Lecture International business (9e): Chapter 3 - Charles W.L. Hill

Chapter 3 - Political economy and economic development. After completing this unit, you should be able to: Explain what determines the level of economic development of a nation, identify the macro-political and economic changes occurring worldwide, describe how transition economies are moving toward market-based systems, explain the implications for management practice of national difference in political economy.

International Business 9e By Charles W.L Hill McGraw­Hill/Irwin         Copyright © 2013 by The McGraw­Hill Companies, Inc. All rights reserved Chapter 3 Political Economy and Economic Development What Determines A Country’s  Level Of Economic Development?  Gross national income (GNI) per person measures the total annual income received by residents of a nation  Japan, Sweden, Switzerland, and the U.S have high GNI  China and India have low GNI  GNI can be misleading because it does not consider differences in the cost of living  need to adjust GNI figures using purchasing power parity (PPP) 3­3 How Do Countries  Compare On GNI? Economic Data for Select Countries 3­4 What Determines A Country’s  Level Of Economic Development?  Nobel-prize winner Amartya Sen - economic development should be seen as a process of expanding the real freedoms that people experience  the removal of major impediments to freedom like poverty, tyranny, and neglect of public facilities  the presence of basic health care and basic education  Amartya Sen also claims that economic progress requires the democratization of political communities to give citizens a voice 3­5 What Determines A Country’s  Level Of Economic Development?  The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is based on  life expectancy at birth  educational attainment  whether average incomes are sufficient to meet the basic needs of life in a country 3­6 How Does Political Economy  Influence Economic Progress?  Innovation and entrepreneurship are the engines of long-run economic growth  innovation includes new products, new processes, new organizations, new management practices, and new strategies  entrepreneurs commercialize innovative new products and processes  Innovation and entrepreneurship  help increase economic activity by creating new markets and products that did not previously exist  require a market economy and strong property rights 3­7 How Does Geography Influence  Economic Development?  Countries with favorable geography are more likely to engage in trade, and so, be more open to market-based economic systems, and the economic growth they promote  Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that  landlocked countries grew more slowly than coastal economies  being totally landlocked reduced a country’s growth rate by 0.7% per year  tropical countries grew more slowly than countries in temperate zones 3­8 How Does Education Influence  Economic Development?  Countries that invest in education have higher growth rates because the workforce is more productive countries in Southeast Asia have offset their geographical disadvantages by investing in education Indonesia, Malaysia, and Singapore 3­9 How Is The Political  Economy Changing?  Trend 1: Democracy has spread over the last two decades  many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations  new information and communication technologies have broken down the ability of the state to control access to uncensored information  economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms 3­10 How Free Are  Countries Politically? Political Freedom in 2010 3­11 How Is The Political  Economy Changing?  Trend 2: The spread of market-based systems  more countries have moved away from centrally planned and mixed economies toward the market-based model  Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries 3­12 How Free Are  Countries Economically? Economic Freedom in 2010 3­13 What Is The Nature Of  Economic Transformation?   The shift toward a market-based system involves deregulation – removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate privatization - transfers the ownership of state property into the hands of private investors the creation of a legal system to safeguard property rights 3­14 What Are The Implications Of Political  Economy Differences For Managers?  The risks of doing business in a country are a function of  Political risk - the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise  Economic risk - the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise  Legal risk - the likelihood that a trading partner will opportunistically break a contract or expropriate property rights 3­15 How Can Managers Determine A  Market’s Overall Attractiveness?    The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country  Other things being equal, the benefit-cost-risk trade-off is likely to be most favorable in politically stable developed and developing nations that have free market systems and no dramatic upsurge in either inflation rates or private sector debt 3­16 How Can Managers Determine A  Market’s Overall Attractiveness? Country Attractiveness 3­17 ... for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country  Other things being equal, the benefit-cost-risk trade-off is... parity (PPP) 3 3 How Do Countries  Compare On GNI? Economic Data for Select Countries 3 4 What Determines A Country’s  Level Of Economic Development?  Nobel-prize winner Amartya Sen - economic... mixed economies toward the market-based model  Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries 3 12 How Free Are  Countries Economically?