International Business

To be viewed together with the book

International Business- Competing in the Global Marketplace by Charles
H.W. Hill and G. Tomas M. Hult
National Differences in
Economic Development
Introduction
• Economic Development
• Differences among nations
• Attractiveness for doing business
• Trends that foster greater economic development
• Democratic forms of government
• Market-based economic reforms
• Legal systems to better enforce property rights
Differences in Economic Development
• Gross National Income (GNI)
• Japan, Sweden, Switzerland, and U.S. have high GNI
• China and India have low GNI
• GNI does not consider differences in the cost of living
• Need to adjust GNI figures using purchasing power parity (PPP)
Differences in Economic Development
• The “official” figures can be misleading
• Do not account for black economy transactions
• GNI and PPP data are static and do not consider economic growth rates
• China and India are currently relatively poor, but their economies are growing more
rapidly than many advanced nations
• China may become the world’s largest economy during the next decade
• India will become among the largest economies in the world
Differences in Economic Development
• Broader Conceptions of Development: Amartya Sen
• Economic development should be assessed by the capabilities and
opportunities people enjoy
• Development requires the removal of major impediments to freedom: poverty, tyranny,
poor economic opportunities
• Economic progress requires the democratization of political communities to
give citizens a voice
Differences in Economic Development
• Broader Conceptions of Development: Amartya Sen continued
• The United Nations used Sen’s ideas to develop the Human Development
Index (HDI) which is based on
• Life expectancy at birth
• Educational attainment
• Whether average incomes are sufficient to meet the basic needs of life in a country
Political Economy and Economic Progress
• Innovation and Entrepreneurship Are the Engines of Growth
Innovation
• Includes new products, new processes, new organizations, new management practices,
and new strategies
Entrepreneurs
• First to commercialize innovative products and processes
• Provides much of the dynamism in an economy
Political Economy and Economic Progress
• Innovation and Entrepreneurship Require a Market Economy
• Little incentive to develop new innovations in planned economies because the
state owns all means of production and therefore, the gains
• E.g. North Korea; Pre 1991 India

• Strong relationship between economic freedom and economic growth

• Post 1991 India
Political Economy and Economic Progress
• Innovation and Entrepreneurship Require Strong Property Rights
• Without strong property rights, individuals and businesses risk having
innovations and potential profits stolen
• By government
• By powerful actors

