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1. Chapter 3
National Differences
in Economic Development

2. A country’s level of economic development
affects its attractiveness as a possible
market or production location for firms
A common measure is gross national
income (GNI)
A purchasing power parity (PPP) adjustment
provides a more direct comparison of living
standards in different countries
3-2

3. Gross Nation Income (GNI)
the total annual income received by
residents of a nation
3-3
Purchasing Power Parity
to compare economic productivity and
standards of living between countries

4. Copyright © 2011 McGraw-Hill/Irwin 3-4

5. GNI and PPP data provide a
static picture of development.
It is also important to consider
growth rates.
If current trends continue China
will become the world’s largest
economy in the next decade.
3-5

6. Amartya Sen → development should be
assessed by the capabilities and
opportunities that people enjoy
The UN created the Human Development
Index (HDI) based on life expectancy,
education attainment, and whether average
incomes are sufficient to meet the basic
needs of life in a country
Reflects Sen’s ideas and gauges a country’s
economic development and likely future
growth rate 3-6

7. What is the relationship between
political economy and economic
progress?
↓
Economic freedom in a market
economy creates greater incentives for
innovation and entrepreneurship than
in either a planned or mixed economy
3-7

8.  Innovation and entrepreneurship are the
engines of growth
 Innovation and entrepreneurship require
market economy
 Innovation and entrepreneurship require
strong property rights
 Required political system
 Economic Progress Begets Democracy
 Geography, Education, and Progress
3-8

9. Innovation and entrepreneurship
are the engines of growth
For a country to sustain long term
economic growth, the business
environment needs to be conducive to
innovation and entrepreneurial activity
3-9

10. Innovation and entrepreneurship
require market economy
Countries with high economic freedom
have high economic growth and richer
citizens
Hong Kong, Switzerland, Singapore,
the U.S., Canada, and Germany
Countries that lack economic freedom
also fail to achieve respectable
economic growth
3-10

11. Innovation and
entrepreneurship require
strong property rights
developing world will not benefit
from capitalism until property rights
are better defined and protected
3-11

12. Required political system
Democratic regimes tend to be
more conducive to long-term
economic growth than dictatorships
Limiting human freedom also
suppresses human development
and therefore limits progress
3-12

13. Economic Progress Begets Democracy
Democracy is often a consequence of
economic growth
Such as:
This has contributed to the attitude of many
Western governments towards human rights
violations in China
If China establishes a free market system, it
is hoped that greater individual freedom and
democracy will follow
3-13

14. Geography, Education, and Progress
Geography influences economic policy,
and thus economic development
Favorable geography facilitates trade
which can promote economic growth
Investment in education promotes faster
economic development
3-14

15. States in Transition:
1. Since the late 1980s, a wave of
democratic revolutions has swept the
world, and many of the previous
totalitarian regimes collapsed
2. There has been a move away from
centrally planned and mixed economies
towards free markets
3-15

16. The Nature of
Economic Transformation:
1. Deregulation
2. Privatization
3. Legal system
3-16

17. Changing Political Economy:
Markets that were formerly off-limits to
Western business are now open
1. China (population of 1.3 billion) could be a bigger market
than the U.S., the EU, and Japan combined
2. India (population 1.2 billion) is also a potentially huge
market
3. Latin America has 600 million potential consumers
However, just as the potential gains are
large, so are the risks
3-17

18. Implications for Managers
What are the implications of the political
economy for international businesses?
The overall attractiveness of a country
depends upon the balance between the
likely benefits of doing business in that
country against the likely costs and risks
3-18

19. The benefits of doing business in a country
are a function of market size, and current
and future consumer purchasing power
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)
Late entrants may face late-mover
disadvantages
3-19

20. The costs of doing business in foreign
markets:
1. Political costs - include the cost of paying
bribes or lobbying for favorable or fair
treatment
2. Economic costs - relate primarily to the
sophistication of the economic system,
including the infrastructure and supporting
businesses
3. Legal costs - can be higher in countries with
dramatically different product, workplace, and
pollution standards, or where there is poor
legal protection for property rights
3-20

21. The Risks of doing business in foreign
markets:
1. 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
2. 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
3. Legal risk - the likelihood that a trading partner
will opportunistically break a contract or
expropriate property rights 3-21