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National Differences in Economic
Development
Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: Brazil’s Struggling Economy
Introduction
Implications of Changing Political Economy
Focus on Managerial Implications: Benefits, Costs, Risks, and Overall Attractiveness of
Doing Business Internationally
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: Economic Development in Bangladesh
Continuous Case Concept
Additional Readings and Sources of Information
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Learning Objectives
3-1 Explain what determines the level of economic development of a nation.
3-2 Identify the macropolitical and economic changes occurring worldwide.
3-3 Describe how transition economies are moving toward market-based systems.
3-4 Explain the implications for management practice of national difference in political
economy.
Chapter Summary
This chapter focuses on the determinants of economic development. 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
chapter examines 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.
Chapter Opening Activity
Ask students if they know what an “emerging market” country is. Have them research the
answer. They may find several definitions. They’ll learn that it’s not the same as a “developing
country.” Investment banking professionals who needed a way to explain the risk/return profile
to their clients coined the term. Emerging markets are nations that are investing in more
productive capacity. They are moving away from their traditional economies that have relied on
agriculture and the export of raw materials. It’s assumed that their leaders want to create a
Other lists of emerging markets may include countries from Kenya, with a per capita income of
$350, to Mexico, with per capita income just above $5,000. What is common across them?
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• Good growth prospects appear desirable but may reflect wishful thinking since only a
handful of developing countries have grown at consistently higher rates than advanced
economies.
• High rates of return may work, but the evidence is that rates of return on emerging
market securities have, on average, been not much better than those obtained by investing
in U.S. treasuries.
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Chapter Outline
Brazil’s Struggling Economy
opening case
Summary
The opening case explores the state of the economy in Brazil, one of the world’s largest
emerging economies. From 2000 to 2012, Brazil’s economy grew rapidly, fueled by market–
reforms and strong exports. Foreign investment poured in, further strengthening the economy.
However, beginning in 2013, Brazil’s economy began to deteriorate, partly due to falling global
commodity prices and partly because of structural problems in the economy. Fiscal
mismanagement, especially about the country’s pension system. has created a crisis situation. In
addition, tariff barriers and a complicated tax code make it difficult for companies to do
business. In 2016, Brazil elected a new president, Michel Temer, who has promised to reform the
economy.
Discussion Questions
1. Do you think Brazil’s new president, Michel Temer, will be successful with his plans to
reform the country’s economy? What challenges is he likely to face?
2. One of President Michel Temer’s economic reforms involves privatizing a number of state–
owned companies. Discuss privatization as a tool in encouraging economic recovery in a
country.
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Introduction
A) Differences in political economy influence the level of economic development of a nation,
and thus, how attractive it is as a place for doing business.
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 (GNI) per
head of population. 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: An interesting notion regarding economic development levels explores the cost of
Big Macs around the world. To learn more, go to
https://www.economist.com/news/2018/07/11/the-big-mac-index.
Did You Know Video Clip
The video clip asks: “Did you know that the United States has an economy that is 70 percent
larger than that of China and has four times the standard of living?”
Discussion Questions
1. Were you surprised that the U.S. still has a larger economy than China’s? Why?
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2. What do you think about the fact that the Chinese economy is growing at a faster rate than the
U.S.’s?
Lecture Note: Learn more about why it’s important to interpret GDP growth and value statistics
carefully by visiting http://www.bloomberg.com/graphics/2016-us-vs-china-economy.
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 (HDI), which is 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.
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Political Economy and Economic Progress
A) What is the relationship between political economy and economic progress? This question
has been the subject of a vigorous debate among academics and policymakers for some time.
INNOVATION AND ENTREPRENEURSHIP ARE THE ENGINES OF GROWTH
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: 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 landholders 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 landholders are granted 40–70-year leases and rural landholders 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. The 2007 law was further strengthened in
2016 with new guidelines from the ruling Communist Party. Even so, there is still room for more
improvement.
Discussion Questions
1. What prompted the new property law in China? Why did it take so long to actually develop
the law?
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2. China’s new law has implications for both urban landholders and rural landholders, but it is
especially important for the latter group. Explain what China’s new property law means for
farmers.
Lecture Note: China’s new efforts to improve property rights are a move in the right direct, but
much remains to be done. To extend this discussion, consider
https://www.forbes.com/sites/sarahsu/2016/11/30/china-improving-property-rights-
protections/#4b68755a6e5c and https://www.export.gov/article?id=China-Protection-of-
Property-Rights.
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 those that are benevolent.
ECONOMIC PROGRESS BEGETS DEMOCRACY
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 a country with the opposite characteristics on each of these attributes.
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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
education of their young people develop faster economically.
States in Transition
A) Since the late 1980s, there have been three 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 move away from centrally
planned and mixed economies toward free markets. Third, there are signs that some countries are
retreating from the free market model, a shift toward greater authoritarianism.
THE SPREAD OF DEMOCRACY
B) One notable development of the past 30 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 the collapse of many
authoritarian regimes in Latin America, have given rise to intense speculation about the future
shape of global geopolitics.
Additionally, our McGraw-Hill Education International Business Video Library at
http://bit.ly/MHEIBVideo 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.
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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 https://www.cia.gov/library/publications/the-world-factbook.
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 way private enterprises operate.
CONNECT
Video Case
China GDP
Summary
This activity focuses on differences in economic systems in a country. Managers can use various
statistics to better understand the nature of an economy, where it is headed, and how it compares
to other countries.
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Activity
Students are asked to watch a video on the economic differences between and the United States
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 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 Question
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. 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.
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Video Note: To explore the demands placed on India’s energy infrastructure, consider Demand
for Power in India Outstrips Current Energy Infrastructure in the International Business Library
at http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video title.
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.
CONNECT
Click and Drag
The Changing World
Summary
This activity focuses on how the modern business environment is shaped by political and
economic forces. International managers need to understand world events and their implications
for the countries in which they do business. As part of this, managers need to understand the
difference between events and trends and how each changes the business environment.
Activity
CONNECT