Mgt321 Final Exam (PDF)

Chapter 3: National Differences in Economic Development 3-1 Explain what determines the level of economic development of a nation. Economic Development: Differences among nations affects how attractive it is for doing business. Trends that foster greater economic developme...

Chapter 3: National Differences in Economic Development 3-1 Explain what determines the level of economic development of a nation. Economic Development: Differences among nations affects how attractive it is for doing business. Trends that foster greater economic development: o Democratic forms of government. o Market-based economic reforms. o Legal systems that better enforce property rights. Differences in Economic Development: Gross National Income (GNI): Measures the total annual income received by residents of a nation. o Japan, Sweden, Switzerland, and U.S. have high GNI. o China and India have low GNI. o GNI does not consider differences in the cost of living. Purchasing power parity (PPP): is an adjustment in gross domestic product per capita to reflect differences in cost of living. The “official” figures can be misleading: Do not account for black economy transactions that include unrecorded cash transactions or barter agreements. o 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 be among the largest economies in the world. Broader Conceptions of Development: Amartya Sen: o 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. o Economic progress requires the democratization of political communities to give citizens a voice. o The United Nations used Sen’s ideas to develop the Human Development Index (HDI) to measure quality of human life in different nations. mid ▪ Life expectancy at birth. ▪ Educational attainment. ▪ Whether average incomes are sufficient to meet the basic needs of life in a country. Amartya Sena: Nobel Prize-winning economist has argued that development is not just an economic process, but it is a political one as well. mid 3-2 Identify the macropolitical and macroeconomic changes occurring worldwide. Political Economy and Economic Progress: Innovation and Entrepreneurship Are the Engines of Growth: mid Innovation: Includes new products, new processes, new organizations, new management practices, and new strategies. Entrepreneurs: First to commercialize innovative products and processes. o Provides much of the dynamism in an economy. Innovation and Entrepreneurship Require a Market Economy: Little incentive to develop new innovations in planned economies because the state owns all means of production and therefore, captures the gains. mid Strong relationship between economic freedom and economic growth. Innovation and Entrepreneurship Require Strong Property Rights: Without strong property rights, individuals and businesses risk having innovations and potential profits stolen. o This reduces the incentive for innovation and entrepreneurism. Economist Hernando de Soto claims that inadequate property protection in many developing nations limits economic growth. The Required Political System: Democratic regimes are probably more conducive to long-term economic growth. o China, South Korea, Taiwan, Singapore, Hong Kong all had undemocratic governments but experienced economic growth. o Property rights are only secure in well-functioning, mature democracies. Totalitarian states are detrimental to progress. o They limit freedom & They suppress human development. Economic Progress Begets Democracy: Economic growth often leads to establishment of democratic regimes. o South Korea and Taiwan. If China adopts a free market system, belief is that the country will have greater individual freedoms followed by democracy. Geography, Education, Demographics and Economic Development: Economist Jeffrey Sachs argues that countries with favorable geography are: o 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. o Countries in Southeast Asia have offset their geographical disadvantage by investing in education.  In terms of demographics, countries with a young and growing population have greater growth potential. o Growing population increases supply of labor. o Younger workers tend to consumer more than older workers. o Aging population implies a stress on government finances. 3-3 Describe how transition economies are moving toward market-based systems. States in Transition: Political economy of nation-states is marked by three trends: 1. Democratic revolutions during late 1980s; early 1990s led to greater commitment to free market capitalism. 2. A move away from centrally planned and mixed economies toward a more free market approach. 3. Since 2005, there has been a shift back toward greater authoritarianism in some nations resulting in a retreat from the free market model. The Spread of Democracy: In 2019, Freedom House ranked countries into three broad categories: o 86 countries classified as free: 44 percent of nations. o 59 countries classified as partly free: 30 percent of nations. o 51 countries classified as not free: 26 percent of nations. Three reasons for the spread of democracy: 1. Many totalitarian regimes failed to deliver economic progress to the bulk of their populations. 2. New information and communication technologies. o Reduced state’s ability to control access to uncensored information. o Created new conduits for the spread of democratic ideals. 