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Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
National Differences in
Economic Development
Chapter Outline
OPENING CASE: Political and Economic Reform in Myanmar
INTRODUCTION
DIFFERENCES IN ECONOMIC DEVELOPMENT
Broader Conceptions of Development: Amartya Sen
POLITICAL ECONOMY AND ECONOMIC PROGRESS
Innovation and Entrepreneurship Are the Engines of Growth
Innovation and Entrepreneurship Require a Market Economy
Innovation and Entrepreneurship Require Strong Property Rights
Country Focus: Emerging Property Rights in China
The Required Political System
Economic Progress Begets Democracy
Geography, Education, and Economic Development
STATES IN TRANSITION
The Spread of Democracy
The New World Order and Global Terrorism
The Spread of Market-Based Systems
THE NATURE OF ECONOMIC TRANSFORMATION
Deregulation
Privatization
Country Focus: India’s Economic Transformation
Legal Systems
IMPLICATIONS OF CHANGING POLITICAL ECONOMY
FOCUS ON MANAGERIAL IMPLICATIONS: BENEFITS, COSTS, RISKS, AND OVERALL
ATTRACTIVENESS OF DOING BUSINESS INTERNATIONALLY
Benefits
Costs
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
Risks
Overall Attractiveness
SUMMARY
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Revolution in Egypt
Learning Objectives
1. Explain what determines the level of economic development of a nation.
2. Identify the macro-political and economic changes taking place worldwide.
3. Describe how transition economies are moving towards market based systems.
4. Explain the implications for management practice of national difference in political economy.
Chapter Summary
This chapter focuses on the determinants of economic development. The author makes the point
that a country’s political, economic, and legal systems have a direct impact on its economic
potential. The importance of innovation, along with the types of systems that facilitate innovation,
is discussed. Next, the author discusses the parts of the world that are in transition from one
political-economic ideology to another. Finally, the chapter ends with a discussion of the
managerial implications of differing political, economic, and legal systems of a country.
Opening Case: Political and Economic Reform in Myanmar
Summary
The opening case explores the political and economic reforms in Myanmar that are changing the
nation’s future. For decades, Myanmar languished under a brutal military dictatorship. With its
economy at a virtual standstill thanks to corruption and poor management, Myanmar, despite is
wealth of natural resources, became one of the poorest countries in the world at a time when its
neighbors were experiencing rapid economic growth. Sanctions by the United States and the
European Union imposed in response to the corrupt behavior of government leaders exacerbated
the country’s plight. Since 2010, however, under the leadership of new president Thein Sein, the
situation is improving. Political and economic reforms have allowed for the freer elections, the
release of political prisoners, privatization of state-run enterprises, and the encouragement of
foreign investment. While it will be some time before Myanmar can catch up with its neighbors,
there is reason for optimism. Discussion of the case can revolve around the following questions:
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
Suggestion Discussion Questions
QUESTION 1: Reflect on how military dictatorships like the one in Myanmar hamper economic
development. Discuss the consequences of this type of political system.
QUESTION 2: Since 2010, Myanmar’s new president has implemented a series of political and
economic reforms. How will these reforms change the nation? What do they mean for the
country’s citizens?
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
B) The past three decades have seen a more general move toward more democratic forms of
government, market-based economic reforms, and adoption of legal systems that better enforce
property rights. Taken together, these trends have helped foster greater economic development
around the world creating a more favorable environment for international business.
C) The opening case on political and economic reform in Myanmar highlights many of the issues
in this chapter. For half a century, Myanmar was ruled by military dictatorships. Today, as it
moves toward being a functioning democracy, the country has gone from being one of the poorest
in the world to one in which free enterprise and foreign investments is encouraged and where
privatization of state-owned businesses is occurring.
DIFFERENCES IN ECONOMIC DEVELOPMENT
A) Different countries have dramatically different levels of economic development. One common
measure of economic development is a country’s gross national income per head of population
(GNI). To account for cost of living differences between countries, GNI can be adjusted by
purchasing power. A purchasing power parity (PPP) adjustment allows for a more direct
comparison of living standards in different countries. A drawback of both GNI and PPP data is
that they provide only a static picture of development.
Lecture Note: As wages continue to rise in China, some companies are rethinking their
manufacturing options and returning to the United States. To learn more, consider
{http://www.businessweek.com/articles/2014-10-23/chinas-rising-wages-and-the-made-in-the-usa-
revival}.
