International Business

Chapter Three
"The Political economy and economic
development"
What Determines a Countrys 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 ,we need to adjust GNI figures
using purchasing power parity (PPP)

Official figures can also be misleading because they do not

account for black economy transactions

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

Amartya Sen argues

1. economic development should be seen as a process of

expanding the real freedoms that people experience
2. the removal of major impediments to freedom like poverty,
tyranny, and neglect of public facilities
3. the presence of basic health care and basic education

4. Amartya Sen also claims that economic progress requires

the democratization of political communities to give
citizens a voice

The United Nations used Sens ideas to develop the

Human Development Index (HDI) which is based on:
1. life expectancy at birth
2. educational attainment
3. whether average incomes are sufficient to meet the basic
needs of life in a country

How Does Political Economy Influence Economic Progress?

Innovation and entrepreneurship are the engines of

long-run economic growth:
1. innovation includes new products, new processes, new
organizations, new management practices, and new
strategies
2. entrepreneurs commercialize innovative new products
and processes

3. Innovation and entrepreneurship help increase

economic activity by creating new markets and products
that did not previously exist
4. 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
1. There is little incentive to develop new innovations in planned
economies because the state owns all means production and
therefore, the gains
2. There is a strong relationship between economic freedom and
economic growth
3. 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

Innovation and entrepreneurship require strong property

rights
1. without strong property rights, individuals and businesses risk
having their innovations and potential profits stolen
2. Economist Hernando de Soto claims that inadequate property
protection in many developing nations limits economic growth

Democratic regimes are probably more conducive to

long-term economic growth than dictatorships, even the benevolent
kind
1.

property rights are only secure in wellfunctioning, mature democracies

2.

Subsequent economic growth leads to the

establishment of democratic regimes
South Korea
Taiwan

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
1. landlocked countries grew more slowly than coastal
economies
2. being totally landlocked reduced a countrys growth rate
by 0.7% per year
3. tropical countries grew more slowly than countries in
temperate zones

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 example : Indonesia, Malaysia, and
Singapore

How Is The Political Economy Changing?

Since the late 1980s, two trends have emerged

1. Democratic revolution (late 1980s and early 1990s) :

democratically elected governments replaced totalitarian
4

regimes and they are more committed to free market

capitalism
2. A move away from centrally planned and mixed economies:
more countries have shifted toward the market-based model

Trend 1: Democracy has spread over the last two decades

1. many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
2. new information and communication technologies have
broken down the ability of the state to control access to
uncensored information
3. economic advances of the last 25 years have led to
increasingly prosperous middle and working classes who
have pushed for democratic reforms
4. Author Francis Fukuyama argues that the new world
order will be characterized by democratic regimes and
free market capitalism

5. Political scientist Samuel Huntington argues that while

many societies are modernizing they are not becoming
more Western and he predicts a world split into different
civilizations, and these civilizations will be in conflict
with each other

Trend 2: The spread of market-based systems

1. more countries have moved away from centrally
planned and mixed economies toward the market-based
model

2. Command and mixed economies failed to deliver the

sustained economic growth achieved in market-based
countries
What Is The Nature of Economic Transformation?

The shift toward a market-based system involves:

1) deregulation removing legal restrictions to the free play of

markets, the establishment of private enterprises, and the
manner in which private enterprises operate
2) privatization - transfers the ownership of state property into
the hands of private investors
3) the creation of a legal system to safeguard property rights

What Does The Changing Economy Mean For Managers?

Markets that were formerly off-limits to Western business are

now open

1) firms need to explore opportunities in these markets

2) 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

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

1) the markets size

2) the purchasing power of its consumers
3) their likely future wealth

The risks of doing business in a country are a function of:

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