international business 03

1. International Business
9e
By Charles W.L. Hill
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 3
Political Economy and
Economic Development

3. 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)

4. 3-4
How Do Countries
Compare On GNI?
Economic Data for Select Countries

5. 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

6. 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

7. 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 entrepreneurship
help increase economic activity by creating new
markets and products that did not previously exist
require a market economy and strong property rights

8. 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
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

9. 3-9
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

10. 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

11. 3-11
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

12. 3-12
How Free Are
Countries Economically?
Economic Freedom in 2010

13. 3-13
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

14. 3-14
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

15. 3-15
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 increase in either inflation rates or
private sector debt

16. 3-16
How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness