This document discusses factors that drive economic growth according to various economists. It provides GDP data for various countries from 1990-2010 that shows high growth rates in China, India, and other developing economies. Theories discussed include how physical and human capital accumulation, technology improvements, and institutions like private property rights systems can influence economic growth. It also examines China's high growth despite a relatively weak legal system, noting the role of informal institutions like guanxi social networks in enabling business transactions.

1. Firm’s environment:
an economic growth approach
Dr Rita Yi Man Li

2. Objectives
What drives economic growth?
How does the formal and informal institutions
affect economic growth?

4. GDP in 1990 and 2010
GDP in 1990 Range in 1990 GDP in 2010 Range in 2010
USA 5.800.525 1 14.657.800 1
China 390.278 10 5.878.257 2
Japan 3.058.038 2 5.458.872 3
Germany 1.547.026 3 3.315.643 4
France 1.248.563 4 2.582.527 5
United Kingdom 1.017.792 6 2.247.455 6
Brazil 507.784 9 2.090.314 7
Italy 1.135.543 5 2.055.114 8
Canada 582.735 7 1.574.051 9
India 325.928 12 1.537.966 10
Russia SD - 1.465.079 11
Spain 520.709 8 1.409.946 12
Australia 327.526 11 1.235.539 13
Mexico 287.803 14 1.039.121 14
South Korea 270.405 15 1.007.084 15
The Netherlands 295.570 13 - -
Source: FMI. En: Bustelo, P. (29 de julio de 2011). La UE ante el auge económico de Asia-
Pacífico. DT 15/2011.
http://www.realinstitutoelcano.org/wps/portal/rielcano/contenido?WCM_GLOBAL_CONTEXT=/

5. GDP growth rate at a glance
1980-1990 1990-2000 2000-2009
China 10,2 10,6 10,9
India 5,8 6,0 7,9
Brazil 2,8 2,9 3,6
Russia 2,8 -4,7 6,0
USA 2,9 3,5 2,0
Japan 4,0 1,3 1,1
Germany 2,1 1,5 1,0
Spain 3,2 2,6 2,8
Low and middle income
countries
3,0 3,9 6,4
East Asia and the Pacific 7,8 8,5 9,4
Latin America & the Caribbean 1,8 3,3 3,8
Southern Asia 5,7 5,6 7,3
High income countries 3,2 2,7 2,0
World 3,1 2,9 2,9
Source: World Bank, Reports on the world development. In: Bustelo, P. (29 de julio de 2011). La
UE ante el auge económico de Asia-Pacífico. DT 15/2011.
http://www.realinstitutoelcano.org/wps/portal/rielcano/contenido?WCM_GLOBAL_CONTEXT=/
elcano/elcano_es/zonas_es/dt15-2011.

6. What drives economic growth?

7. Robert Solow
• In the first stage, agriculture is the major
industry
• Exogenous shocks (e.g., climate change) play a
major role in economic growth.
• In the second stage, the efficiency of
agricultural production increases and trade
activities increase. Other business sectors
emerge. The growth rate of savings and
investment is also increasing (Li and Hung
2013).

8. Robert Solow
• In the third stage, the rapid growth of the
Gross National Income (GNI), provides the
opportunity for entrepreneurs to use higher
technology to strengthen the main sector of
the economy.
• In the fourth stage, new technology spreads to
other industrial sectors. The efficiency of
other industries also contributes to growth.
• In the final stage, the economy completes the
industrialization process (Li and Hung 2013).

9. John Mill
• Previous research suggests that
the key factors of economic
development are physical and
human capital accumulation and
improvements in technology.
• John Mill stated that “productions
will be limited by the amount of
their previous accumulation,
and … will be proportional to
their energy, their skill, the
perfection of their machinery, and
their judicious use of the
advantages of combined
labour”(Mill, 2001).

10. Neoclassical growth school
• Neoclassical growth school of thought stresses
on physical capital accumulation (Heitger,
2004).
• Academic researchers in economic
geographers and regional science have
emphasized the importance of technology in
structuring and restructuring regional,
national and international economy.

11. Joseph A. Schumpeter
• Joseph A. Schumpeter emphasizes the
role of innovations and inventions in
economic development as in 1930s.
• Endogenous growth theory has also
stressed the strategic role of
technological progress in economic
dynamics over time and international
space.
• In view of these, governments at various
levels across different parts of the world
spend large amount of resources in
inventions and innovations to speed up
regional economic growth and to
increase national and international
competitiveness (Sun, 2000).

12. Friedrich August Hayek
• As Hayek (1949)
comments “self
interests represented
the universal mover.
The worth of a state in
the long run is the
worth of the individuals
who help compose it
(Mill, 2001).

13. Institutions affect economic growth?
There are 2 types of institutions:
Formal: legal rules and regulations
Informal: culture, history etc outside the regime
of formal rules and regulations

14. The importance of private property
rights in economic growth
• Current researchers think that the major
ingredient in economic growth and innovation is
incentives, which strappingly depend on private
property rights system.
• Such rights can enable the sources of production
attain their utmost degree of fecundity.
• If the government itself or the sovereign power
“practices robbery,” property will become a pure
“mockery.”

