The Nature of Economic Transformation

Certain steps have to be taken to shift towards a market based economy. They are
deregulation, privatization and creation and implementation of a legal system.
Deregulation
This term refers to the removal of regulatory and legal restrictions for free moving
activities in the markets and establishment of private enterprises. In command
economies, the state used to set the level of outputs and prices, restricted private
enterprises and foreign investment. In this case, deregulation would abolish price
control, and outputs and prices would be settled by demand and supply, allow
foreign investment and private enterprises.
Privatization
Privatization is the transfer of ownership from the state to private individuals. The
reason for this is the powerful incentive of greater profits, and the state can enjoy
more economic efficiency. One of the first cases of privatization can be found in
Britain, where British PM Margaret Thatcher started to sell state owned assets such
as the telephone company British Telecom. This was done keeping in mind the
deregulation procedures and greater economic efficiency for the country. This was
then followed by many governments around the world. But not only privatizing
helps the company and the economy. If the newly privatized firm keeps on getting
help from the state, then they will find little incentive to restructure to improve
economic efficiency. Hence healthy competition should be promoted among the
firms in business.
Legal Systems
There needs to be an efficient legal system in place after the above steps are taken.
If the constituents of a nation have no confidence in their property or businesss
safety, then they will not be motivated to achieve higher efficiency and profits.
These type of problems were very common in communist nations who shifted
towards market or mixed economy, as all the property was owned by the state and
there were no private property holdings that substantial to think about its
protection.

Implications of changing economy

The changes in economic and political systems have several implications for
international businesses. For many years, half of the world was not exposed to the
West and its businesses, but now the story is different. The past 30 years or so have
seen a drastic change in the way business is being conducted. Many markets of
eastern Europe, Latin America, Africa, Asia are undeveloped markets but these are
potentially enormous, as huge amount of population resides here. Countries like
China and India alone are around 35% of the world population. Businessmen have
started to recognize potentials in areas where they did not before.
But along with gains, there are potential risks associated with it. There is no
guarantee that a relatively new democracy will keep functioning as a democracy for

a long period of time. Dictatorships could return. These along with many other risks
would be foolish of us to ignore.

Benefits
Generally, the monetary benefits of doing business in a country is the size of the
market, the purchasing power of the market and the future wealth of the market.
Some markets, although they are large, are not as economically beneficial as some
might think so. The likes of China and India are huge markets, but the purchasing
power of a large number of their constituents is not high. Businesses need to
recognize these types of factors, and their future prospects, as it can grow in to an
economically huge market by establishing early, they can work on customer loyalty
and retention so that when the market is growing and the people will have a high
purchasing power, the firms can earn higher profits than their competition. Late
entrants will find it hard to penetrate through the market to establish a strong
customer base and hence their profits will be lower. Businesses are now solely
focused on first-mover advantage, which is a term given to the advantage a
company has over its competitors in term of market capitalization, customer base
and technological innovation. First-movers earn substantially higher profits that
their competition.
Costs
There are many costs associated with doing business. A country where there is no
democracy has different principles of operations and ethics than countries which
run on democracy. The need to pay bribes and different kinds of protection money is
greater in places where there is weak or no democracy. In strong democracies,
people can be held accountable, but not everywhere.
Another cost is associated with the infrastructure. If there is a strong and reliable
infrastructure, businesses tend to run smoothly. There are many cases in which
international firms have made their own infrastructure to facilitate their own
businesses processes, which in itself is a huge cost.
One more factor which can contribute towards costs is legal factors. If local laws and
regulations is followed by every individual constituting the area, it tends to facilitate
businesses in their operations. Countries where legal issues are present, firms find it
hard to settle legal and contractual disputes with parties they do business with and
can continuously face large losses due to these disputes.
Risks
Risks for companies include political, legal and economic risks.
Countries where there is political unrest can lead to losses for firms doing business.
Strikes, demonstrations which lead to closing down of business activities prove to
be substantial losses for businesses.

Economic mismanagement by the government cause drastic changes profits and

other goals of businesses. It can give rise to significant social unrest and hence
increase political risk.
Legal risks arise when the state fails to provide basic legal protections to its citizens
and businesses. Failure to provide safeguards in contract violations or protection of
property rights can prove to be a huge cost for corporations.

Overall Attractiveness
Firms have to calculate and evaluate the above factors to consider a country as a
potential business center. In economically advanced and politically strong countries,
it is easier to do business whereas economically weak countries prove to be a
greater risk to operate in. but potential long run benefits have to be weighed in both
cases where a countrys situation can go from good to bad or bad to good.
But it can safely be concluded that the benefit-cost-risk trade-off is likely to be most
favorable in politically strong developed and developing nations that have free
market systems and no dramatic deviations in either inflation rates debt, or
currency value.