NATIONAL

DIFFERENCE IN
ECONOMIC
DEVELOPMENT
Learning Objectives
■ To understand how the economic
systems of the countries differ.
 Types of Economic
Systems
■ An Economic systems refers to the
mechanism that deals with the
production, distribution, and
consumption of goods and services
■ Type
■ Market economy
■ Command economy
■ Mixed economy
 Market Economy
■ All productive activities are privately owned, as
opposed to being owned by the state. The goods
and services that a country produces are not planned
by anyone
■ Production is determined by the interaction of supply
and demand and signaled to producers through the
price system.
■ If demand for a product exceeds supply, prices will
rise, signaling producers to produce more.
■ If supply exceeds demand, prices will fall, signaling
producers to produce less
 Market Economy
■ Mostly private (individual or business) ownership resources
■ Bias towards entrepreneurial innovation
■ Applies the invisible hand, laissez fair, property rights, and
individualism
■ In a market economy individuals rather than governments make
most economic decisions
■ Philosophical Anchor : Capitalism
■ Private ownership of capital

■ Laissez-Faire
■ Governmental non interference in economic affairs
 Command Economy
■ In a command economy the visible hand of the state supersedes
the invisible hand of individuals
■ Government
■ Owns and controls resources

■ Determines prices

■ Bias towards large scale, capital intensive production

■ Applies the visible hand or the state, central planning and
collectivism
■ Philosophical Anchor: Communism
Mixed Economy
■ Government and private ownership of economic resources
mixed in varying proportion
■ Goals of balancing economic efficiency but protecting against
the excess of greed and self interest
■ Most of the economies are mixed economies
■ Fall between market and command economies
■ Philosophical Anchor: Socialism
■ Regulate economic activity with a focus on social equality
and a fair distribution of wealth.
 State Capitalism: Detour or
Destination
■ State Capitalism – refers to a system in
which the government explicitly manipulates
market outcome for political purposes
■ Promote certain industries to encourage

economic development
■ Develop national companies into global

leaders
■ Foreign companies restricted from strategic

industries
 Economic Development
Measures
■ Different countries have dramatically
different levels of economic
development.
■ A country’s level of economic
development affects its attractiveness
as a possible market or production
location for firms.
 Economic Development
Measures
■ A common measure are:
■ Gross National Income (GNI) – is
regarded as the yardstick for the economic
activity of a country; it measures the total
national income received by residents of a
nation.
Economic Development
Measures
■ To account for differences in the cost of living,
one can adjust GNI per capita by purchasing
power.
■ Purchasing Power Parity (PPP) adjustment,
it allows a more direct comparison of living
standards in different countries.
■ Human Development Index- life
expectancy, literacy, PPP based average
income
 Economic Development
Measures
■ Gross National Product (GDP)
■ the total value of all final goods and services
produced within a nation in a particular year.
■ Gross Domestic Product (GDP)
■ The total market value of goods and services
produced by workers and capital within a
nation’s borders
■ GDP per capita
■ Does not factor cost of living differences
Economic Development
Measures
■ GNI and PPP data provide a static
picture of development.
■ It also important to consider growth
rates.
■ If current trends continue China will
become the world’s largest economy in
the next decade.
Economic Development
Measures
■ 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 income 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
What are the relationship between
economy and economic progress
■ Economic freedom in a market economy creates a greater
incentives for innovation and entrepreneurships than in either a
planned of mixed economy
■ Innovations and entrepreneurships 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
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.
Innovation and entrepreneurship
require market economy

■ Countries with high economic freedom

have high economic growth and richer
citizens (Hongkong, Switzerland,
Singapore, US, Canada and Germany)
■ Countries that lack economic freedom
also fails to achieve respectable
economic growth
Innovation and entrepreneurship
require strong property rights

■ Developing world will not benefit from

capitalism until property rights are
better defined and protected.
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
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
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
States in Transition:
■ Since the late 1980s, a wave of
democratic revolutions has swept the
world, and many of the previous
totalitarian regimes collapsed.
■ There has been a move away from
centrally planned and mixed economies
towards free markets.
 The Nature of Economic
Transformation
■ Deregulation – removal of government
restrictions concerning the conduct of a
business
■ Privatization- transfers the ownership of
state property into the hands of private
individuals, frequently by the sale of state
assets through an auction
■ Legal System - System of rules that regulate
behavior and the processes by which the laws of a
country are enforced and through which redress of
grievances is obtained.
 Changing Political Economy
■ Markets that were formerly off-limits to Western
business are now open
■ China(population of 1.3 billion) could be a bigger

market than the US., the EU and Japan combined.