3. Economic advances have led to a prosperous middle class that has pushed for democratic reforms. The Spread of Democracy: Since 2005, there has been a drift back toward more authoritarian modes of government in many nations. o Elections have been compromised; civil liberties restricted; independent press has been attacked; opposition parties have been restricted. o Examples: Turkey, Russia, Ukraine, Indonesia, Ecuador, Venezuela. 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. o 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.  Huntington: global terrorism is a product of tensions between civilizations and a clash of value systems and ideology. o Al-Qaeda and ISIS. Former U.S. Secretary of State Colin Powell maintains that terrorism is one of the major threats to world peace and economic progress. The Spread of Market-Based Systems: A shift from centrally planned economies to market-based economies. o More than 30 countries in the former Soviet Union and eastern European communist bloc have changed economic system. o Change also occurring in Asian and African states. Command and mixed economies failed to deliver the sustained economic growth achieved in market-based countries. The Nature of Economic Transformation: The shift toward a market-based system involves: 1. Deregulation: Removing legal restrictions to the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate. Deregulation in mixed economies involved the same initiatives as in command economies. o Transition was easier due to a vibrant private sector. 2. Privatization: Transfers ownership of state property into the hands of private individuals. o Movement 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. 3. Legal Systems to safeguard property rights: A well-functioning market economy requires laws. o Need to protect property rights. o 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. Implications of Changing Political Economy: Ideological conflict between collectivism and individualism 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? Focus on Managerial Implications: 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: o Democratic regimes. Market-based economic policies. Strong property rights protection. These markets are more attractive to international businesses. Benefits: Based on the size of the market, as well as current and future purchasing power of its consumers. o Size of Economy , Likely Economic Growth. o First-mover advantages enjoyed by early entrants. Late-mover disadvantages suffered by late entrants. mid o A country’s economic system and property rights regime good predictors of economic prospects. mid Costs: Corruption, lack of infrastructure, Legal Costs. o Political system: is it necessary to pay bribes to get market access? o Economic level: are the necessary supporting business and infrastructure in place? o Legal system: how do local laws and regulations affect business decisions? Are there well-established contract laws? Risks: o Political risk: : Social Unrest/Antibusiness Trends, the likelihood that political forces will cause drastic changes in a country’s business environment that will adversely affect the profit and other goals of a business. o Economic risk: the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise. o Legal risk: the likelihood that a trading partner will opportunistically break a contract or expropriate property rights. (failure to Safeguard property right). Overall Attractiveness: Based on balancing the benefits, costs, and risks associated with doing business in that country. o 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. Government Policy Instruments and FDI: Home-Country Policies: 1. Encouraging Outward FDI: mid o Government-backed insurance programs. o Government loans. o Elimination of double taxation of foreign income. o Relaxation of restrictions on FDI by host countries. 2. Restricting Outward FDI: o Limit capital outflows. Manipulate tax rules. o Prohibit investment for political reasons. Host-Country Policies: 1. Encouraging Inward FDI: Incentives such as tax concessions, low-interest loans, grants or subsidies. 2. Restricting Inward FDI: Ownership restraints. Performance requirements. International Institutions and the Liberalization of FDI: World Trade Organization formed in 1995. ▪ Push for liberalization of regulations governing FDI. ▪ Two extensive multinational agreements were reached in 1997 to liberalize trade in telecommunications and financial services. Focus on Managerial Implications: FDI and Government Policy and Theory: The Theory of FDI. o Dunning’s locations specific advantages argument explains the direction of FDI, but not why firms prefer FDI to exporting or licensing. o Internalization theories identify the relative profitability of FDI, exporting, and licensing. o Licensing not a good option in three types of industries: High-technology, Global oligopolies, Industries facing intense cost pressures. Government Policy: o Investing in countries that have permissive policies generally preferable than those that restrict FDI. o Many countries still display a pragmatic stance. o Bargaining power dependent on three factors: 1. Value each side places on what the other has to offer. 2. Number of comparable alternatives available to each side. 3. Each party’s time horizon.