• Economist Hernando de Soto claims that inadequate property protection in

many developing nations limits economic growth
Political Economy and Economic Progress
• The Required Political System
• Democratic regimes are probably more conducive to long-term economic
growth
• Property rights are only secure in well-functioning, mature democracies
• Totalitarian states are detrimental to progress
• They limit freedom
• They suppress human development
Political Economy and Economic Progress
• Economic Progress Begets Democracy
• Economic growth leads to establishment of democratic regimes
• South Korea
• Taiwan
• If China adopts a free market system, belief is that the country will have
• Greater individual freedoms
• Democracy
Political Economy and Economic Progress
• Geography, Education, and Economic Development
• Economist Jeffrey Sachs argues that countries with favorable geography are
• Coasts Vs. Landlocked
• More likely to engage in trade
• More open to market-based systems
• Countries that invest in education have higher growth rates because the
workforce is more productive
• Countries in Southeast Asia have offset their geographical disadvantage by
investing in education
• Pakistan Vs. South Korea
States in Transition
• Political economy of nation-states is marked by two trends
1. Democratic revolutions of the late 1980s and early 1990s
• Totalitarian governments fell
• Replaced by democratically elected governments
• Greater commitment to free market capitalism
2. A move away from centrally planned and mixed economies toward a more
free market approach
States in Transition
• The Spread of Democracy
• Many totalitarian regimes failed to deliver economic progress to the bulk of
their populations
• New information and communication technologies
• Reduced state’s ability to control access to uncensored information
• Created new conduits for the spread of democratic ideals
• Twitter and Facebook
• Economic advances have led to a prosperous middle class that has pushed for
democratic reforms
• People traveling
• People getting more demanding as they observe others
States in Transition
• The Spread of Democracy continued
• It is naïve to conclude that the spread of democracy will continue
unchallenged
• Democracy is still rare in parts of the world
• Sub-Saharan Africa
• Former communist Eastern and central Europe and former USSR
• Middle East and North Africa
• Signs that authoritarianism is gaining ground
• Russia, Ukraine, Indonesia, Ecuador, and Venezuela
• Egypt
• Do interventions make sense?
States in Transition
• The New World Order and Global Terrorism
• Author Francis Fukuyama argues the new world order will be characterized by
democratic regimes and free market capitalism
• Political scientist Samuel Huntington argues that while many societies are
modernizing, they are not becoming more Western
• Predicts a world split into different civilizations that will be in conflict making
business difficult
• Political position is more likely to be somewhere between Fukuyama and
Huntington
States in Transition
• The New World Order and Global Terrorism continued
• Global terrorism is a product of tensions between civilizations and a clash of
value systems and ideology
• Al-Qaeda and ISIS
• Struggle between radicalized Sunni and Shia factions within Islam
• Former U.S. Secretary of State Colin Powell maintains that terrorism is one of
the major threats to world peace and economic progress
States in Transition
• The Spread of Market-Based Systems
• A shift from centrally planned economies to market-based economies
• More than 30 countries in the former Soviet Union and eastern European
communist bloc
• Change also occurring in Asian and African states
• Command and mixed economies failed to deliver the sustained economic
growth achieved in market-based countries
The Nature of Economic Transformation
• The shift toward a market-based system involves
• Deregulation
• Privatization
• A legal system to safeguard property rights
The Nature of Economic Transformation
• Deregulation
• Deregulation in command economies- USSR
• Removing price controls
• Abolishing laws regulating the establishment and operation of private enterprise
• Relaxing or removing restrictions on direct investment by foreign enterprises
• Deregulation in mixed economies involved the same initiatives as in
command economies
• Transition was easier due to a vibrant private sector
• UK; India?
The Nature of Economic Transformation
• Privatization
• A way to stimulate economic efficiency
• Started in Great Britain in early 1980s
• In many nations economic activity is still in the hands of state-owned
enterprises
• Selling state-owned enterprises not enough to guarantee economic growth
• For privatization to work it must be paired with a general deregulation and
opening of the economy
The Nature of Economic Transformation
• Legal Systems
• A well-functioning market economy requires laws
• Need to protect property rights
• Mechanisms for contract enforcement
• Adoption of a legal system requires time to function well
• Institutional weaknesses undermine contract enforcement in most countries
• Progress being made regarding laws on property rights
Implications of Changing Political Economy
• Ideological conflict between collectivism and individualism is less
prevalent today
• Western ideology more widespread
• Markets formerly off-limits to Western business are now open presenting a
huge potential for business
• Potential risks are large
• Will democracy thrive during difficult times?
• Will totalitarian regimes return? Current Situation?
• Is the risk associated with investment worth it?
• Is China’s financial system stable?
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally
• Countries are more likely to have higher sustained rates of economic growth
when they have
• Democratic regimes
• Market based economic policies
• Strong property rights protection
• These markets are more attractive to international businesses
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally continued
• Benefits of doing business in a country based on
• The size of the market
• The current and future purchasing power of its consumers- South Korea (1960-2017)
• First-mover advantages
• Late-mover disadvantages (China)
• A country’s economic system and property rights regime good predictors of
economic prospects
• Market Size
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally continued
• The costs of doing business in a country based on
• Political system: is it necessary to pay bribes to get market access?
• Economic level: are the necessary supporting business and infrastructure in
place?
• Electricity; Internet; Supply chains; Quality of Supplies (McDonalds in Russia)
• Legal system: how do local laws and regulations affect business decisions? Are
there well-established contract laws?
• Protection of Intellectual Property
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally continued
• The risks of doing business in a country based on
• Political risk- Social Unrest/ Political Instability/ Violent Conflict- Arab Spring
• Economic risk- Economic Mismanagement/ Inflation/ Government Debt- Fall of
oil prices- Russia/ Venezuela
• Legal risk- Contract Breaking- IBM and Coca Cola (1970’s)
Focus on Managerial Implications
• Benefits, Costs, Risks, and Overall Attractiveness of Doing Business
Internationally continued
• Overall attractiveness of a potential market to international
business
• Depends on balancing the benefits, costs, and risks associated with doing business
in that country
• Other things being equal, the benefit-cost-risk trade-off is likely to
be most favorable in politically stable developed and developing
nations that have free market systems and no dramatic upsurge in
either inflation rates or private sector debt
Questions?