978-1259929441 Chapter 3 Part 2

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Chapter 03 – National Differences in Economic Development

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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 customer 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 3-27 – 3-33 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.

Early entrants to a market may capture first mover advantages, while later entrants may

face late mover disadvantages.

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.

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.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: What is the relationship among property rights, corruption, and economic

progress? How important are anticorruption efforts in the effort to improve a country’s level

of economic development?

ANSWER 1: Innovation and entrepreneurship are widely recognized as important to long–

run economic growth. Innovation and entrepreneurship flourish in environments that are

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free of corruption and where proprietary property is protected. Support for companies and

individuals is important to this process. Individuals or companies that must pay bribes to

obtain licenses or face other types of corrupt behavior are less likely to carry out the

activities necessary for economic growth and progress. Similarly, companies and individuals

are likely to shy away from environments where property rights are not well protected.

QUESTION 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?

ANSWER 2: 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

QUESTION 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 (1) the efficiency of state and private businesses, and (2) the rate

of new business formation in India during the 1947-1990 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 3:

a. From 1947 to 1990, India operated under a mixed economy that included several large

state-owned enterprises, central planning, and subsidies. Today, the country is moving

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However, tariffs are still high and efforts to lower them are meeting with opposition from

companies that fear lower tariffs will bring in too much competition. Antiquated labor and

manufacturing laws are also making it difficult for firms to operate competitively.

b. Many students will probably agree that introducing privatization at a much earlier date

could have led to greater corporate efficiency and generated more economic growth in India.

c. Since 1990, India has been much more open to foreign investment, and extensive

privatization of numerous industries has introduced a new level of competition to the

d. India’s information technology sector and pharmaceutical sector have been particularly

successful in recent years. For example, in 2012, India’s software development sector had

sales of $100 billion as compared to just $150 million in 1991. Many students will probably

e. Many students will probably suggest that despite the many recent changes in India,

consumer products manufacturers could still face significant challenges in the country.

CLOSING CASE: The Political and Economic Evolution of Indonesia

Summary

The closing case explores the political and economic evolution of Indonesia since President

Suharto took power. Under the 30-year reign of President Suharto, Indonesia’s economy

grew steadily; however, the growth ultimately proved to be unsustainable as the fiscal

mismanagement and crony capitalism caught up to the brutal dictator. Since Suharto was

forced out of office, Indonesia, now under the guidance of President Joko Widodo, has been

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moving toward market-based policies but much remains to be done before the country can

reach its full economic potential. A discussion of the case can begin with the following

questions:

QUESTION 1: Under the leadership of Suharto, the Indonesian economy grew at a steady

pace. Why was this ultimately not sustainable?

ANSWER 1: President Suharto, who in reality was not a president but instead a brutal

military-backed dictator, ruled Indonesia for some 30 years. During his tenure as president,

Indonesia experienced consistent economic growth; however, his practice of crony

QUESTION 2: Since Suharto was removed, Indonesia has grown its economy at a slower

pace than two other large developing nations, India and China. Why do you think this has

been the case?

ANSWER 2: Unlike other large developing nations such as India and China, economic

growth in Indonesia over the last decade or so has been slow. Much of the blame for this

QUESTION 3: What actions could Indonesia take to improve its economic performance?

What impediments might make it difficult for the government to take these actions?

ANSWER 3: Under Indonesia’s President Joko Widodo, who took office in 2014, Indonesia

has embarked on a series of reforms designed to get the economy back on track. Subsidies

on products such as gasoline have been abolished leaving market forces to set prices.

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than-expected-in-second-quarter} and {http://time.com/4416354/indonesia-joko-jokowi-

widodo-terrorism-lgbt-economy/}.

MHE INTERNATIONAL BUSINESS VIDEO LIBRARY

Please click here to visit our International Business Video Library which provides an

ongoing stream of updated video suggestions correlated by key concept and major topic.

Every new clip posted is supported by teaching notes and discussion questions. Please feel

free to leave comments in the library that you feel might be helpful to your colleagues.

INCORPORATING globalEDGE™ EXERCISES

Use the globalEDGE™ site {http://globalEDGE.msu.edu/} to complete the following

exercises:

Exercise 1

Increased instability in the global marketplace can introduce risks in a company’s daily

transactions that can be unanticipated. As such, your company must evaluate these

commercial transaction risks for its foreign operations in Argentina, China, Egypt, Poland,

and South Africa. A risk analyst at your firm indicated that you could evaluate both the

political and commercial risk of these countries simultaneously. Provide a commercial

transaction risk overview of all five countries for top management. In your evaluation,

indicate possible corrective measures in the countries with considerably high political and/or

commercial risk.

Exercise 2

Managers at your firm are very concerned about the influence of terrorism on its long-term

strategy. To counter this issue, the CEO has indicated you must identify the countries where

terrorism threat and political risk are minimal. This will provide the basis for the

development of future company facilities, which need to be built in all major continents in

the world. Include recommendations as to which countries on each continent would serve as

good candidates for your company to analyze further.

Answers to Exercises

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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

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 includes countries presenting a “normal” commercial risk, and category C are

those presenting a “high” risk.

Exercise 2 Answer

Search phrase: terrorism threat

Resource Name: AON Crisis Management Web Analytics