15. The importance of private property
rights
• Nobody will have an incentive to invent
something if he does not have the right to
generate income from his innovation.
• It is undeniable that efficient use of resources
requires secure property rights.
• Traditional growth theory, however, never
mentions the importance of private property
rights which is quite obvious not true in reality
(Heitger, 2004).

16. Jean-Baptiste Say
• Without the protection of private
property rights, “it is impossible to
conceive any considerable
development of the productive
power of man, of land, and of
capital; or even to conceive the
existence of capital at all” (Say,
2001).

17. Empirical evidence
Low
income
countrie
s
Low
middle
income
countries
Upper
middle
income
countries
High
income
countries
Total
Low rule of law
countries
19 10 2 2 33
Lower middle
rule of law
countries
28 31 17 3 79
Upper middle rule
of law countries
1 15 18 26 60
High rule of law
countries
1 1 3 29 34
Total 49 57 40 60 206
The relationship between rule of law and economic growth (Y Xu 2011).

18. China as an exception ? The informal
rule’s supplementary to rule of law
leads to the dragon to the road of
revival
• In between 1995 and 2008, China’s average
annual growth rate of GDP was 9.64%, which
was more than twice the world’s average
(4.56%).
• China was also the ninth-fastest-growing
economy among the 183 economies in a study
conducted by Wu (2011).

19. Poor legal system but fast economic
growth?
• Nevertheless, a sharp contrast to the fast
growing economy is the underdeveloped legal
system vulnerable to political pressure, poor
enforcement of legal rules and weak and
poorly defined property rights (Wu 2011;
Landry et al. 2009; Braendle et al. 2005; Allen
et al. 2005; Lu and Yang 2009; Ji 2009; Yueh
2010; C Xu 2011).

20. Examples
• For example, corruption is one of the major
problems (China ranks 75 out of 182 countries in
2011) (Braendle et al. 2005; Transparency
International 2011) and violation of intellectual
property rights (Chow 1997) can be found easily
• Each year 15 million illegal mobile phones are
distributed Worldwide from Shenzhen and illegal
mobile phones occupy 1/3 of the market, Chinese
manufacturers change one or two letters of the
branded product and turn it become their own
product (Hu 2008).

21. Examples
• China has also been criticized as the World’s
major intellectual property infringement
culprit for it accounts for nearly 2/3 of the
counterfeit goods which include motorcycles,
movie music CDs, DVDs designer handbags
and so on with an estimated of 512 million
worldwide (Priest 2006 ).

22. Good legal system is not a
precondition
• Therefore, many scholars pointed out that
good legal system is not a precondition for
economic growth in China (Allen et al. 2005;
Lu and Yang 2009; Clarke et al. 2006) or law
will simply develop after economic growth
(Shen and Wang 2009; Chen 2003) in spite of
the many scholars agreed that well developed
legal system favours economic growth (Lam
and Chen 2004; Yu 2009; Potter 1999).

23. Informal institutions at work
• The high enforcement cost under the American
legal system suggests that informal alternatives to
legal regulation may be more efficient than
competitive markets based on law (Chow 1997;
Jones 1994)
• The solution to an ineffective legal system lies in
the traditional culture with regard to its possible
outcomes on the social network (Braendle et al.
2005).
• This is evidenced by the Chinese’s Guanxi
“informal legal enforcement method”.

24. Guanxi
• Guanxi could facilitate business if people honour their
promise. It could, however, ruin the trades when
someone fails to follow the rule of reciprocity and
equity as he will be labeled as untrustworthy and no
one will trade with him anymore (Luo and Chen 1996).
• Breach of faith against one person will be harmful to
his business with others as the victim will depict him as
an evil in front of his friends and family.
• The negative influence could be far-reaching if the
person who was betrayed has a broad guanxi network.

25. Informal network replace the role of
formal institutions
• Guanxi could be treated as an alternative
reward and punishment system, a kind of
“unwritten law” (Braendle et al. 2005) which
serves as a kind of a surrogate market system
due to ill-defined property rights, economic
roles, a restricted flow of information
(Braendle et al. 2005) and has become the
engine of the growth of SMEs (Ji 2009).

26. (Li and Li 2013)

27. References / further reading
• Li, Rita Yi Man and Hung Ronald (2013) Rostow’s Stages of Growth Model,
“Urban Bias” and Sustainable Development in India, Journal of
Contemporary Issues in Business Research, 2(5), pp.170-178
• Li, Rita Yi Man and Li, Yi Lut (2013) The relationship between law and
economic growth: A paradox in China Cities, Asian Social Science, Vol.9,
No.9, pp.19-30
• Li, Rita Yi Man (2013) An Evolution Analysis on the Ingredients which Lead
to Economic Growth in China, 1979 through 2013, CESA-JNU Joint
International Conference on Industrial Upgrading and Sustainable
Economic Growth in China, Jinan University, Guangzhou
• Li, Rita Yi Man (2011) Internet Boost the Economic Growth of mainland
China? Discovering Knowledge from Our World Wide Web, Global Business
and Management Research: An International Journal, Vol. 3 No. 3/4,
p.345-355.
• Li, Rita Yi Man (2009) Private Property Rights, Legal Enforcement and
Economic Prosperity: the Fall of Early Civilized China and the Rise of
United Kingdom in 18th -19th Century, Asian Social Science, Vol.5, No.10,
pp.5-10