■ India (population of 1.2 billion) is also a potentially

huge market
■ Latin America has 600 million potential consumers

■ However, just as the potential gains are large,

so are the risks.
Implications for Managers
■ What are the implications of the political
economy for international business?
■ 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 risk.
Benefits
■ The benefits of doing business in a country are
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
Costs of doing business in
foreign markets
■ Political costs – include the cost of paying bribes or
lobbying for favorable or fair treatment
■ Economic costs – relate primarily to the
sophistication of the economic system, including the
infrastructure and supporting businesses.
■ Legal costs – can be higher in countries with
dramatically different products, workplace, and
pollution standards, or where there is poor legal
protection for property rights.
 Risk of doing business in
foreign markets
■ 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 business
enterprise.
 Risk of doing business in
foreign markets
■ 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.
Features of an Economy
■ Managers should also consider
■ Inflation
■ Unemployment
■ Debt
■ Income distribution
■ Poverty
■ Balance of payments
 Implications for International
Business
■ Country’s political, economic, and legal environment
■ Influence attractiveness

■ Raise ethical issues

■ Country attractiveness
■ Balance long-term risk with short-term benefits for
business
■ Benefits depend on: size, wealth, future economic growth
■ First mover advantages
■ Identify “star” future economies
 Implications for International
Business
■ Costs are affected by:
■ Economics sophistication (maybe more costly to operate in LDCs,
no infrastructure)
■ Legal framework impact on costs
■ Political payoffs
How Geography Affects the
International Business
■ Geographical features can an advantage
or disadvantage in international trade
■ A country’s geographic layout
determines how well its companies are
able to trade. Success in international
business means taking advantage of
positive geographic features.
Geographic Influences on
International Trade
Topography
■ Topography of a country greatly
influences country’s ability to be
self-sufficient and its overall economic
well being.
■ Topography is the physical surface of a
geographic area.
Deserts and Tropical Forest
■ Higher transportation costs exists in deserts and
tropical countries.
■ Fewer people live in deserts and tropical forests.
■ Deserts and tropical forest have a low population
density
■ High population density areas have economic
opportunity, but problems such as crimes
■ Population density – is a measure of the number
of people living in a geographic area.
Bodies of Water
■ Rivers and lakes provide water for irrigation and
support the movement of goods through the interior
of a country.
■ Shipping supports a wide number of industries and
products.
■ Areas without ports must find other, usually more
expensive ways to move products.
■ (Questions: How does a country’s access to water
affect its economy)
Climate
■ A mild climate can promote industries, such as travel,
tourism, and agriculture.
■ Extreme heat ad cold may limit a nation’s ability to
trade by inhibiting crop growth and activities such as
transportation.
Time Zones
■ The farther away from country you are,
the greater the time zone disparity.
■ You should conduct business within the
parameters of normal business hours.
Seasons Around the World
■ Daylight is affected by a country’s
north/south location.
■ The seasons in the Southern
Hemisphere are reversed from those in
the Northern Hemisphere.
Geographic Advantages and
Factors
■ Some cities or countries have natural
geographic advantage simply because
of one key factors in business location.
■ Geographic features affect both
economic development and
international trade.
Location and Trade Routes
■ Being located near bodies of water is
one of the most important geographic
advantages for international trade.
■ Cities that are located near bodies of
water often become important
transportation centers.
■ (Q: why do major cities need good
transportation systems)
Geography and Trade
Alliances
■ In business proximity often lead to
closer trade relationships.
■ NAFTA – North America
■ EU- Europe
■ ASEAN – Southeast Asia
■ Proximity – the physical nearness of one
thing to another.
Geography and Trade
Alliances
■ Countries that are in close proximity often share a
common language.
■ Countries in close proximity have lower shipping
costs.
■ Sometimes, economic alliances have counterparts in
military partnerships
 Economic and Geographic
Influences
■ Geographic feature’s play a part in
creating economic advantages and
disadvantages
■ Geographic affects trade through
location, time zones, and proximity
■ Trading partners are often physically
close together on a world map.
References:
■ Global Business Today by Charles W L
Hill.