Global Business Today Chapter 3: National Differences in Economic Development PDF

Because learning changes everything.® Chapter 3 National Differences in Economic Development naqiewei/DigitalVision Vectors...

Because learning changes everything.® Chapter 3 National Differences in Economic Development naqiewei/DigitalVision Vectors/Getty Images © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.  Learning Objectives 3-1 Explain what determines the level of economic development of a nation. 3-2 Identify the macropolitical and macroeconomic changes occurring worldwide. 3-3 Describe how transition economies are moving toward market-based systems. 3-4 Explain the implications for management practice of national difference in political economy. © McGraw Hill 2  Opening Case What Ails Argentina? A hundred years ago, Argentina was one of the world’s wealthiest countries. It now ranks about 60th in GDP per capita. Issues: High government spending along with budget deficits. Persistently high inflation rates have hurt business investment. Legacy of Peronist rule. Reformist government tried to liberalize economy in 2015, but efforts failed and caused severe economic contraction. Peronist Alberto Fernandez elected in 2019. © McGraw Hill 3  Introduction Differences in Political, Economic, and Legal Systems All influence level of economic development and its attractiveness for doing business. General movement toward: Democratic forms of government. Market-based economic reforms. Adoption of legal systems that better enforce property rights. © McGraw Hill 4  Differences in Economic Development 1 Level of Economic Development Affects a country’s attractiveness as a possible market or production location for firms. Common measure is gross national income (GNI). Purchasing power parity (PPP) adjustment provides a more direct comparison of living standards in different countries. GNI and PPP data give a static picture of development. Economic growth rates provide a dynamic picture of development. © McGraw Hill 5  Map 3.1 GNI per Capita, 2019 Access the text alternative for slide images. © McGraw Hill 6  Table 3.1 Economic Data for Select Countries Annual GDP Size of Economy GNI per GNI PPP per Country Growth Rate, GDP, 2019 ($ Capita, 2019 $ Capita, 2019 $ 2010 to 2019 % billions) Brazil $9,130 $14,850 1.39 percent $1,840 China 10,410 16,740 7.69 14,343 Germany 48,520 57,690 1.97 3,998 India 2,130 6,960 6.74 2,875 Japan 41,690 44,780 1.28 5,0812 Nigeria 2,030 5,170 3.65 448 Poland 15,200 32,710 3.63 592 Russia 11,260 28,270 1.92 1,700 Switzerland 85,500 72,390 1.85 703 United Kingdom 42,370 48,040 1.86 2,827 United States 65,760 65,880 2.28 21,428 © McGraw Hill Source: World Development Indicators Online, 2020. 7  Map 3.2 GNI PPP per Capita, 2019 Access the text alternative for slide images. © McGraw Hill 8  Differences in Economic Development 2 Differences in Standards of Living Official figures can be misleading. Unrecorded cash transactions can be significant. India’s black or shadow economy may be around 50 percent of GDP. EU estimates shadow economy accounted for 10 to 12 percent of GDP in the U.K. and France, 21 percent in Italy, and 23 percent in Greece. GNI and PPP data don’t indicate growth rates. © McGraw Hill 9  Map 3.3 Average Annual Growth Rate in GDP (%) 2010 to 2019 Access the text alternative for slide images. © McGraw Hill 10  Differences in Economic Development 3 Broader Conceptions of Development: Amartya Sen Economist Amartya Sen argues development should be assessed less by material output and more by the capabilities and opportunities people enjoy. UN created the Human Development Index (HDI) based on life expectancy, education attainment, and whether average incomes are sufficient to meet basic needs of life in a country. Reflects Sen’s ideas and gauges a country’s economic development and likely future growth rate. © McGraw Hill 11  Map 3.4 Human Development Index, 2018 Access the text alternative for slide images. © McGraw Hill 12  Political Economy and Economic Progress 1 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: new products, new processes, new organizations, new management practices, and new strategies. Entrepreneurs: first to commercialize innovative new products and processes. © McGraw Hill 13  Political Economy and Economic Progress 2 Innovation and Entrepreneurship Require a Market Economy Countries with high economic freedom have high economic growth and richer citizens. Hong Kong, Switzerland, Singapore, U.S., Canada, and Germany. Countries that lack economic freedom fail to achieve respectable economic growth. © McGraw Hill 14  Political Economy and Economic Progress 3 Innovation and Entrepreneurship Require Strong Property Rights Individuals and businesses must have opportunity to profit from innovative ideas. Economist Hernando de Soto argues developing world will not benefit from capitalism until property rights are better defined and protected. © McGraw Hill 15  Political Economy and Economic Progress 4 The Required Political System Democratic regimes tend to be more conducive to long-term economic growth than dictatorships, even the benevolent kind. Limiting human freedom also suppresses human development and therefore limits progress. Some of the fastest growing economies of past 40 years began as undemocratic governments: China, South Korea, Taiwan, Singapore, and Hong Kong. But only in a well-functioning, mature democracy are property rights truly secure. © McGraw Hill 16  Political Economy and Economic Progress 5 causes Economic Progress Begets Democracy Democracy is often a consequence of economic growth. South Korea and Taiwan. Contributed to 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. © McGraw Hill 17  Political Economy and Economic Progress 6 Geography, Education, Demographics, and Economic Development Belief that geography influences economic policy, and thus economic development, goes back to Adam Smith. Economist Jeffrey Sachs argues that by virtue of favorable economy, certain societies are more likely to engage in trade, which promotes economic growth. Investment in education promotes faster economic development. Demographic forces are also important determinants of economic growth rate. Young and growing population. © McGraw Hill 18  States in Transition 1 Three Trends in Political Economy Since Late 1980s 1. A wave of democratic revolutions swept the world and many previous totalitarian regimes collapsed. 