Chapter 4

1. Chapter 4 Economic environment and economic development

2. 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. What Determines A Country’s Level Of Economic Development? • Purchasing Power Parity (PPP) can be examined by this and this…

4. What Determines A Country’s Level Of Economic Development?

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

6. 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

7. Broader Conceptions of Development • Nobel-prize winner Amartya Sen

8. 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

9. How Do Countries Compare on Economic Development?

10. 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

11. How Does Political Economy Influence Economic Progress? • 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

12. 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

13. 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 • Samsung and Apple FIGHT!!! • Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth

14. How Does Political Economy Influence Economic Progress? • De Soto claims property rights are particularly important for economic growth. • Total value of real estate in third world nations and former communist states = $9.3tn • E.g. In 2007 China passed a law that gave private property owners the same rights as the state • Hernando De Soto

15. 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

16. How Does Geography Influence Economic Development? • Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that geography matters!

17. 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 • The Education Crisis in Developing Countries

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

19. 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 • economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms

20. How Is The Political Economy Changing? • new information and communication technologies have broken down the ability of the state to control access to uncensored information • http://www.greatfirewallofchina.org/

21. How Is The Political Economy Changing? • new information and communication technologies have broken down the ability of the state to control access to uncensored information

22. How Free Are Countries Politically? Political Freedom in 2010

23. How Is The Political Economy Changing? • Francis Fukuyama • Samuel Huntington

24. 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

25. How Free Are Countries Economically? Economic Freedom in 2010 http://www.heritage.org/index/ranking

26. 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

27. 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 • Latin America – 400 million potential consumers • China -1.2 billion people • India – 1.1 billion people

28. 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?

29. 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 • First mover advantages

30. Ingredients for economic growth and development

31. What Are The Implications Of Political Economy Differences For Managers? • Three factors that are reasonably good predictors of a country’s future economic prospects are its economic system, its property rights regime and the quality of its ‘deep’ institutions. • The costs of doing business in a country are a function of its • political system • economic level • legal system

32. 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 • E.g. Venezuela • Hugo Chavez • Govt intervention

33. What Are The Implications Of Political Economy Differences For Managers? • The risks of doing business in a country are a function of • 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 • The Asian Financial Crisis • Overinvestment of banks

34. What Are The Implications Of Political Economy Differences For Managers? • The risks of doing business in a country are a function of • Legal risk - the likelihood that a trading partner will opportunisticallybreak a contract or expropriate property rights

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

36. Summary of main themes • 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 • The potential benefits, costs and risks of doing business in a country are a function of its resource endowments, its macroeconomic stability, its level of economic development and the nature of its economic system.