Chapter 03 – National Differences in Economic Development
National Differences in Economic
Development
Learning objectives
Explain what determines the level of economic development of a nation.
Identify the macropolitical and macroeconomic changes occurring worldwide.
Describe how transition economies are moving toward market-based systems.
Explain the implications for management practice of national difference in
political economy.
This chapter discusses differences in national political, economic, and legal systems,
highlighting the ways in which managers in global settings need to be sensitive to these
differences.
The global trend toward democratization and economic liberalization over the past
several decades is explored in detail. The effect of market-based reforms on economic
development is discussed in terms of gross national income per capita and purchasing
power parity. The importance of deregulation, privatization, and the development of
adequate legal systems is discussed in terms of states transitioning toward a free market
economy.
The opening case considers the trend toward political and economic reform in
sub-Saharan Africa over the past 25 years. New democratic institutions and market
deregulation have contributed to the region’s emergence as one of the world’s
fastest-growing economies. The closing case describes the recent political and economic
reform in the country of Myanmar (formerly known as Burma). Today the country is
beginning to privatize industries, restructure the floating rate for its currency, stabilize
elections, and welcome foreign investors.
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OUTLINE OF CHAPTER 3: NATIONAL DIFFERENCES IN ECONOMIC
DEVELOPMENT
Opening Case: Democracy and Economic Development in Sub-Saharan Africa
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Chapter 03 – National Differences in Economic Development
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
Overall Attractiveness
Critical Thinking and Discussion Questions
Closing Case: Political and Economic Reform in Myanmar
CLASSROOM DISCUSSION POINT
Ask students if they have ever knowingly purchased a counterfeit product—perhaps a
purse or a wallet, or maybe a watch. Then ask students to discuss the implications for
their purchase decision for the real company as well as for the entrepreneur selling the
counterfeit product.
Topics to consider include:
Why is there a market for counterfeit goods?
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Chapter 03 – National Differences in Economic Development
How does this market benefit sellers?
What does it mean for the company producing the real product?
Where was the counterfeit product likely to have been made?
How do counterfeit products help an economy? How do they hurt it?
Next, ask students to consider how decisions like theirs could influence new product
development policies at companies. Finally, ask students to consider how a legal system
that protects property rights could change their responses.
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slides 3-3 through 3-10 Determinants of Economic Development
Differences in economic development across countries are often linked to differences in
their political, economic, and legal systems.
Economic development can be measured by gross national income per head of
population (GNI) (rather than GNP) and purchasing power parity (PPP) which is GNI
per capita adjusted for cost of living.
The Nobel prize-winning economist Amartya Sen has argued in his theory of social
development that development should be assessed less by material output measures such
as GNI per capita/GDP per capita and more by the capabilities and opportunities that
people enjoy.
Sen’s influential thesis has been picked up by the United Nations, which has developed
the Human Development Index (HDI) to measure the quality of human life in different
nations.
Slides 3-11 through 3-14 Political Economy and Economic Progress
A country’s economic development is a function of its economic and political systems.
Economic freedom associated with a market economy creates greater incentives for
innovation and entrepreneurship than either a planned or a mixed economy.
Innovation and entrepreneurship require strong property rights. Without strong property
rights protection, businesses and individuals run the risk that the profits from their
innovative efforts will be expropriated, either by criminal elements or by the state.
There is debate on the kind of political system that best achieves a functioning market
economy with strong protection for property rights. People in the West tend to associate a
representative democracy with a market economic system, strong property rights
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Chapter 03 – National Differences in Economic Development
protection, and economic progress. Building on this, we tend to argue that democracy is
good for growth.
However, some totalitarian regimes have fostered a market economy and strong property
rights protection and have experienced rapid economic growth. Four of the
fastest-growing economies of the past 30 years—South Korea, Taiwan, Singapore, and
Hong Kong—had one thing in common at the start of their economic growth:
undemocratic governments!
While it is possible to argue that democracy is not a necessary precondition for a free
market economy in which property rights are protected, subsequent economic growth
often leads to establishment of a democratic regime.
Slides 3-15 and 3-16 Geography, Education, and Economic Development
In addition to political and economic systems, geography and education are also
important determinants of economic development
Slides 3-17 through 3-21 States in Transition
Two trends are evident: first, during the late 1980s and early 1990s, a wave of democratic
revolutions swept the world; second, totalitarian governments collapsed and were
replaced by democratically elected governments that were typically more committed to
free market capitalism than their predecessors had been.
These changes were most dramatic in Eastern Europe, where the collapse of communism
brought an end to the Cold War and led to the breakup of the Soviet Union, but similar
changes were occurring throughout the world during the same period. Across much of
Asia, Latin America, and Africa there was a marked shift toward greater democracy.
Another Perspective: To explore the recent changes and ongoing economic and political
challenges in the Middle East, consider
{http://knowledge.insead.edu/world/middle-east/the-middle-east-challenge-in-2013-2370
} and also iGLOBE What Political Models Might Shape The New Libya, Tunisia?
There are three reasons for the spread of democracy:
First, many totalitarian regimes failed to deliver economic progress to the vast bulk of
their populations.
Second, new information and communication technologies have broken down the ability
of the state to control access to uncensored information.
Third, the economic advances of the past quarter century have led to the emergence of
increasingly prosperous middle and working classes who have pushed for democratic
reforms.
Another Perspective: The U.S. State Department produces a number of reports that are
helpful to understanding the conditions in other markets, as well as information regarding
visas and other relevant issues. The site is {http://www.state.gov/}.
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Chapter 03 – National Differences in Economic Development
Paralleling the spread of democracy since the 1980s has been the transformation from
centrally planned command economies to market-based economies.
Slides 3-22 and 3-23 The Nature of Economic Transformation
These changes have involved:
Deregulation – removing legal restrictions to the free play of markets, and allowing the
establishment and operations of private enterprises.
Privatization – transferring the ownership of state property into the hands of private
individuals, frequently by the sale of state assets through an auction.
Creation of a legal system to safeguard property rights.
Markets that were formerly off-limits to Western businesses are now open, and some of
these markets have huge potential: China, more than 1.3 billion people; India, more than
1.2 billion people; and Latin America, more than 600 million potential customers.
Slides 3-24 through 3-29 Implications of Changing Political Economy
Just as the potential gains are large, so, too, are the risks. Democracy may not thrive in
some countries.
Managers need to focus on two broad areas:
First, the political, economic, and legal environment of a country influences the
attractiveness of that country as a market and/or investment site. The benefits, costs, and
risks associated with doing business in a country are a function of that country’s political,
economic, and legal systems.
Second, the political, economic, and legal systems of a country can raise important
ethical issues that have implications for the practice of international business.
The long-run benefits of doing business in a country are a function of the size of the
market, the present wealth of consumers in that market, and the likely future wealth of
consumers.
There are three types of costs involved in international business: political costs,
economic costs, and legal costs.
There are three types of risk involved in international business: political risk, economic
risk, and legal risk.
Slide 3-30 Overall Attractiveness
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.
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Chapter 03 – National Differences in Economic Development
Slide 3-31 How Attractive is your Home Town to Investors?
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