Lecture Note: An interesting notion regarding economic development levels explores the wages of
workers at McDonald’s around the world. To learn more, go to
{http://www.businessweek.com/articles/2012-05-29/the-big-mac-theory-of-development}.
Video Note: To expand this discussion, consider Marriott Plans Asian Hotel Expansion
in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) .
Broader Conceptions of Development: Amartya Sen
B) Nobel Prize winning economist Amartya Sen has argued that development should be assessed
less by material output and more by the capabilities and opportunities that people enjoy. Sen’s
ideas have been picked up by the United Nations and are reflected in the Human Development
Index (a United Nations developed index based on life expectancy, education attainment, and
whether average incomes are sufficient to meet the basic needs of life in a country). The index
was developed to gauge a country’s economic development and likely future growth rate.
POLITICAL ECONOMY AND ECONOMIC PROGRESS
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
A) What is the relationship between political economy and economic progress? This question has
been the subject of a vigorous debate among academics and policy makers for some time.
Innovation and Entrepreneurship Are the Engines of Growth
B) Innovation is the process through which people create new products, new processes, new
organizations, new management practices, and new strategies. Innovation is often seen as the
product of entrepreneurial activity.
C) Entrepreneurs first commercialize innovative new products and processes. There is broad
agreement that innovation and entrepreneurship are the engines of long-run economic growth.
Innovation and Entrepreneurship Require a Market Economy
D) It has also been argued that the economic freedom associated with a market economy creates
greater incentives for innovation and entrepreneurship than either a planned or mixed economy.
Innovation and Entrepreneurship Require Strong Property Rights
E) Strong legal protection of property rights is another requirement for a business environment
conducive to innovation, entrepreneurship, and economic growth.
Country Focus: Emerging Property Rights in China
Summary
This feature explores the effect of a new property law in China. The law, which was passed in
2007, gives both rural and urban land holders more secure property rights. The new law was a
much needed response to the changes in China’s economy over the last 30 years. Under the law,
urban land holders are granted 40 – 70 year leases, and rural land holders 30 year leases, and both
groups have the right to automatically renew their leases. While the law has its limitations, it is a
step toward strengthening property rights in China.
Suggested Discussion Questions
1. What prompted the new property law in China? Why did it take so long to actually develop the
law?
© 2016 by McGraw-Hill Education.
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49
2. China’s new law has implications for both urban land holders and rural land holders, but it is
especially important for the latter group. Explain what China’s new property law means for
farmers.
Lecture Note: To extend this discussion consider exploring the rising frustration of multinational
companies as the business environment in China becomes more challenging thanks to government
policies. To learn more, go to {http://www.businessweek.com/articles/2014-10-24/frustrated-
multinationals-look-to-trim-china-based-staff} and {http://www.businessweek.com/news/2014-10-
26/china-trade-accord-unlikely-to-aid-manufacturers-survey-shows}.
The Required Political System
F) In the West, it is often argued that democracy is good for economic growth. However, there are
examples of totalitarian regimes that have fostered a market economy and strong property rights
protection and experienced rapid economic growth. Given all the facts though, it seems likely that
democratic regimes are far more conducive to long-term economic growth than a dictatorship,
even one of the benevolent kind.
Economic Progress Begets Democracy
G) While it is possible to argue that democracy is not a necessary precondition for the
establishment of a free market economy in which property rights are protected, it seems evident
that subsequent economic growth leads to establishment of democratic regimes.
Geography, Education, and Economic Development
H) Geography can also affect economic development. A landlocked country with an inhospitable
climate, poor soil, few natural resources, and terrible diseases is unlikely to develop economically
as fast as country with the opposite characteristics on each of these attributes.
I) While it can be hard to do much about unfavorable geography, education is something that
governments can change. Numerous studies suggest that countries that invest more in the
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
education of their young people develop faster economically.
STATES IN TRANSITION
A) Since the late 1980s there have been two major changes in the political economy of many of the
world’s nations. First, a wave of democratic revolutions swept the world, and many of the
previous totalitarian regimes collapsed. Second, there has been a more away from centrally
planned and mixed economies towards free markets.
The Spread of Democracy
B) One notable development of the past 20 years has been the spread of democracy (and by
extension, the decline of totalitarianism. Three main reasons account for the spread of democracy.
First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their
population. Second, new information and communication technologies have broken down the
ability of the state to control access to uncensored information. Third, in many countries the
economic advances of the last quarter century have led to the emergence of increasingly
prosperous middle and working classes who have pushed for democratic reforms.
