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Global Business Today 6e

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1 Global Business Today 6e
by Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2 National Differences in Political Economy
Chapter 2 National Differences in Political Economy

3 Introduction Question: What is the political economy of a country?
A country’s political economy refers to its political, economic, and legal systems These systems are interdependent, and interact and influence each other A country’s political system has major implications for the practice of international business

4 Political Systems A political system is the system of government in a nation Political systems can be assessed in terms of the degree to which they emphasize collectivism as opposed to individualism in terms of the degree to which they are democratic or totalitarian

5 Classroom Performance System
The political, economic and legal systems of a country are called Political systems Economic systems Legal systems Political economy Classroom Performance System Answer: d

6 Collectivism and Individualism
Collectivism refers to a system that stresses the primacy of collective goals over individual goals Collectivism can be traced to the ancient Greek philosopher Plato Today, socialists support collectivism When collectivism is emphasized, the needs of the society as whole are generally viewed as being more important than individual freedoms

7 Collectivism and Individualism
Socialism Modern socialists trace their roots to Karl Marx who advocated state ownership of the basic means of production, distribution, and exchange The state then manages the enterprises for the benefit of society as whole

8 Collectivism and Individualism
In the early 20th century, socialism split into communists and social democrats Communists generally believed that collectivism could only be achieved though revolution and totalitarian dictatorship, while social democrats worked to achieve the same goals by democratic means Many state-owned enterprises failed to succeed, and today, many nations are implementing privatization programs whereby state-owned enterprises to private investors

9 Collectivism and Individualism
Individualism is a political philosophy that suggests individuals should have freedom over their economic and political pursuits It can be traced to Aristotle who argued that individual diversity and private ownership are desirable Individualism stresses individual freedom and self-expression letting people pursue their own self-interests to achieve the best overall good for society democratic systems and free markets

10 Classroom Performance System
Individuals who believe socialism can be achieved only through revolutions and totalitarian dictatorship are called Social democrats Communists Individualists Representative democrats Classroom Performance System Answer: b

11 Democracy and Totalitarianism
Question: What is the difference between a democracy and totalitarianism? Democracy is a political system in which government is by the people, exercised either directly or through elected representatives Totalitarianism is a form of government in which one person or political party exercises absolute control over all spheres of human life, and opposing political parties are prohibited

12 Democracy and Totalitarianism
Generally, democracy and individualism go hand in hand The most common form of democracy today is representative democracy, where elected representatives vote on behalf of constituents

13 Democracy and Totalitarianism
Collectivism and totalitarianism generally go hand in hand In most totalitarian regimes there is widespread political repression there are no free and fair elections media is censored basic civil liberties are denied challenges to the regime are prohibited

14 Democracy and Totalitarianism
There are four major forms of totalitarianism today: communist totalitarianism: advocates achieving socialism through totalitarian dictatorship theocratic totalitarianism: political power is monopolized by a party, group, or individual that governs according to religious principles tribal totalitarianism: a political party that represents the interests of a particular tribe monopolizes power right wing totalitarianism: individual economic freedom is allowed but individual political freedom is restricted in the belief that it could lead to communism

15 Classroom Performance System
Which system emphasizes individual freedom and self-expression? Individualism Collectivism Theocratic totalitarianism Tribal totalitarianism Classroom Performance System Answer: a

16 Economic Systems Political ideology and economic systems are connected
There are three types of economic systems: the market economy, the command economy, and the mixed economy A free market system is likely in countries where individual goals are given primacy over collective goals State-owned enterprises and restricted markets are common in countries where collective goals are dominant

17 Market Economy In a pure market economy the goods and services that a country produces, and the quantity in which they are produced is determined by supply and demand Consumers, through their purchases, determine what us produced and in what quantity The role of government is to encourage free and fair competition between private producers

18 Command Economy In a pure command economy the goods and services that a country produces, the quantity in which they are produced, and the price at which they are sold are all planned by the government All businesses are state owned, and so have little incentive to control costs and be efficient Because there is no private ownership, there is little incentive to better serve consumer needs

19 Mixed Economy A mixed economy includes some elements of a market economy and some elements of a command economy Governments tend to take over troubled firms that are considered to be vital to national interests The number of mixed economies in the world today is falling

20 Classroom Performance System
Which of the following is not one of the three broad types of economic systems? Market economy Command economy Mixed economy Free economy Classroom Performance System Answer: d

