International Business 9e

By Charles W.L. Hill

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3

Political Economy and Economic Development

3-3

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)

3-4

How Do Countries Compare On GNI?

Economic Data for Select Countries

3-5

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

3-6

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

3-7

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 entrepreneurshiphelp increase economic activity by creating new

markets and products that did not previously exist require a market economy and strong property rights

3-8

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

economiesbeing totally landlocked reduced a country’s growth

rate by 0.7% per year tropical countries grew more slowly than countries in

temperate zones

3-9

How Does Education Influence Economic Development?

Countries that invest in education have higher growth rates because the workforce is more productivecountries in Southeast Asia have offset their

geographical disadvantages by investing in educationIndonesia, Malaysia, and Singapore

3-10

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

3-11

How Free Are Countries Politically?

Political Freedom in 2010

3-12

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

3-13

How Free Are Countries Economically?

Economic Freedom in 2010

3-14

What Is The Nature Of Economic Transformation?

The shift toward a market-based system involvesderegulation – 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

3-15

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

3-16

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

3-17

How Can Managers Determine A Market’s Overall Attractiveness?

Country Attractiveness