The New World Order and Global Terrorism
C) The end of the Cold War and the “new world order” that followed the collapse of communism
in Eastern Europe and the former Soviet Union, taken together with collapse of many authoritarian
regimes in Latin America, have given rise to intense speculation about the future shape of global
geopolitics. Author Francis Fukuyama, suggests a more harmonious world dominated by a
universal civilization characterized by democratic regimes and free market capitalism, while
others, including Huntington, envision a world that is split into different civilizations each of
which with its own value systems and ideology.
Lecture Note: The situation in Russia under the leadership of Vladimir Putin has prompted
sanctions from both the European Union and the United States. As a result, Russia is furthering its
ties with China. To learn more, consider {http://www.businessweek.com/articles/2014-10-
16/putin-turns-to-china-as-russias-economy-is-weakened-by-sanctions}.
The Spread of Market-Based Systems
D) Paralleling the spread of democracy since the late 1980s has been the transformation from
centrally planned command economies to market-based economies. The rationale for
transformation has been the same the world over. In general, command and mixed economies
failed to deliver the kind of sustained economic performance that was achieved by countries
adopting market-based systems.
Teaching Tip: The CIA maintains a site with extensive information on every country in the world
including a section on current issues. This can be an excellent “first stop” when conducting
research on the market potential of a particular country or area. The site is available at
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
{https://www.cia.gov/library/publications/the-world-factbook/}.
Teaching Tip: The U.S. State Department produces a series of annual "Country Reports" to
acquaint American businesses with other countries. Each report contains nine sections: (1) Key
Economic Indicators; (2) General Policy Framework; (3) Exchange Rate Policies; (4) Structural
Policies; (5) Debt Management Practices; (6) Significant Barriers to US Exports and Investments;
(7) Export Subsidies Policies; (8) Protection of US Intellectual Property; and (9) Worker Rights.
Information about obtaining these reports is available through the United States Department.
There is also a special section devoted to international business. The site is
{http://www.state.gov/} click on “countries and regions” then on “countries from a to z”.
THE NATURE OF ECONOMIC TRANSFORMATION
A) The shift toward a market-based economic system typically involves at least three distinct
activities: deregulation, privatization, and legal enforcement of property rights.
Deregulation
B) Deregulation involves removing restrictions on the free operation of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Country Focus: India’s Economic Transformation
Summary
This feature explores the economic transformation in India over the last two decades. After
implementing a series of deregulation reforms, India’s economy has been expanding rapidly and
the country has been the recipient of significant investment by foreign companies particularly in
information technology and pharmaceuticals. These investments are helping India to become a
force in global markets. Still, the country has some way to go. Recent efforts to reduce tariffs
have met with opposition and laws still limit the operation of private enterprises. Discussion of
this feature can begin with the following questions.
Suggested Discussion Questions
Please see Critical Discussion Question 3 for a detailed discussion of this feature.
Privatization
C) Privatization transfers the ownership of state property into the hands of private investors. In
order to attract investment and protect the interests of the private enterprise encouraged by the first
two activities, changes typically need to be made to legal systems to protect the property rights of
investors and entrepreneurs.
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
Legal Systems
D) Laws protecting private property rights and providing mechanisms for contract enforcement are
required for a well functioning market economy. Without a legal system that protects property
rights, and without the machinery to enforce that system, the incentive to engage in economic
activity can be reduced substantially by private and public entities that expropriate the profits
generated by the efforts of private sector entrepreneurs.
IMPLICATIONS OF CHANGING POLITICAL ECONOMY
A) The implications for business of the move toward free markets and democracy are enormous.
Markets that were formerly off-limits to Western business are now open. However, just as the
potential gains are large, so are the risks.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) G-20 To Replace G-8 As Global Economic Forum
explores the major shift in how policies will be determined in the future.
FOCUS ON MANAGERIAL IMPLICATIONS: BENEFITS, COSTS, AND RISKS OF DOING
BUSINESS INTERNATIONALLY
A) The benefits, costs, and risks associated with doing business in a country are a function of that
country’s political, economic, and legal systems. The overall attractiveness of a country as a
market and/or investment site depends on balancing the likely long-term benefits of doing business
in that country against the likely costs and risks.
Benefits
B) The long run monetary benefits of doing business in a country are a function of the size of the
market, the present wealth (purchasing power) of consumers, and the likely future wealth of
consumers. By identifying and investing early in a potential future economic star, firms may be
able to gain first mover advantages (advantages that accrue to early entrants into a market) and
establish loyalty and experience in a country. Companies that are late to enter a marker may suffer
from late-mover disadvantages. Two factors that are reasonably good predictors of a country’s
future economic prospects are its economic system and property rights regime.
