squares (OLS)........................... 52
3.3 Linear model assumptions...................................................................... 54

4. II
3.4 Linear models 1 and 2: Generalized linear models (GLMs)...................58
3.5 Linear models 3 to 6: Ordinary least-squares (OLS)..............................64
4 Conclusions ..................................................................................................68
Bibliography....................................................................................................... XV
Appendixes ...................................................................................................... XXV
Appendix A: Histograms.............................................................................. XXV
Appendix B: Scatterplots............................................................................XXVII
Appendix C: Boxplots .................................................................................. XXX
Appendix D: Summary table GLM regressions (no dummies)....................... XV
Declaration of authorship .............................................................................. XVII
List of Tables
Table 1-1: The CAGE framework at the country level .........................................11
Table 2-1: Acquisitions frequencies......................................................................36
Table 3-1: Codeplan ..............................................................................................48
Table 3-2: Correlation Matrix................................................................................49
Table 3-3: Summary table OLS regressions..........................................................53
Table 3-4: Correlations between regressors and residuals ....................................56
Table 3-5: Summary table GLM regressions ........................................................62
Table 3-6: Summary table Models 3 to 6: the interaction effect...........................65
List of Figures
Figure 1-1: The role of distance in the foreign acquisition behavior of firms.........9
Figure 3-1: Histograms of the residuals ................................................................55
Figure 3-2: Marginal effect of distance variables on cross-border acquisitions....66

5. III
Abbreviations
A Administrative Distance
AIC Akaike information criterion
BEUC The European Consumer Organisation
BLUE Best linear unbiased estimator
C Cultural Distance
CBA Number of cross-border acquisitions
CEO Chief Executive Officer
CODACONS Coordinamento delle Associazioni per la Difesa
dell'Ambiente e dei Diritti degli Utenti e dei Consumatori
E Economic Distance
F Overall F-statistic
FDI Foreign direct investment
G Geographic Distance
GDP Gross domestic product
GLM Generalized linear model
IRR Incidence rate ratio
LS Least squares
M&A Mergers and Acquisition
ML Maximum-likelihood
MP Market Potential
NGO Non-governmental organization
OECD The Organisation for Economic Co-operation and
Development
OLS Ordinary least squares
UNCTAD United Nations Conference on Trade and Development

6. IV

7. V
Acknowledgments
Having reached this stage in my journey, I would like to put indelibly on record
my recognition of, and gratitude to, all those people who have been close to me
along the way, those who have always believed in me, and those who through
thick and thin have supported and put up with me.
I wish to thank Professor Michel Habib and Dr Jacqueline Haverals for accepting
to supervise my Master's thesis and for the help and guidance they provided.
In addition to my thesis directors, I am deeply grateful to all those people who,
with insightful remarks and questioning, encouraged me to widen, and so enrich,
my research by exploring diverse perspectives.
My heartfelt appreciation goes to my former English teacher at Università della
Svizzera italiana, Mrs Simona Cain-Polli, for her valuable and thoughtful revision
work and her stylistic input.
Last but not least, I want to thank my loved ones, who have unfailingly supported
and surrounded me with love and affection. A special thought goes to my
girlfriend, who has stood loyally by my side from the beginning. Finally,
therefore, it is to my family and to her, my future, that I dedicate this
achievement.

8. VI

9. VII
Abstract
This research aims to provide an empirical contribution to the current findings in
the field of international strategy. Focusing on the target market selection
behaviors of multinational companies, we investigate the influence of distance
factors in Ghemawat's CAGE framework on a sample of cross-border acquisitions
completed by developed countries. Besides examining the role of cultural,
administrative, geographic and economic distances, in tune with Malhotra,
Sivakumar and Zhu (2009), we explore the influence of the target country's
market potential, firstly on the target market selection behavior itself and secondly
on the relationship between the distance dimensions and the mode of entry
analyzed. Different estimators (OLS, GLM) and a moderated regression analysis
have helped us ascertain what influence is exercised by the distance dimensions
and by the interaction with the market potential.
We found that all distance factors have a significant negative impact on the
number of cross border acquisitions, while market potential showed a significant
positive effect on the entry mode analyzed, but did not act as mediator between
distance factors and number of cross-border acquisitions.
The generalized approach used, though one of our contributions, did not allow us
to spot possible nuances between different industries, or to understand what
connection exists between the parameters analyzed and the business
performances. In this regard, any researchers interested in pursuing this line of
inquiry or expand it further would be advised to take into account industry-
specific factors and/or performance indicators.
Finally, the originality and the theoretical contribution of this research consist in
having provided an empirical validation for a more comprehensive measure of
distance or, more precisely, to the best of our knowledge, the first illustration of
Ghemawat's distance framework applied to developed countries.

10. VIII