Chapter 3

National Differences in
Economic Development

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 WHAT WE KNOW

- Globalization (of markets and products)

- Global Institutions (WTO, UN, World Bank…)
- Drivers of Globalization (Less barriers, trade agreements, technology,
internet..)
- Pros and Cons of globalization
- Political systems (collectivism vs individualism AND democratic vs
totalitarian)
- Economic systems (market economy, command economy, mixed)
- Legal System (Common law, civil law, theocratic law)

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 Learning Objectives

LO 3-1 Explain what determines the level of economic development of a nation.

LO 3-2 Identify the macropolitical and macroeconomic changes occurring worldwide.
LO 3-3 Describe how transition economies are moving toward market-based
systems.
LO 3-4 Explain the implications for management practice of national difference in
political economy.

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 Innovation and Entrepreneurship Are the Engines of Growth,
They need:
• Market Economy
• Strong Property Rights
• Political System

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 Differences in Economic Development 1 of 4
A measure of economic development is a country’s gross national income (GNI).
(total amount of money earned by people in a country.
– Richest Countries: Japan, Sweden,
Switzerland, and U.S. have high
GNI
– China and India have low GNI
– GNI does not consider differences
in the cost of living
• Need to adjust GNI figures using
purchasing power parity
(PPP)

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 Table 3.1 Economic Data for Select Countries
GNI per GNI PPP per Annual GDP Size of Economy
Capita, 2016 Capita, 2016 Growth Rate, GDP, 2016
Country ($) ($) 2007-2016 (%) ($ billions)
Brazil $8,840 $14,810 2.1 $1,796
China 8,260 15,500 9.0 11,199
Germany 43,660 49,530 1.3 3,467
India 1,680 6,490 7.4 2,263
Japan 38,000 42,870 0.5 4,939
Nigeria 2,450 5,740 5.0 405
Poland 12,680 26,770 3.6 470
Russia 9,720 22,540 1.7 1,283
Switzerland 81,240 63,660 1.6 660
United Kingdom 42,390 42,100 1.1 2,618
United States 56,180 58,030 1.3 18,569

©McGraw-Hill Education. Source: World Development Indicators Online, 2017.

 Differences in Economic Development 2 of 4
• The “official” figures can be misleading
– GNI and PPP data are static and do
not consider economic growth rates
• China and India are currently
relatively poor, but their
economies are growing more
rapidly than many advanced
nations
• China may become the world’s
largest economy during the next
decade
• India will become among the
largest economies in the world

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 Differences in Economic Development 3 of 4

• Broader Conceptions of Development:

Amartya Sen (economist)
– Economic development should be
assessed by the capabilities and
opportunities people enjoy
• Development requires the
removal of major impediments
to freedom: poverty, tyranny,
poor economic opportunities
– Economic progress requires the
democratization of political
communities to give citizens a voice

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 Differences in Economic Development 4 of 4
Broader Conceptions of Development: Amartya Sen continued
• The United Nations used Sen’s ideas to develop the Human Development
Index (HDI) which is based on
• Life expectancy at birth
• Educational achievement
• Whether average incomes are sufficient to meet the basic needs of life in a
country

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 Political Economy and Economic Progress 1 of 6
• Innovation and Entrepreneurship Are
the Engines of Growth
Innovation
• Includes new products, new
processes, new organizations,
new management practices, and
new strategies
Entrepreneurs
• First to commercialize innovative
products and processes
• Provides much of the dynamism
in an economy

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 Political Economy and Economic Progress 2 of 6
Innovation and Entrepreneurship Require a Market Economy (PP/SD)
• Little incentive to develop new innovations in command economies because the
state owns all means of production and therefore, the gains
• Strong relationship between economic freedom and economic growth

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 Political Economy and Economic Progress 3 of 6
• Innovation and Entrepreneurship
Require Strong Property Rights
– Without strong property rights,
individuals and businesses risk
having 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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 Political Economy and Economic Progress 4 of 6
• The Required Political System
– Democratic regimes are probably
more conducive to long-term
economic growth
• Property rights are only secure
in well-functioning, mature
democracies
– Totalitarian states are detrimental to
progress
• They limit freedom
• They suppress human
development

