political economy and - national paralegal...
TRANSCRIPT
International Business 9e
By Charles W.L. Hill
McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved.
Chapter 3
Political Economy and Economic Development
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What Determines A Country’s Level Of Economic Development?
Ø Gross national income (GNI) per person measures the total annual income received by residents of a nation Ø Japan, Sweden, Switzerland, and the U.S.
have high GNI Ø China and India have low GNI
Ø GNI can be misleading because it does not consider differences in the cost of living Ø need to adjust GNI figures using purchasing
power parity (PPP)
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How Do Countries Compare On GNI?
Economic Data for Select Countries
35
What Determines A Country’s Level Of Economic Development?
Ø Official figures can also be misleading because they do not account for black economy transactions
Ø In addition, GNI and PPP data are static and do not consider economic growth rates Ø 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
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How Do Countries Compare On Growth Rates?
Economic Data for Select Countries
37
What Determines A Country’s Level Of Economic Development?
Ø Nobelprize winner Amartya Sen argues economic development should be seen as a process of expanding the real freedoms that people experience Ø the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities Ø the presence of basic health care and basic
education Ø Amartya Sen also claims that economic
progress requires the democratization of political communities to give citizens a voice
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What Determines A Country’s Level Of Economic Development?
Ø The United Nations used Sen’s ideas to develop the Human Development Index (HDI) which is based on Ø life expectancy at birth Ø educational attainment Ø whether average incomes are sufficient to
meet the basic needs of life in a country
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How Do Countries Compare on Economic Development?
Economic Data for Select Countries
310
How Does Political Economy Influence Economic Progress? Ø Innovation and entrepreneurship are the engines of longrun economic growth Ø innovation includes new products, new processes, new organizations, new management practices, and new strategies Øentrepreneurs commercialize innovative new products and processes
Ø Innovation and entrepreneurship help increase economic activity by creating new markets and products that did not previously exist Ø innovation in production and business processes result in more productive labor and capital further boosting economic growth rates
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How Does Political Economy Influence Economic Progress? Ø Innovation and entrepreneurship require a market economy Ø there is little incentive to develop new innovations in planned economies because the state owns all means production and therefore, the gains
ØThere is a strong relationship between economic freedom and economic growth Ø the six countries with the highest ratings of economic freedom from 1975 to 1995 were also among the highest for economic growth ØHong Kong, Switzerland, Singapore, the United States, Canada, and Germany
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How Does Political Economy Influence Economic Progress? ØInnovation and entrepreneurship require strong property rights Øwithout strong property rights, individuals and businesses risk having their innovations and potential profits stolen
ØEconomist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth
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How Does Political Economy Influence Economic Progress? ØDemocratic regimes are probably more conducive to longterm economic growth than dictatorships, even the benevolent kind Øproperty rights are only secure in wellfunctioning, mature democracies
ØSubsequent economic growth leads to the establishment of democratic regimes ØSouth Korea ØTaiwan
314
How Does Geography Influence Economic Development?
ØCountries with favorable geography are more likely to engage in trade, and so, be more open to marketbased economic systems, and the economic growth they promote Ø Jeffrey Sachs studied economic growth rates between 1965 and 1990 and found that Ø landlocked countries grew more slowly than coastal economies Øbeing totally landlocked reduced a country’s growth rate by 0.7% per year Ø tropical countries grew more slowly than countries in temperate zones
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How Does Education Influence Economic Development?
ØCountries that invest in education have higher growth rates because the workforce is more productive Øcountries in Southeast Asia have offset their geographical disadvantages by investing in education ØIndonesia, Malaysia, and Singapore
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How Is The Political Economy Changing?
Ø Since the late 1980s, two trends have emerged
1. Democratic revolution (late 1980s and early 1990s) Ø democratically elected governments replaced
totalitarian regimes Ø more committed to free market capitalism
2. A move away from centrally planned and mixed economies Ø more countries have shifted toward the market
based model
317
How Is The Political Economy Changing?
Ø Trend 1: Democracy has spread over the last two decades Ø many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations Ø new information and communication technologies
have broken down the ability of the state to control access to uncensored information
Ø economic advances of the last 25 years have led to increasingly prosperous middle and working classes who have pushed for democratic reforms
318
How Free Are Countries Politically?
Political Freedom in 2010
319
How Is The Political Economy Changing?
Ø Author Francis Fukuyama argues that the new world order will be characterized by democratic regimes and free market capitalism
Ø But, political scientist Samuel Huntington argues that while many societies are modernizing they are not becoming more Western Ø predicts a world split into different civilizations Ø these civilizations will be in conflict with each
other
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How Is The Political Economy Changing?
Ø Trend 2: The spread of marketbased systems Ø more countries have moved away from
centrally planned and mixed economies toward the marketbased model
Ø Command and mixed economies failed to deliver the sustained economic growth achieved in marketbased countries
321
How Free Are Countries Economically?
Economic Freedom in 2010
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What Is The Nature Of Economic Transformation?
ØThe shift toward a marketbased system involves Øderegulation – removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate Øprivatization transfers the ownership of state property into the hands of private investors Øthe creation of a legal system to safeguard property rights
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What Does The Changing Economy Mean For Managers? ØMarkets that were formerly offlimits to Western business are now open Ø firms need to explore opportunities in these markets
ØDespite being underdeveloped and poor, some markets have huge potential ØChina 1.2 billion people Ø India – 1.1 billion people ØLatin America – 400 million potential consumers
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What Does The Changing Economy Mean For Managers? ØHowever, the potential risks are large Øwill democracy thrive especially in difficult economic times? Øwill totalitarian regimes return? Øwill a multipolar world of different civilizations emerge? Øwill China’s financial system be stable?
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What Are The Implications Of Political Economy Differences For Managers?
Ø Countries with democratic regimes, market based economic policies, and strong property rights protection are more likely to have higher sustained rates of economic growth Ø these markets are more attractive to international
businesses Ø the benefits, costs, and risks of doing business in a
country are a function of the country’s political, economic, and legal systems
326
What Are The Implications Of Political Economy Differences For Managers?
ØThe benefits of doing business in a country are a function of Ø the market’s size Ø the purchasing power of its consumers Ø their likely future wealth
ØBy 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 ØChina
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What Are The Implications Of Political Economy Differences For Managers?
ØThe costs of doing business in a country are a function of its Øpolitical system Øis it necessary to pay bribes to get market access?
Øeconomic level Øare the necessary supporting business and infrastructure in place?
Ølegal system Øit 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
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What Are The Implications Of Political Economy Differences For Managers?
Ø The risks of doing business in a country are a function of Ø 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
Ø 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
Ø Legal risk the likelihood that a trading partner will opportunistically break a contract or expropriate property rights
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How Can Managers Determine A Market’s Overall Attractiveness? ØThe 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 ØOther things being equal, the benefitcostrisk tradeoff 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
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How Can Managers Determine A Market’s Overall Attractiveness?
Country Attractiveness