Lecture International business - Chapter 4: Economics and emerging markets

In this chapter, you will learn about different economic systems and their effect on international business. You will also: Recognize the importance of economic development; understand how nations are classified as developing, newly industrialized, emerging, or developed; and learn about the process of economic transition and how countries implement market-based economic reforms.

Economics and  Emerging Markets

4

• Describe what is meant by a centrally planned economy and explain why its use is declining

• Identify the main characteristics of a mixed economy and

explain the emphasis on privatization

• Explain how a market economy functions and identify its

• Infosys is a global provider of IT services

• India has organic-led path to development

• Brainpower is driving development

Mostly private (individual

or business) ownership of economic resources Government and private

Range of Economic Systems

Centrally Planned Economy Centrally Planned Economy

Government owns most land,

factories, and other economic

resources and plans nearly all

economic activity

Asia Central Europe Eastern Europe Latin America

Russia (1917) China (1949) Cuba (1959)

 Welfare of the group

is paramount

 Economic and social

equality is the goal

 “Communist” system

is needed

Central planning failed to:

 Create economic value

 Provide incentives

 Achieve rapid growth

 Satisfy consumer needs

North Korea

Socialism with Chinese characteristics:

  Unemployment and        migrant labor

  Eventual(?) reunification        with Taiwan

 Prices and taxes higher, living standards mixed Government and private parties share ownership of land,

factories, and other economic resources rather evenly

A economy is

one in which government

and private parties share

A economy is

one in which government

and private parties share

Private parties (individuals or businesses) own most

land, factories, and other economic resources

Demand

Quantity buyers will

purchase at a specific selling price

Laissez­Faire  Economics

Less government interference in business

Market Economy

monetary stability

Encourages development of  industries with as

many competing businesses as market will sustain

    Keeps consumer prices in check

 Prevents growth-stunting monopolies

Encourages commerce in a nation because it improves its reputation as a place to do business

 Fiscal policies (taxation, government spending)

 Monetary policies (money supply, interest rates)

 Reduces overall uncertainty

 Improves business forecasts

Encourages businesses to engage in activities without fear of disrupted future operations

 Promotes economic growth generally

 Reduces worries of political risk

 Improves chances for business survival

Three key features of a market

economy: free choice, free

enterprise, and price flexibility.

Four roles of government in a

market economy: enforce

antitrust laws, preserve

property rights, provide fiscal

and monetary stability, and

preserve political stability.

Economic Freedom & Wealth

Economic well-being of one

nation’s people relative to

another nation’s people

 Economic output (agricultural,

industrial, and service)

 Infrastructure (communications,

transportation, and power)

 People (physical health and

Relative ability of two countries’

currencies to buy the same “basket”

of goods in those two countries

PPP Estimate of GDP per Capita GDP per Capita

Source: Based on data from Organization for Economic

Cooperation and Development (OECD), “Statistics”

Human Development Index

Highly industrialized, highly efficient, and whose people enjoy a high quality of life

Newly industrialized countries plus those with potential to be newly industrialized

Recently greater national production and exports from industrial operations

Poor infrastructure and extremely low personal income

_ is the relative

ability of two countries’

currencies to buy the same

basket of goods in those

_ is the relative

ability of two countries’

currencies to buy the same

basket of goods in those

Reforms:

 Reduce budget deficits and expand credit

 Allow the “price mechanism” to determine prices

and economic activity

 Legalize private firms and privatize state-owned

assets within a property rights framework

 Remove barriers to trade and investment and

eliminate currency controls

Fundamental reorganization of an economy and the

creation of new free-market institutions

Cultural changes

Cultural changes

Capital shortage

 Operated under a staunchly communist system for

about 75 years

economic and political reform

improving and foreign

What is economic

transition and what

are the remaining

obstacles in

post-communist

countries?

Economic transition: Changing a nation’s

fundamental economic organization and

creating new free-market institutions A

country must: Stabilize the economy,

reduce budget deficits, and expand credit

availability; Allow prices to reflect supply

and demand; Legalize private business, sell

state-owned companies, and support

property rights; and Reduce barriers to

trade and investment and allow currency

convertibility

Remaining obstacles: Lack of managerial

expertise, Shortage of capital, Cultural

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