Chapter 03 – National Differences in Economic Development
National Differences in Economic Development
Learning Objectives
• LO3-1: Explain what determines the
level of economic development of a
nation.
• LO3-2: Identify the macropolitical and
macroeconomic changes occurring
worldwide.
• LO3-3: Describe how transition
economies are moving toward market-
based systems.
• LO3-4: 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 explores the economic
transformation of Poland. After 40 years of
Communist rule, Poland elected democratic
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Chapter 03 – National Differences in Economic Development
3-2
OUTLINE OF CHAPTER 3: NATIONAL DIFFERENCES IN
ECONOMIC DEVELOPMENT
Opening Case: Poland: Eastern Europe’s Economic Miracle
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
The Required Political System
Country Focus: Property Rights in China
Economic Progress Begets Democracy
Geography, Education, Demographics, and Economic Development
Implications of Changing Political Economy
Focus on Managerial Implications
Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally
Chapter Summary
Chapter 03 – National Differences in Economic Development
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 of 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?
How does this market benefit sellers?
OPENING CASE: Poland: Eastern Europe’s Economic Miracle
Summary
The opening case explores the economic transformation of Poland following its
abandonment of four decades of Communist leadership in 1989. Under its newly elected
democratic government, Poland quickly implemented a series of reforms designed to get the
country on track economically. The country embraced market-based policies including
related to an aging population and labor shortages as well as a number of state-owned
businesses, Poland has one of the strongest economies in Europe. Discussion of the case can
begin with the following questions:
QUESTION 1: How has Poland found post-Communism economic success while other
Eastern European countries continue to struggle?
ANSWER 1: After rejecting four decades of Communism, in 1989, Poland elected its first
democratic government. Unlike other Eastern European countries, Poland made the decision
to quickly implement market-based policies using a “shock therapy” program. In addition to
QUESTION 2: Discuss the challenges still facing Poland. How can continued economic
reform help the country?
ANSWER 2: Despite having one of the strongest economies in Europe, Poland still faces
some challenges. One major challenge is its aging population and looming labor shortage.
Poland is working to encourage immigration as a way to deal with this problem, but anti–
immigration sentiment in the country is hampering progress. Another challenge for Poland
QUESTION 3: Discuss the importance of lowering barriers to trade and investment as a
factor contributing to the economic success of Poland since 1989. Would Poland have had
the same success had it not lowered barriers? Explain.
ANSWER 3: As part of its transition to a market-based economy, Poland lowered barriers to
foreign trade and investment. Today, exports account for more than half of the country’s
GDP and the country boasts the highest sustained growth in the region. As part of its effort
to be part of the global economy, Poland joined the European Union in 2004 and adopted
the euro further integrating its economy with much of Western Europe. Students should
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Slide 3-3 Introduction to Economic Development
Chapter 03 – National Differences in Economic Development
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Slides 3-4 – 3-9 Differences in Economic Development
Economic development can be measured by gross national income (GNI) per head of
population (GNI) (rather than GNP) and purchasing power parity (PPP), which is GNI per
capita adjusted for cost of living. However, official figures do not include transactions
carried out through the black or shadow economy.
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.
CONNECT
Case Analysis
National Differences in Economic Development
Activity
Students are asked to read a case on economic development in East and West Germany following the
fall of the Berlin Wall and then respond to questions about the case.
Class Discussion
Discuss differences in economic development. What contributes to these differences? What are the
implications of different levels of economic development for international business?
Slides 3-10 – 3-16 Political Economy and Economic Progress
A country’s economic development is a function of its economic and political systems.
Innovation and Entrepreneurship Are the Engines of Growth
There is substantial agreement among economists that innovation and entrepreneurial
activity are the engines of long-run economic growth.
Chapter 03 – National Differences in Economic Development
3-6
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.
The Required Political System
There is debate on the kind of political system that best achieves a functioning market
economy with strong protection of property rights. People in the West tend to associate a
representative democracy with a market economic system, strong property rights protection,
and economic progress. Building on this, we tend to argue that democracy is good for
growth.
Economic Progress Begets Democracy
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.
Geography, Education, Demographics, and Economic Development
In addition to political and economic systems, geography and education are also important
determinants of economic development.
CONNECT
Click and Drag
The Changing World
Activity
Students are asked to identify whether various trends are political or economic in nature.
Chapter 03 – National Differences in Economic Development
Class Discussion
The modern business environment is continually evolving, shaped by political and economic trends
and events. Identify some of those trends and discuss why they are occurring and what they mean for
international companies now, and going forward.
Slides 3-17 – 3-25 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.
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.
Despite progress toward greater democracy, there are recent signs that authoritarianism is
taking hold in some countries.
The Spread of Market-Based Systems
Paralleling the spread of democracy since the 1980s has been the transformation from
centrally planned command economies to market-based economies.
Chapter 03 – National Differences in Economic Development
Slides 3-26 – 3-29 The Nature of Economic Transformation
These changes have involved:
Deregulation
Deregulation is removing legal restrictions to the free play of markets, and allowing the
establishment and operations of private enterprises.
Legal Systems
The creation of a legal system to safeguard property rights is necessary.
CONNECT
Video Case
Japan’s Economic Malaise
Summary
This activity focuses on Japan’s rise as an economic powerhouse. Once the second largest economy
in the world, Japan has seen its economic fortunes shift following the downturn in the stock market
and an ensuing series of economic chain reactions.