Costs
C) The costs of doing business in a country are determined by a number of political, economic,
and legal factors. Political costs can involve the cost of paying bribes or lobbying for favorable or
fair treatment. Economic costs relate primarily to the sophistication of the economic system,
including the infrastructure and supporting businesses. Regarding legal factors, it can be more
costly to do business in countries with dramatically different product, workplace, and pollution
standards, or where there is poor legal protection for property rights.
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
Risks
D) As with costs, the risks of doing business in a country are determined by a number of political,
economic, and legal factors. Political risk is 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 is 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 is the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Mercedes-Benz Questioned in China Pricing Probe
explores how German automaker Mercedes is dealing with an adverse political situation in China.
Overall Attractiveness
E) 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.
Lecture Note: To extend this discussion consider {http://www.businessweek.com/articles/2013-11-
14/2014-a-users-guide-to-the-global-economy} for a quick overview of the global economy and its
overall potential.
Critical Thinking and Discussion Questions
1. What is the relationship between property rights and economic progress? How important are
anti-corruption efforts in the effort to improve a country’s level of economic development?
2. You are a senior manager at a U.S. automobile company with the job of deciding whether to
invest in production facilities in China, Russia, or Germany. These facilities will serve local
market demand. Evaluate the benefits, costs, and risks associated with doing business in each
nation. Given your answer here, which country seems to be the most attractive target for foreign
direct investment? Why?
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
54
Answer: Responses to this question will vary by student. Many will probably suggest that
China’s low cost labor and large potential domestic market make it an attractive destination for the
investment. Other students however may raise questions about the legal environment in the
country and whether proprietary property would be adequately protected. Similarly, may students
might wonder whether despite Russia’s privatization efforts, the high level of corruption in the
country would offset any opportunities the market might offer. Some students might favor
Germany with its stable government and strong history as a key player in the global auto industry
as well as its easy access to other European Union markets.
3. Reread the Country Focus feature on India and answer the following questions:
a. What kind of economic system did India operate during 1947 to 1990? What kind of system is
it moving toward today? What are the impediments to completing this transformation?
b. How might widespread public ownership of business and extensive government regulations
have impacted (i) the efficiency of state and private businesses, and (ii) the rate of new business
formation in India during the 1947 to 1990 time frame? How do you think these factors affected
the rate of economic growth in India during this time frame?
c. How would privatization, deregulation, and the removal of barriers to foreign direct investment
affect the efficiency of business, new business formation, and the rate of economic growth in India
during the post-1990 time period?
d. India now has pockets of strengths in key high-technology industries such as software and
pharmaceuticals. Why do you think India is developing strength in these areas? How might
success in these industries help to generate growth in other sectors of the Indian economy?
e. Given what is now occurring in the Indian economy, do you think the country represents an
attractive target for inward investment by foreign multinationals selling consumer products?
Why?
Answer:
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
55
Lecture Note: To extend this discussion, consider exploring the new rush of businesses that are
investing in India. For example, Wal-Mart recently announced that its intention to open 50 retail
outlets in the country and Google has announced plans to focus on India’s android phone market.
To learn more, go to {http://www.businessweek.com/articles/2014-10-23/wal-mart-struggles-to-
crack-retail-market-in-india} and {http://www.businessweek.com/articles/2014-10-21/googles-
big-plans-for-low-cost-android-one-phones-in-india}.
Teaching Tip: Information on doing business in India is available at
{http://www.indianembassy.org/}.
Closing Case: Revolution in Egypt
The closing case explores Egypt’s rapid growth during the late 2000s. Thanks to a series of
economic reforms implemented in 2004, Egypt’s exports nearly tripled from 2005 to 2008, inward
investment more than doubled from 2004 to 2008, and overall unemployment fell during the same
time period. Despite these economic advances, the gap between the country’s rich and poor
remained a serious problem, one that came to a head in 2011 when long-time President Mubarak
was forced to step down, and the Muslim Brother hood took up the reins of power. A discussion
of the case can revolve around the following questions:
QUESTION 1: What were the underlying causes, economic and political, of the collapse of the
Mubrark regime?
© 2016 by McGraw-Hill Education.
This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
56
QUESTION 2: What do you think the Egyptian government needs to do in order to get the
economy growing again and to attract foreign capital? What are the risks to the government of
taking such actions?