2. A move away from centrally planned and mixed economies towards free markets. centrally planned/mixed economies free markets 3. A shift back toward greater authoritarianism in some nations and signs of a retreat from the free market model. greater authoritarianism © McGraw Hill 19  States in Transition 2 The Spread of Democracy Many totalitarian regimes failed to deliver economic progress to majority of population. New information and communication technologies have broken down ability of state to control access to uncensored information. Economic advances of last quarter century led to increasingly prosperous middle and working classes who pushed for democratic reforms. © McGraw Hill 20  Map 3.5 Freedom in the World, 2020 Access the text alternative for slide images. © McGraw Hill Source: Freedom House, 2020. https://freedomhouse.org/explore-the-map?type=fiw&year=2020. 21  Transfer of Power in Nigeria Voters wait in a queue in front of the election center in the city of Lagos, Nigeria. © McGraw Hill Anadolu Agency/Getty Images 22  States in Transition 3 The New World Order and Global Terrorism End of Cold War and “new world order” that followed the collapse of communism, along with collapse of many authoritarian regimes in Latin America, have given rise to intense speculation about the future of global geopolitics. Fukuyama argues war of ideas may be at an end and liberal democracy has triumphed. Huntington saw the world split into different civilizations each with its own value systems and ideology. © McGraw Hill 23  Rising Global Terrorism ISIS fighters are a visible symbol of the rise of global terrorism in the post Cold War world. © McGraw Hill Medyan Dairieh/ZUMA Press, Inc./Alamy Stock Photo 24  States in Transition 4 The Spread of Market-Based Systems Since the late 1980s, a transformation from centrally planned command economies to market-based economies. Command and mixed economies failed to deliver the sustained economic performance achieved by countries that had adopted market-based systems. Many countries shifted to a market-based system. © McGraw Hill 25  Map 3.6 Index of Economic Freedom, 2020 Access the text alternative for slide images. © McGraw Hill Source: “Interactive Heat Map.” The Heritage Foundation, 2020. https://www.heritage.org/index/heatmap?version=929. 26  The Nature of Economic Transformation 1 Deregulation Removing legal restrictions to the free play of markets. Establishment of private enterprises. Removing price controls. © McGraw Hill 27  The Nature of Economic Transformation 2 Privatization Legal Systems Transfers ownership of Laws protect private state property to private property rights and individuals. provide mechanisms for First seen in Great Britain contract enforcement. under PM Thatcher; now a Without a legal system in worldwide phenomenon. place, there is little Does not guarantee incentive to engage in economic growth. economic activity. © McGraw Hill 28  Implications of Changing Political Economy Global Changes in Political and Economic Systems Markets formerly off-limits to Western business are now open. China (population of 1.3 billion) could be a bigger market than U.S., EU, and Japan combined. India (population 1.2 billion) is also a potentially huge market. Latin America has 600 million potential consumers. No guarantee that democracy will thrive in newer democratic states. © McGraw Hill 29  360° View: Managerial Implications 1 Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally Overall attractiveness of a country depends upon balance between likely benefits of doing business in that country against the likely costs and risks. Benefits: Function of market size and current and future consumer purchasing power. May be able to gain first-mover advantages. Late entrants face late-mover disadvantages. © McGraw Hill Testing/Shutterstock 30  360° View: Managerial Implications 2 Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally (continued) Costs: Political costs include paying bribes or lobbying for favorable or fair treatment. Economic costs relate primarily to sophistication of economic system, including infrastructure and supporting businesses. Legal costs can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights. © McGraw Hill 31  360° View: Managerial Implications 3 Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally (continued) Risks: Political risk: likelihood that political forces will cause drastic changes in a country's business environment that adversely affects profit and other goals of a business enterprise. Economic risk: likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects profit and other goals of a business enterprise. Legal risk: likelihood that a trading partner will opportunistically break a contract or expropriate property rights. © McGraw Hill 32  360° View: Managerial Implications 4 Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally (continued) Overall Attractiveness: Depends on balancing benefits, costs, and risks associated with doing business in that country. Generally, costs and risks are lower in economically developed and politically stable markets. However, potential for growth may be higher in less developed nations. © McGraw Hill 33  Figure 3.1 Country Attractiveness Access the text alternative for slide images. © McGraw Hill 34  Summary In this chapter, we have Explained what determines the level of economic development of a nation. Identified macropolitical and macroeconomic changes occurring worldwide. Described how transition economies are moving toward market-based systems. Explained implications for management practice of national differences in political economy. © McGraw Hill 35  Because learning changes everything. ® www.mheducation.com © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.