MGT 3660: International Business

Session 4: Political Economy and Economic Development

Announcement
International business presentation I (1/28 & 1/30)
Find a case that shows how international business setting helps to gain competitive advantage Group presentation Your presentation is evaluated by the audience

Check your team No late assignment Use your name tent

Warm-up Quiz
Distribution of warm-up quiz
Average: 9.45 Standard deviation: 0.66 Distribution
35

30
25 20 15 10 5 0 6 7 8 9 10

Congrats: 31 students!!!

Warm-up Quiz
True or false questions

Learning Objectives
After this session, we can do followings:
Explain what determine the level of economic development of a nation Identify the macro-political and economic changes occurring worldwide Describe how transition economies are moving toward market-based systems Explain the implications for management practice of national difference in political economy

Where We Are
Concepts of globalization
Chapter 1

Country differences
Chapter 2-5

The global trade and investment environment

Chapter 6-9

The strategy and structure of international business

Chapter 13-15

Business operation
Chapter 16-20

Class Activities
Closing case [Japans economic malaise]
In the 1980s Japan was viewed as one of the worlds most dynamic economies. Today it is viewed as one of its most stagnant. Why has the Japanese economy stagnated? What are the implications of Japans economic stagnation for the benefits, costs, and risks of doing business in this nation? As an international business, which economy would you rather invest in, that of Japan or that of India? Explain your answer.

2-7

Determinants 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

Determinants of Economic Development

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)

Official figures do not account for black economy transactions

Drug and national security industries

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

Determinants 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

The United Nations used Sens 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

Impact of Political Economy on Economic Progress

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

Why?

Impact of Political Economy on 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

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

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

Impact of Political Economy on 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

Impact of Geography on Economic Progress

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 countrys growth rate by 0.7% per year tropical countries grew more slowly than countries in temperate zones

Impact of Education on Economic Progress

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

Dynamics of Political Economy

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

Dynamics of Political Economy

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

Dynamics of Political Economy

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

Dynamics of Political Economy

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

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

Managerial Implications of Economic Transformation

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 -1.2 billion people India 1.1 billion people Latin America 400 million potential consumers

Managerial Implications of Economic Transformation

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 Chinas financial system be stable?

Managerial Implications of Economic Transformation

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 countrys political, economic, and legal systems

Markets Overall Attractiveness

Country Attractiveness

Managerial Implications of Economic Transformation

The benefits of doing business in a country are a function of
the markets 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

Managerial Implications of Economic Transformation

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

Managerial Implications of Economic Transformation

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

Markets 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

Next Time
Differences in culture

1-29