International Business

9e

By Charles W.L. Hill

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3

Political Economy and

Economic Development
 What Determines A Country’s Level
Of Economic Development?
 Different countries have dramatically different levels of economic development.
One common measure of economic development is a country’s gross domestic
product (GDP) per head of population. GDP is regarded as a yardstick for the
economic activity of a country; it measures the total monetary or market value
of all the finished goods and services produced within a country’s borders in a
specific time period.
 Gross national income (GNI) per person measures the total annual income
received by residents of a nation.
 GDP/GNI can be misleading because it does not consider differences in the cost of
living
-> need to adjust GDP/GNI figures using purchasing power parity (PPP)

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 How Do Countries
Compare On GDP/GDP per capita
Economic Data for Select Countries

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What Determines A Country’s Level
Of Economic Development?
 Official figures can also be misleading
because they do not account for black
economy transactions
 In addition, GDP/GNI and PPP data are
static and do not consider economic
growth rates
 So, while China and India are currently
categorized as being developing nations,
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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 What Determines A Country’s Level
Of Economic Development?
 Human Development Index (HDI)

3-6
Human Development
Index (HDI) 2021-22

Việt Nam đã tăng hai bậc trong bảng xếp

hạng toàn cầu từ 117/189 quốc gia vào
năm 2019 lên 115/191 quốc gia vào năm
2021.

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 How Does Political Economy
Influence Economic Progress?
 Innovation and entrepreneurship are the engines
of long-run economic growth
 innovation includes new products, new processes,
new organizations, new management practices, and
new strategies
 entrepreneurs commercialize innovative new products
and processes
 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

3-8
 How Does Political Economy
Influence Economic Progress?
 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
 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

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 How Does Political Economy
Influence Economic Progress?
 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

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 How Does Political Economy
Influence 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

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 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
 landlocked countries grew more slowly than coastal
economies
 being totally landlocked reduced a country’s growth
rate by 0.7% per year
 tropical countries grew more slowly than countries in
temperate zones

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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
Indonesia, Malaysia, and Singapore

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 What Is The 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

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 What Are The Implications Of Political
Economy Differences For Managers?
 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 country’s political,
economic, and legal systems

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 What Are The Implications Of Political
Economy Differences For Managers?
 The benefits of doing business in a country are a
function of
 the market’s 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

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 What Are The Implications Of Political
Economy Differences For Managers?
 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

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 What Are The Implications Of Political
Economy Differences For Managers?
 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

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How Can Managers Determine A
Market’s 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

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How Can Managers Determine A
Market’s Overall Attractiveness?
Country Attractiveness

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