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
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
need to adjust GNI figures using purchasing
power parity (PPP)
3-3

How Do Countries
Compare On GNI?
Economic Data for Select Countries

3-4

What Determines A
Countrys Level Of
Economic Development?

Nobel-prize winner Amartya Sen - economic

development should be seen as a process of
expanding the real freedoms that people
experience
the removal of major impediments to freedom like
poverty, tyranny, and neglect of public facilities
the presence of basic health care and basic
education

Amartya Sen also claims that economic

progress requires the democratization of
political communities to give citizens a voice

3-5

What Determines A
Countrys Level Of
Economic Development?

The United Nations used Sens ideas to

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

3-6

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
require a market economy and strong property rights

3-7

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 countrys growth
rate by 0.7% per year
tropical countries grew more slowly than countries in
temperate zones

3-8

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

3-9

How Is The Political

Economy Changing?
Trend 1: Democracy has spread over the last
two decades
many totalitarian regimes failed to deliver economic
progress to the vast bulk of their populations
new information and communication technologies
have broken down the ability of the state to control
access to uncensored information
economic advances of the last 25 years have led to
increasingly prosperous middle and working classes
who have pushed for democratic reforms

3-10

How Free Are

Countries Politically?
Political Freedom in 2010

3-11

How Is The Political

Economy Changing?
Trend 2: The spread of market-based
systems
more countries have moved away from
centrally planned and mixed economies
toward the market-based model

Command and mixed economies failed

to deliver the sustained economic growth
achieved in market-based countries

3-12

How Free Are

Countries Economically?
Economic Freedom in 2010

3-13

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?
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

3-15

How Can Managers

Determine A Markets
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
3-16

How Can Managers

Determine A Markets
Overall Attractiveness?
Country Attractiveness

3-17