QUESTION 3: What dangers do you see in the current trajectory of the Egyptian economy? What
are the implications of these dangers for foreign companies that might consider doing business in
Egypt? What do you think it would take to encourage more foreigners to visit, invest, and do
business in Egypt? Would such inward investment be good for the Egyptian economy?
QUESTION 4: Political risks in Egypt seem to be increasing again, and the country seems to be
retreating from democracy, largely due to intervention by the military. As a manager in an
international business, how would the current turmoil and political uncertainty in Egypt influence
your investment decisions, and what does this mean for the future of the Egyptian economy?
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
Continuous Case Concept
Will Morocco become the next Detroit? The country has been working hard over the last few
years to build up its auto industry by offering various incentives to foreign companies as an
enticement for investment. Already, France’s Renault has a plant in Casablanca and is now
threatening to shift production from its Dacia plant in Romania to Morocco if workers at the
Romanian plant do not accept wage cuts. At the moment, the plant in Romania is running at near
capacity.
.
• Ask students to consider how Morocco’s new policies could impact economic development
in the country. How might investment in the auto industry benefit the country? Are there
any drawbacks?
• Next, ask students to reflect on the role of government in economic development. How
important are Morocco’s new incentive policies to the country? Should other governments,
like those of Romania which stands to lose if Renault goes through with its threats, follow
Morocco’s lead?
• Finally, ask students to thinks about Morocco as an investment destination. What
challenges might a company investing in the country face? Ask students to identify the
risks involved and how each risk level might change depending on whether a firm is a first
mover as compared to a late mover.
This exercise could be used at the beginning of the discussion of this chapter’s material, and/or
again at the end. To take the discussion into greater depth, ask students read the pertinent
selections in the additional readings section below. The exercise also works well at the beginning
of the implications for managers section.
globalEDGE Exercises
The resources for each exercise can be easily located by using the search box at the top of the
globalEDGE website at http://globalEDGE.msu.edu
Exercise 1
Search phrase: commercial transaction
Resource Name: Ducroire|Delcredere Country Risks
Website: http://www.ducroiredelcredere.be
globalEDGE Category: Rankings
Additional Info:
Ducroire|Delcredere is a provider of credit insurance with a specialization in commercial
transactions, based in Belgium. On its website, the company provides a “commercial risk
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
assessment” for a large number of countries. The assessment is based on economic and financial
indicators for the country, indicators reflecting the country's payment experience for commercial
risk; and indicators characterizing the institutional context in which local companies operate.
Category A includes countries presenting a low commercial risk, category B groups those for
which it is “normal" and category C are those presenting a high risk.
Exercise 2
Search phrase: terrorism threat
Resource Name: AON Crisis Management Web Analytics
Website: http://www.riskmap.aon.co.uk/
globalEDGE Category: Rankings
Additional Info:
The AON website includes a Terrorism Risk Map, in addition to a Political Risk map, where red or
dark orange identify high risk countries and green and yellow identify low risk countries. Clicking
on each country will provide a paragraph write-up justifying the reasons for the current rating.
Additional Readings and Sources of Information
Bric Nations Building Bigger Share of Global GDP
http://www.businessweek.com/videos/2014-10-21/bric-nations-building-bigger-share-of-global-
gdp
Japan’s Megabanks ICBC Win Approval to Open Banks in Myanmar
http://www.businessweek.com/news/2014-10-01/japan-s-megabanks-icbc-win-approval-to-open-
banks-in-myanmar
Japan-Myanmar Sign Investment Pact
http://www.businessweek.com/ap/2013-12-14/japan-myanmar-sign-investment-pact
Myanmar Gets Low Rating for Ease of Doing Business
http://www.businessweek.com/ap/2013-10-30/myanmar-gets-low-rating-for-ease-of-doing-
business
Global Trade Stalls as Emerging Market Demand Drops
http://www.businessweek.com/articles/2013-10-31/global-trade-stalls-as-emerging-market-
demand-drops
Gazans celebrate Brotherhood victory in Egypt
http://www.businessweek.com/ap/2012-06-24/gazans-celebrate-islamic-victory-in-egypt
Why Apple’s iPhone Success in BRIC Countries is a Big Deal
Global Business Today Ninth Edition Chapter 3
© 2016 by McGraw-Hill Education.
http://www.businessweek.com/news/2014-04-23/why-apples-iphone-success-in-bric-countries-is-
a-big-deal