Slide 3-30 Implications of Changing Political Economy
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 3-31 – 3-25 Focus on Managerial Implications
Benefits, Costs, Risks, and Overall Attractiveness of Doing Business Internationally
Just as the potential gains are large, so too are the risks. Democracy may not thrive in some
countries.
Chapter 03 – National Differences in Economic Development
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.
CONNECT
Click and Drag
States in Transition
Summary
This activity focuses on understanding how political upheaval in a nation changes the attractiveness
of a country as a destination for investment. International managers need to understand the nature of
the transition, why it is occurring and what it means for the business environment.
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.
Chapter 03 – National Differences in Economic Development
CONNECT
Click and Drag
Evaluating Country Attractiveness
Activity
Students are asked to identify various factors in terms of whether they are a benefit, a cost, or a risk
of doing business in a country.
Class Discussion
A country’s attractiveness as a place of doing business is determined by numerous factors. Discuss
how companies might identify which factors are most relevant to them. Then discuss how those
factors can be measured to determine the overall attractiveness of a country.
CONNECT
Case Analysis
Lego: Building Global Markets One Block at a Time
Summary
This activity explores Danish company Lego’s expansion into emerging markets. Until now, Lego
has largely focused on developed markets where proprietary property rights are strong, and levels of
economic development and living standards are relatively high.
Chapter 03 – National Differences in Economic Development
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
free of corruption and where proprietary property is protected. Support for companies and
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
environment in the country and whether proprietary property would be adequately protected.
QUESTION 3: Reread the Country Focus “India’s Economic Transformation” 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?
Chapter 03 – National Differences in Economic Development
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
toward a market economy. Already a number of economic reforms have been implemented
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.
Extensive government regulations also hampered the efforts of businesses to expand prior to
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 2017, India’s software development sector had
sales of $150 billion as compared to just $150 million in 1991. Many students will probably
attribute much of the country’s success in these sectors to a combination of factors including
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.
India’s laws make it difficult for private companies to operate efficiently, companies are
limited in their ability to manufacture some products, and they may also find it difficult to
fire workers. Still, the country’s new prosperity and large potential market could make it
attractive to many companies.
Chapter 03 – National Differences in Economic Development
CONNECT
Video Case
Did You Know? India May Be the Second Largest Economy by 2050
Activity
Students are asked to watch a video on India and then respond to a series of questions about the
video.
Class Discussion
Discuss the factors that determine a country’s level of economic development. What are the
implications of these factors and a country’s level of economic development for international
business?
CLOSING CASE: Brazil’s Struggling Economy
Summary
The closing case explores the political and economic transitions in Brazil, a country that
once boasted the sixth largest economy in the world. From 2000-2012, Brazil’s economy
grew more than 5 percent annually thanks to strong international demand for commodities
together with strong commodity prices. Since then, however, Brazil’s economy has
struggled. Poor fiscal decisions by President Dilma Rousseff combined with burdensome tax
Chapter 03 – National Differences in Economic Development
QUESTION 1: Brazil was seen as one of the world’s fastest-growing developing
economies in the 2000-2010 period. What were the foundations of this success?
ANSWER 1: From 2000 until 2012, Brazil’s economy was on fire, growing by more than 5
percent annually. Indeed, in 2012 Brazil surpassed the United Kingdom to claim the sixth
largest economy position in the world. As a major exporter of coffee, soybeans, and iron
QUESTION 2: Why did Brazil’s economic growth falter after 2012? How much of the
damage was self-inflicted, and how much was due to factors outside of the country’s
control?
ANSWER 2: Most students will probably agree that Brazil’s economy suffered a setback in
2012 as a result of a combination of self-inflicted damage and external factors. Poor fiscal
decisions by President Dilma Rousseff are one example of self-inflicted damage.
Extravagant spending on tax breaks and pensions by Rousseff proved to exacerbate damage
inflicted by an economic slowdown. With unemployment rates at 12 percent and slumping
QUESTION 3: What do you think of Temer’s economic reforms? Were they on the right
track?
ANSWER 3: When Michel Temer took office in 2016 promising economic reform, he
quickly took steps to freeze public spending for the next 20 years. Many students will see
this as an important step in reforming the country’s debilitating pension program. Temer
also worked to reform labor laws that protected unproductive workers. Under Temer, Brazil
showed signs of improvement. Inflation slowed, commodity exports rose, interest rates were
QUESTION 4: What policies do you think Brazil should adopt going forward to reignite
economic growth? How easy would it be to implement these policies in Brazil?
ANSWER 4: Responses to this question will vary by student. While pension reform will
likely be at the top of everyone’s list, some students may suggest that the country work
Chapter 03 – National Differences in Economic Development
Brazil for the longer run. Other students may recommend that Brazil look to foreign
companies for investment. Students taking this perspective may point out that relying on
foreign funds would minimize the potential for government overspending while achieving
some of the same objectives as increased government spending. Many students are likely to
agree that working to lower barriers to trade and investment could also be beneficial.
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
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.
CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to chapter
material are asked, requiring students to understand the topics and the locations of the countries
involved.
Activity
Students are asked to respond to a series of questions related to the geographic location of several
countries.
Chapter 03 – National Differences in Economic Development
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INCORPORATING globalEDGE™ EXERCISES
Exercise 1
Increased instability in the global marketplace can introduce risks in a company’s daily
transactions that can be unanticipated. Your company must evaluate these commercial
transaction risks for its foreign operations in Argentina, China, Egypt, Poland, and South
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
Answers to Exercises
Exercise 1 Answer
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
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
Chapter 03 – National Differences in Economic Development
Additional Info:
The AON website includes a terrorism risk map, in addition to a political risk map, where