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 Political Economy and Economic Progress 5 of 6
• Economic Progress Begets
Democracy
– Economic growth leads to
establishment of democratic
regimes
• South Korea
• Taiwan
– If China adopts a free market
system, belief is that the country
will have
• Greater individual freedoms
• Democracy

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 Political Economy and Economic Progress 6 of 6
• Geography, Education, and Economic
Development
– Economist Jeffrey Sachs argues
that countries with favorable
geography are
• More likely to engage in trade
• More open to market-based
systems
– Countries that invest in education
have higher growth rates because
the workforce is more productive
• Countries in Southeast Asia
have offset their geographical
disadvantage by investing in
education

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 States in Transition 1 of 6
Learning Objective 3-2 Identify the macropolitical and macroeconomic changes
occurring worldwide.
Political economy of nation-states is marked by two trends
1. Democratic revolutions of the late 1980s and early 1990s
• Totalitarian governments fell
• Replaced by democratically elected governments
• Greater commitment to free market capitalism
2. A move away from centrally planned and mixed
economies toward a more free market approach

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 States in Transition 2 of 6
• The Spread of Democracy
– Many totalitarian regimes failed to
deliver economic progress to the
bulk of their populations
– New information and
communication technologies
• Reduced state’s ability to control
access to uncensored
information
• Created new conduits for the
spread of democratic ideals
– Economic advances have led to a
prosperous middle class that has
pushed for democratic reforms

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 States in Transition 3 of 6
• The Spread of Democracy continued
– It is naïve to conclude that the spread
of democracy will continue
unchallenged
• Democracy is still rare in parts of
the world
– Sub-Saharan Africa
– Former communist Eastern and
central Europe and former
USSR
– Middle East and North Africa
• Signs that authoritarianism is
gaining ground
– Russia, Ukraine, Indonesia,
Ecuador, and Venezuela
– Egypt
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 Map 3.5 Freedom in the World, 2017

©McGraw-Hill Education. Source: The Freedom House Survey Team, “Freedom in the World 2017,” www.freedomhouse.org
 States in Transition 4 of 6

The New World Order and Global Terrorism

• Author Francis Fukuyama argues the new world order will be characterized by
democratic regimes and free market capitalism
• Political scientist Samuel Huntington argues that while many societies are
modernizing, they are not becoming more Western
• Predicts a world split into different civilizations that will be in conflict making
business difficult
• Political position is more likely to be somewhere between Fukuyama and
Huntington

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 States in Transition 5 of 6
• The New World Order and Global
Terrorism continued
– Global terrorism is a product of
tensions between civilizations and a
clash of value systems and
ideology
• Al-Qaeda and ISIS
• Struggle between radicalized
Sunni and Shia factions within
Islam
– Former U.S. Secretary of State
Colin Powell maintains that
terrorism is one of the major threats
to world peace and economic
progress

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 States in Transition 6 of 6
• The Spread of Market-Based Systems
– A shift from centrally planned
economies to market-based
economies
• More than 30 countries in the
former Soviet Union and eastern
European communist bloc
• Change also occurring in Asian
and African states
– Command and mixed economies
failed to deliver the sustained
economic growth achieved in
market-based countries

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 Map 3.6 Index of Economic Freedom, 2017

Jump to long description in appendix

©McGraw-Hill Education. Source: The Freedom House Survey Team, “Freedom in the World 2016.” www.freedomhouse.org
 The Nature of Economic Transformation 1 of 4

Learning Objective 3-3 Describe how transition

economies are moving toward market-based
systems.

