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

Political Economy and Economic Development

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)

How Do Countries 

Compare On GNI?

Economic Data for Select Countries

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

poverty, tyranny, and neglect of public facilities

education

 Amartya Sen also claims that economic

progress requires the democratization of

political communities to give citizens a voice

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

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

markets and products that did not previously exist

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

economies

rate by 0.7% per year

temperate zones

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

How Is The Political  Economy Changing?

 Trend 1: Democracy has spread over the last

two decades

progress to the vast bulk of their populations

have broken down the ability of the state to control access to uncensored information

increasingly prosperous middle and working classes who have pushed for democratic reforms

Countries Politically?

Political Freedom in 2010

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

How Free Are  Countries Economically?

Economic Freedom in 2010

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

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

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

Market’s Overall Attractiveness?

Country Attractiveness