International Business: The Challenges of Globalization Tenth Edition PDF

International Business: The Challenges of Globalization Tenth Edition Chapter 5 Economic Development of Nations Copyright © 2023, 2...

International Business: The Challenges of Globalization Tenth Edition Chapter 5 Economic Development of Nations Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives 5.1 Explain economic development and how it is measured. 5.2 Outline the various sources of political risk. 5.3 Explain how companies can manage political risk. 5.4 Describe economic transition and the experiences of China and Russia. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Paytm in India One of India’s most popular apps – 20 million businesses accept payments through Paytm – 300 million Indians use Paytm to shop online and in stores, buy movie tickets, pay bills, send money to others, top-up their phone plans and more Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Two Approaches to Economic Development Countries have historically relied on a strong manufacturing base to begin their economic development. – China used its abundant supply of natural resources and inexpensive factory labor to fuel its economic development. – India focused on its white-collar service sector rather than blue-collar manufacturing. The best growth strategy—the organic-led path of India versus the investment-led path of China—depends on a nation’s circumstances. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development Increase in the economic well-being, quality of life, and general welfare of a nation’s people – Requires economic growth – Economic growth depends on gains in productivity – Businesses increase productivity through all forms of entrepreneurial activity and innovation Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: Classifying Countries (1 of 3) Advanced country (developed country) Country that is highly industrialized and highly efficient, and whose people enjoy a high quality of life – Australia, Canada, Japan, New Zealand, the United States, and all western European nations Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: Classifying Countries (2 of 3) Emerging market (newly industrialized countries) Country that has recently increased the portion of its national production and exports derived from industrial operations – Primarily located in Asia, Central and Eastern Europe, and Latin America ▪ Asia’s “four tigers” (Hong Kong, South Korea, Singapore, and Taiwan), Argentina, Brazil, Brunei, Chile, China, the Czech Republic, Hungary, India, Indonesia, Malaysia, Mexico, the Philippines, Poland, Russia, Slovakia, South Africa, Turkey, Thailand, and Vietnam Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (1 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: Classifying Countries (3 of 3) Developing country (less-developed country) Nation that has a low-quality infrastructure and low personal incomes – Sometimes characterized by a high degree of technological dualism – Include nations in Africa, the Middle East, and the least affluent formerly communist nations in Eastern Europe and Asia Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: National Production (1 of 5) Popular indicators of economic development – Gross domestic product (GDP) – Gross national product (GNP) Marketers often use per capita figures for GDP or GNP to determine whether a country’s population is wealthy enough to begin purchasing its products. – Myanmar Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: National Production (2 of 5) Uncounted transactions – Many of a nation’s transactions do not get counted in either GDP or GNP Shadow economy All economic activities that have market value but are not formally registered – Can be as high as around 70 percent of an economy to as low as around 7 percent – On average, it represents 35 percent of GDP in developing and emerging-market countries and around 15 percent in advanced nations Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: National Production (3 of 5) Question of growth – Gross product figures do not tell us whether a nation’s economy is growing or shrinking—they are simply a snapshot of one year’s economic output – Need to supplement this data with information on expected future economic performance Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: National Production (4 of 5) Problem of averages – In almost every country, urban areas tend to be more developed and have higher per capita income than rural areas. – In most emerging markets, regions near good harbors or other transportation centers tend to be more economically developed than interior regions isolated by less efficient means of transportation. ▪ Shanghai, China Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: National Production (5 of 5) Pitfalls of comparisons – Country comparisons using gross product figures can be misleading – Apply the concept of purchasing power parity Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: Purchasing Power Parity Purchasing power Value of goods and services that can be purchased with one unit of a country’s currency Purchasing power parity (PPP) Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Development: Human Development United Nations’ Human Development Index (HDI) Measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living – Demonstrates that high national income alone does not guarantee human progress Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Map 5.1: Human Development Index (1 of 2) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Map 5.1: Human Development Index (2 of 2) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 5.1 1. What is meant by the term economic development? 2. What are the drawbacks of using national production to measure economic development? 3. The human development index measures which aspects of a nation’s development? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Political Risk Likelihood of political action that will positively or negatively affect a business. – Varies from nation to nation and can affect different types of companies in different ways. – A solid grasp of local values, customs, and traditions can help reduce a company’s exposure to political risk. Two broad categories of political risk: – Macro risk threatens the activities of all domestic and international companies in every industry. – Micro risk threatens companies only within a particular industry or more narrowly defined group. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Political Risk: Conflict and Violence Open conflict can threaten a company’s physical assets, such as offices and factories, and even the lives of employees. – Can arise over territorial disputes ▪ Kashmir territory between India and Pakistan Terrorism includes politically motivated violence against individuals and property. – Kidnapping for ransom Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (2 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Global Manager: Your Global Security Checklist Getting There: Take nonstop flights when possible. Getting Around: Vary your routines. Keep a Low Profile: Don’t draw attention to yourself. Guard Personal Data: Be friendly but cautious when answering questions about yourself, your family, or your employment. Use Caution: Be friendly but cautious if a local approaches you seeking information. Know Emergency Procedures: Know local emergency procedures before trouble starts. