International Business

11e

By Charles W.L. Hill

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Chapter 3

National Differences in
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)

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 How Do Countries
Compare On GNI?
Economic Data for Select Countries

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 What Determines A Country’s Level
Of Economic Development?
 Official figures can also be misleading
because they do not account for black
economy transactions
 In addition, GNI and PPP data are static
and do not consider economic growth
rates
 So, while China and India are currently
categorized as being poor they are growing
more rapidly than many developed nations
and are expected to become among the
largest economies in the world

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 How Do Countries
Compare On Growth Rates?
Average Annual Growth Rate in GDP, 2004--2013

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 What Determines A Country’s Level
Of Economic Development?
 Nobel-prize winner Amartya Sen argues
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

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 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

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How Do Countries Compare on
Economic Development?
Human Development Index, 2013

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 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
 innovation in production and business processes
result in more productive labor and capital further
boosting economic growth rates

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 How Does Political Economy
Influence Economic Progress?
 Innovation and entrepreneurship require a
market economy
 there is little incentive to develop new innovations in
planned economies because the state owns all
means production and therefore, the gains
 There is a strong relationship between economic
freedom and economic growth
 the six countries with the highest ratings of economic
freedom from 1975 to 1995 were also among the
highest for economic growth
 Hong Kong, Switzerland, Singapore, the United States,
Canada, and Germany

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 How Does Political Economy
Influence Economic Progress?
Innovation and entrepreneurship require
strong property rights
 without strong property rights, individuals and
businesses risk having their innovations and
potential profits stolen
Economist Hernando de Soto claims that
inadequate property protection in many
developing nations limits economic growth

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 How Does Political Economy
Influence Economic Progress?
 Democratic regimes are probably more
conducive to long-term economic growth than
dictatorships, even the benevolent kind
 property rights are only secure in well-functioning,
mature democracies
 Subsequent economic growth leads to the
establishment of democratic regimes
 South Korea
 Taiwan

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 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

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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

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 How Is The Political
Economy Changing?
 Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early
1990s)
 democratically elected governments replaced
totalitarian regimes
 more committed to free market capitalism
2. A move away from centrally planned and
mixed economies
 more countries have shifted toward the market-
based model

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 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

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 How Free Are
Countries Politically?
Freedom in the World in 2015

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 How Is The Political
Economy Changing?
 Author Francis Fukuyama argues that the new
world order will be characterized by democratic
regimes and free market capitalism
 But, political scientist Samuel Huntington
argues that while many societies are
modernizing they are not becoming more
Western
 predicts a world split into different civilizations
 these civilizations will be in conflict with each
other

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 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

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 How Free Are
Countries Economically?
Distribution of Economic Freedom, 2015

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 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

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 What Does The Changing
Economy Mean For Managers?
 Markets that were formerly off-limits to Western
business are now open
 firms need to explore opportunities in these markets
 Despite being underdeveloped and poor, some
markets have huge potential
 China -1.3 billion people
 India – 1.2 billion people
 Latin America – 600 million potential consumers

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 What Does The Changing
Economy Mean For Managers?
However, the potential risks are large
 will democracy thrive especially in difficult
economic times?
 will totalitarian regimes return?
 will a multi-polar world of different civilizations
emerge?
 will China’s financial system be stable?

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 What Are The Implications Of Political
Economy Differences For Managers?
 Countries with democratic regimes, market
based economic policies, and strong property
rights protection are more likely to have higher
sustained rates of economic growth
 these markets are more attractive to international
businesses
 the benefits, costs, and risks of doing business in a
country are a function of the country’s political,
economic, and legal systems

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 What Are The Implications Of Political
Economy Differences For Managers?
 The benefits of doing business in a country are a
function of
 the market’s size
 the purchasing power of its consumers
 their likely future wealth
 By identifying and investing early in potential
future economic stars, firms may be able to gain
first mover advantages (advantages that accrue
to early entrants into a market) and establish
loyalty and experience in a country
 China

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 What Are The Implications Of Political
Economy Differences For Managers?
The costs of doing business in a country
are a function of its
 political system
 is it necessary to pay bribes to get market access?
 economic level
 are the necessary supporting business and
infrastructure in place?
 legal system
 it can be more costly to do business in countries
with dramatically different product, workplace, and
pollution standards, or where there is poor legal
protection for property rights

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 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

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 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

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 How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness

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Before investing in a foreign location, a firm must take three
things into consideration: the costs, benefits, and risks
(political, economic, or legal) associated with entering into
a business venture there.

Imagine you are the manager of a foreign company

considering an investment in your home town. What would
be some of the expected costs, benefits, or risks of starting
a new business where you live? How high would you rate
your location on its overall attractiveness to investors?
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