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National
Differences in
Economic
Development
Chapter 3

@ Mc Graw Hill LLC. Edited by: Dr Syed Sadullah Hussainy – GCC BUS629
 Learning Objectives
3-1 Explain what determines the level of economic
development of a nation.
3-2 Identify the macropolitical and macroeconomic
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.

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 Introduction
Economic Development
Differences among nations affect how attractive it is
for doing business.
Trends that foster greater economic development:
• Democratic forms of government.
• Market-based economic reforms.
• Legal systems that better enforce property rights.

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 Differences in Economic Development 1

Gross Domestic Product (GDP)

Measures the total monetary or market value of all the
finished goods and services produced within a country's
borders in a specific time period.
Japan, Sweden, Switzerland, Australia and the United States
have high GDP.
• China and India are significantly poorer.

GDP does not consider differences in the cost of living.

• Purchasing power parity (PPP) is an adjustment in gross domestic
product per capita to reflect differences in cost of living.

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 Map 3.1 GDP per capita, 2020

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 Table 3.1 Economic Data for Select Countries

GDP per GDP P P P Annual GDP Growth Size of Economy

Capita, per Capita, Rate, 2011 to 2020 GDP, 2020
Country 2020 ($) 2020 ($) (%) ($ billions)
Brazil $6,797 $14,836 0.3 $1,445
China 10,500 17,312 6.84 14,723
Germany 45,724 53,694 1.02 3,806
India 1,901 6,454 5.02 2,875
Japan 40,113 42,197 0.83 5,065
Nigeria 2,097 5,187 2.67 432
Poland 15,656 32,710 3.00 594
Russia 10,127 28,213 1.28 1,484
Switzerland 86,602 71,352 1.39 748
United Kingdom 40,285 44,916 0.64 2,708
United States 63,544 63,543 1.70 20,937

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 Differences in Economic Development 2

The “official” figures can be misleading.

Do not account for black economy transactions, such as
unrecorded cash transactions or barter agreements.
GDP 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 within the
next decade.
• India will be among the largest economies in the world.

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 Map 3.2 GDP PPP per Capita, 2020

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 Map 3.3 Average annual growth rate in
GDP (%), 2010 to 2019

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 Differences in Economic Development 3

Broader Conceptions of Development: Amartya Sen

Economic development should be assessed by the
capabilities and opportunities people enjoy.
• Development requires removing major impediments to
freedom: poverty, tyranny, poor economic opportunities,
systematic social deprivation, neglect of public facilities.
Economic progress requires the democratization of
political communities to give citizens a voice.

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 Differences in Economic Development 4

Broader Conceptions of Development: Amartya Sen

The United Nations used Sen’s ideas to develop the
Human Development Index (HDI) to measure
quality of human life in different nations.
• Life expectancy at birth.
• Educational attainment.
• Whether average incomes are sufficient to meet the basic
needs of life.

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 Map 3.4 Human Development Index,
2020

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 Political Economy and Economic Progress 1

Innovation and Entrepreneurship Are the Engines of

Growth
Innovation.
• New products along with 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.

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 Political Economy and Economic Progress 2

Innovation and Entrepreneurship Require a Market

Economy
• In market economies, any individual is free to try
out an innovative idea by starting a business, and
existing businesses are free to improve their
operations through innovation.
• In planned economies, there is little incentive to
develop new innovations because the state owns
all means of production and captures the gains.
• Strong relationship between economic freedom
and economic growth.
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 Political Economy and Economic Progress 3

Innovation and Entrepreneurship Require Strong

Property Rights
Without strong property rights, individuals and
businesses risk having innovations and potential
profits stolen.
• This reduces the incentive for innovation and
entrepreneurism.

Economist Hernando de Soto claims that

inadequate property protection in many developing
nations limits economic growth.
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 Political Economy and Economic Progress 4

The Required Political System

Democratic regimes are probably more conducive to
long-term economic growth.
• China, South Korea, Taiwan, Singapore, and Hong Kong
all had undemocratic governments but experienced rapid
economic growth.
• Property rights are only secure in well-functioning, mature
democracies.

Totalitarian states are detrimental to progress.

• They limit freedom and suppress human development.

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 Political Economy and Economic Progress 6

Geography, Education, Demographics and Economic

Development
Economist Jeffrey Sachs argues that countries with
favorable geography are more likely to engage in trade
and are open to market-based systems.
• Promotes faster economic growth.

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.

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 Political Economy and Economic Progress 7

Geography, Education, Demographics and

Economic Development
In terms of demographics, countries with a young
and growing population have greater growth
potential.
• Growing population increases supply of labor.
• Younger workers tend to consumer more than older
workers.
• Aging population implies a stress on government finances.

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 The Nature of Economic Transformation 1

The shift toward a market-based system involves:

• Deregulation.
• Privatization.
• A legal system to safeguard property rights.

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 The Nature of Economic Transformation 2

Deregulation
• Removing legal restrictions to the free play of
markets, the establishment of private enterprises,
and the manner in which private enterprises
operate.
• In command economies and mixed economies,
the state sets prices, owns businesses, limits
private enterprise, restricts investment by
foreigners, and restricts international trade.

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 The Nature of Economic Transformation 3

Privatization
Transfers ownership of state property to private
individuals.
• Movement started in Great Britain in early 1980s.

In many nations, economic activity is still dominated

by 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.
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 The Nature of Economic Transformation 4

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.
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 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?
• Is the risk associated with investment worth it?
• Is China’s financial system stable?
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 360° View: Managerial Implications 1

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Countries are more likely to have higher sustained
rates of economic growth with:
• Democratic regimes.
• Market-based economic policies.
• Strong property rights protection.

These markets are more attractive to international

businesses.

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 360° View: Managerial Implications 2

Benefits, Costs, Risks, and Overall Attractiveness

of Doing Business Internationally
Benefits:
• Based on size of the market, as well as current and future
purchasing power of its consumers.
• First-mover advantages enjoyed by early entrants.
• Late-mover disadvantages suffered by late entrants.
• A country’s economic system, property rights regime, and
education systems are good predictors of economic
prospects.

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 360° View: Managerial Implications 3

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Costs:
• Political system: is it necessary to pay bribes to get market
access?
• Economic level: are the necessary supporting businesses
and infrastructures in place?
• Legal system: how do local laws and regulations affect
business decisions? Are there well-established contract
laws?

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 360° View: Managerial Implications 4

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Risks:
• Political risk: likelihood that political forces will cause drastic
changes in a country’s business environment that will
adversely affect a business’s profit and other goals.
• Economic risk: likelihood that economic mismanagement will
cause drastic changes in a country’s business environment
that adversely affect a business’s profit and other goals.
• Legal risk: likelihood that a trading partner will
opportunistically break a contract or expropriate property
rights.
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 360° View: Managerial Implications 5

Benefits, Costs, Risks, and Overall Attractiveness of

Doing Business Internationally
Overall Attractiveness:
• Based 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.

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 Figure 3.1 Country attractiveness

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