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Political Risk: Property Seizure Confiscation Forced transfer of assets from a company to the government without compensation – Helms-Burton Law Expropriation Forced transfer of assets from a company to the government with compensation – Argentina action against Yacimientos Petroliferos Fiscales (YPF) Nationalization Government takeover of an entire industry – Venezuela Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (3 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Political Risk: Government Policies One policy that governments use in international business restricts ownership to domestic companies only or limits ownership by foreign firms to a minority stake – China – India Local content requirements Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 5.2 1. What is political risk and how might it affect companies? 2. What dangers does conflict abroad present to companies? 3. What are the three forms of property seizure that nations might pursue? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk International companies monitor and attempt to predict political changes that can negatively affect their activities. – Be proactive – Develop situational awareness ▪ Royal Caribbean International ▪ Marriott International Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk: Adaptation Adaptation means incorporating risk into business strategies, often with the help of local officials. – Companies can incorporate risk in four ways: ▪ Partnerships ▪ Localization ▪ Development assistance ▪ Insurance Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk: Information Gathering There are two sources that companies use to conduct accurate political risk forecasting: – Current employees who have worked in a country long enough to gain insight into local culture and politics – Agencies specialized in providing political-risk services Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk: Political Influence Lobbying Policy of hiring people to represent a company’s views on political matters – Goal: ▪ Get favorable legislation enacted and unfavorable legislation rejected Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk: International Relations Favorable and strong political relationships – Foster stable business environments – Expand business opportunities – Lower risk – Promote economic development Multilateral agreements – European Union Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (4 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Managing Political Risk: The United Nations The United Nations Six main bodies – The General Assembly – The Security Council – The Economic and Social Council ▪ UN Conference on Trade and Development – The Trusteeship Council – The International Court of Justice – Secretariat Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 5.3 1. How can situational awareness help to keep a company ahead of political risks? 2. What are the three main approaches to managing political risk? 3. How might international relations among countries affect political risk? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition Economic transition Process by which a nation changes its fundamental economic organization and creates new free-market institutions – Involves key reform measures: ▪ Stabilizing the economy, reducing budget deficits, and expanding credit availability ▪ Allowing prices to reflect supply and demand ▪ Legalizing private business, selling state-owned companies, and supporting property rights ▪ Reducing barriers to trade and investment and allowing currency convertibility ▪ Encouraging innovation through investment and entrepreneurship Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: Transition Obstacles There are several key obstacles for countries in transition: – Managerial expertise ▪ Higher-quality management practices have taken root in transition countries – Samsung Electronics in Vietnam – Shortage of capital ▪ Outside sources of capital – World Bank, IMF, Asian Development Bank – Cultural differences ▪ Certain cultures welcome change more easily than others – Daewoo in South Korea Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: China (1 of 3) Communist after civil war ended in 1949 Agricultural reforms began in 1979 – Township and village enterprises legalized in1984 Today, “Socialism with Chinese characteristics” – Immense population, rising incomes, and expanding opportunities attract huge sums of investment – Belt and Road Initiative to promote regional integration, increase trade, and stimulate growth Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (5 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: China (2 of 3) Chinese patience and guanxi (personal relationships) – Personal networks fueled by guanxi help companies to reduce costs and increase flexibility. – Companies exploit a lax environment surrounding property rights protection and quickly copy new, global products and manufacture cheaper versions. ▪ Three-month window before copycats saturate the market Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Culture Insights: Guidelines for Good Guanxi Contacts versus Contracts: Face-to-face communication and personal relationships take priority over written contracts Pleasure before Business: Leave the sales pitch on the back burner and follow the lead of Chinese hosts Importance of Family: Never turn down an invitation to attend a Chinese executive’s family event Cultural Sensitivity: China is not a single market but many different regional markets with different cultures and different languages Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: China (3 of 3) China’s challenges – Rapid economic and social change – Political and social problems ▪ Unemployment and migrant labor ▪ Increased democratic reform is not supported by the government ▪ Limiting the power of the nation’s biggest firms – Reunification of “greater China” ▪ Hong Kong ▪ Macau ▪ Taiwan Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: Russia (1 of 2) Operated under a staunchly communist system for about 75 years In the 1980s, the former Soviet Union entered a new era of freedom of thought, freedom of expression, and economic restructuring. Transition away from government ownership and central planning was sudden and turbulent Today, many Russians are doing reasonably well and a fairly strong middle class has emerged. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Photo and Discussion Question (6 of 6) Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Economic Transition: Russia (2 of 2) Russia’s challenges – Developing managerial talent ▪ Years of central planning delayed the development of managerial skills needed in a market-based economy – Political instability ▪ Strong ethnic and nationalist sentiments in the region can cause misunderstandings to spiral out of control quickly – Unstable investment climate ▪ If Russia wishes to become an attractive location for international companies, it needs to improve its relations with other nations, enact pro-business laws, and better safeguard property rights. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Quick Study 5.4 1. What does the economic transition process involve? 2. What are the key obstacles for countries in transition? 3. What are the main characteristics of China’s experience with economic transition? 4. How has Russia managed its economic transition from central planning? Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2023, 2019, 2016 Pearson Education, Inc. All Rights Reserved