• The shift toward a market-based

system involves
– Deregulation
– Privatization
– A legal system to safeguard
property rights

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 The Nature of Economic Transformation 2 of 4
• Deregulation
– Deregulation in command
economies
– Removing price controls
– Abolishing laws regulating the
establishment and operation of
private enterprise
– Relaxing or removing
restrictions on direct investment
by foreign enterprises
– Deregulation in mixed economies
involved the same initiatives as in
command economies
– Transition was easier due to a
vibrant private sector

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 The Nature of Economic Transformation 3 of 4
• Privatization
– A way to stimulate economic
efficiency
– Started in Great Britain in early
1980s
– In many nations economic activity is
still in the hands of state-owned
enterprises
– Selling state-owned enterprises not
enough to guarantee economic
growth
– For privatization to work it must be
paired with a general deregulation
and opening of the economy

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 The Nature of Economic Transformation 4 of 4
• Legal Systems
– A well-functioning market economy
requires laws
• Need to protect property rights
• Mechanisms for contract
enforcement
– Adoption of a legal system requires
time to function well
– Institutional weaknesses undermine
contract enforcement in most
countries
– Progress being made regarding
laws on property rights

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 Implications of Changing Political Economy
• Ideological conflict between
collectivism and individualism is less
prevalent today
– Western ideology more widespread
– Markets formerly off-limits to
Western business are now open
presenting a huge potential for
business
– Potential risks are large
• Will democracy thrive during
difficult times?
• Will totalitarian regimes return?
• Is the risk associated with
investment worth it?
• Is China’s financial system
stable?
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 Focus on Managerial Implications 1 of 5
Learning Objective 3-4 Explain the implications for management practice of
national difference in political economy.

Benefits, Costs, Risks, and Overall Attractiveness

of Doing Business Internationally
• Countries are more likely to have higher
sustained rates of economic growth when
they have
• Democratic regimes
• Market based economic policies
• Strong property rights protection
• These markets are more attractive to
international businesses

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 Focus on Managerial Implications 2 of 5
• Benefits, Costs, Risks, and Overall
Attractiveness of Doing Business
Internationally continued
– Benefits of doing business in a
country based on
• The size of the market
• The current and future
purchasing power of its
consumers
– First-mover advantages
– Late-mover disadvantages
– A country’s economic system and
property rights regime good
predictors of economic prospects

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 Focus on Managerial Implications 3 of 5
Benefits, Costs, Risks, and Overall Attractiveness of Doing
Business Internationally continued
• The costs of doing business in a country based on
• 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: how do local laws and regulations affect
business decisions? Are there well-established
contract laws?

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 Focus on Managerial Implications 4 of 5

Benefits, Costs, Risks, and Overall Attractiveness

of Doing Business Internationally continued
• The risks of doing business in a country based on
• Political risk
• Economic risk
• Legal risk

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 Focus on Managerial Implications 5 of 5
• Benefits, Costs, Risks, and Overall
Attractiveness of Doing Business
Internationally continued
• Overall attractiveness of a potential
market to 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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 Figure 3.1 Country Attractiveness

Jump to long description in appendix

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 SUMMARY

This chapter reviewed how the political, economic, and legal systems of countries vary.
The potential benefits, costs, and risks of doing business in a country are a function of
its political, economic, and legal systems. The chapter made the following points:
1.The rate of economic progress in a country seems to depend on the extent to which
that country has a well-functioning market economy in which property rights are
protected.
2.Many countries are now in a state of transition. There is a marked shift away from
totalitarian governments and command or mixed economic systems and toward
democratic political institutions and free market economic systems.
3.The attractiveness of a country as a market and/or investment site depends on
balancing the likely long-run benefits of doing business in that country against the
likely costs and risks.
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 SUMMARY

4. The benefits of doing business in a country are a function of the size of the market
(population), its present wealth (purchasing power), and its future growth prospects.
By investing early in countries that are currently poor but are nevertheless growing
rapidly, firms can gain first-mover advantages that will pay back substantial dividends in
the future.
5. The costs of doing business in a country tend to be greater where political payoffs
are required to gain market access, where supporting infrastructure is lacking or
underdeveloped, and where adhering to local laws and regulations is costly.
6. The risks of doing business in a country tend to be greater in countries that are
politically unstable, subject to economic mismanagement, and lacking a legal system to
provide adequate safeguards in the case of contract or property rights violations.

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