21 Legal Systems The legal system of a country refers to the rules, or laws, that regulate behavior, along with the processes by which the laws of a country are enforced and through which redress for grievances is obtained A country’s legal system is important because laws regulate business practice laws define the manner in which business transactions are to be executed laws set down the rights and obligations of those involved in business transactions

22 Different Legal Systems
There are three main types of legal systems: Common law (based on tradition, precedent, and custom) found in most of Great Britain’s former colonies, including the United States Civil law (based on a very detailed set of laws organized into codes) found in over 80 countries, including Germany, France, Japan, and Russia Theocratic law (based on religious teachings) Islamic law is the most widely practiced

23 Differences in Contract Law
Question: How do common law and civil differ? The two systems approach contract law (the body of law that governs contract enforcement) in different ways A contract is a document that specifies the conditions under which an exchange is to occur and details the rights and obligations of the parties involved In a common law state, contracts are very detailed will all contingencies spelled out In a civil law state, contracts are shorter and much less specific

24 Differences in Contract Law
Question: In a contract dispute, which country’s laws should apply? The United Nations Convention in Contracts for the International Sales of Goods (CIGS) establishes a uniform set of rules governing certain aspects of the making and performance of everyday commercial contracts between sellers and buyers who have their places of business in different nations Countries that adopt CIGS signal to other nations that they will treat the Convention’s rules as part of their law

25 Classroom Performance System
Which type of legal system is based on a very detailed set of laws organized into codes? Contract law Civil law Common law Theocratic law Classroom Performance System Answer: b

26 Property Rights and Corruption
Property rights (the legal rights over the use to which a resource is put and over the use made of any income that may be derived from that resource) are very important for the functioning of business Property rights can be violated by private action (theft, piracy, blackmail, and the like by private individuals or groups) by public action (when public officials extort income or resources from property holders using various legal mechanisms including excessive taxation, requiring expensive licenses or permits from property holders, or taking assets into state ownership without compensating the owners)

27 Property Rights and Corruption
Corruption is present in all countries to some degree, however when a country has a high level of corruption Foreign direct investment falls International trade falls Economic growth falls

28 Property Rights and Corruption
Rankings of Corruption by Country 2007

29 Foreign Corrupt Practices Act
To limit corruption in the U.S., the Foreign Corrupt Practices Act was passed The Act makes it a violation of the United States’ law to bribe a foreign government official in order to obtain or maintain business over which the foreign official has authority, and requires all publicly traded countries to keep detailed records so that it is clear whether a violation of the act has occurred The Act does allow facilitating or expediting payments for secure the performance of routine government actions Country Focus: Corruption in Nigeria Summary This feature describes the corruption that has characterized Nigeria’s economy over the last 40 years. When the country initially gained its independence from Britain in 1960, expectations were high that Nigeria would become an economic heavyweight in Africa. With abundant natural resources and a large population, it seemed the stage was set for success. However, despite earnings of more than $500 billion from oil sales during the period 1970 to 2007, the country still suffered from extreme poverty, illiteracy, and high debt. Several factors have been blamed for Nigeria’s troubles including political instability and corruption. Furthermore, in 2007, Transparency International ranked Nigeria one of the most corrupt countries in the world, and the Human Development Index ranked the country a dismal 159 out of 177. Suggested Discussion Questions 1. What is meant by corruption? Explain how a corrupt political system affects the well being of a country. Discussion Points: Corruption in Nigeria involved open and systematic plundering of the nation’s state treasury. Bribery was also a regular part of business. In fact, the situation in Nigeria is so dismal that Transparency International ranked Nigeria one of the most corrupt countries in the world. When a country experiences this sort of activity, returns on business investments are lower, and there is less incentive for inward foreign direct investment. Most students will recognize that this then negatively affects economic growth. 2. With its huge oil reserves and large population, Nigeria was expected to emerge as a major player in Africa. Yet today the country is extremely poor with little expectation for an economic turnaround any time in the near future. Explain how Nigeria came to be in such a sad state. Discussion Points: Studies show that countries with high levels of corruption have lower inward foreign direct investment, lower levels of international trade, and poor levels of economic growth. Nigeria is a perfect example of this type of country. Political strife resulting from in-fighting between the country’s various tribes and ethnic groups led to instability and questionable legitimacy in the government. Military dictatorships were inept and corrupt. Because the country is viewed so poorly thanks to its level of corruption and political instability, investors are reluctant to bring in the kinds of funds that could help the economy grow. 3. Clearly, Nigeria’s corrupt government has been a major factor in the country’s demise. In contrast, other countries including Finland and Canada expressly prohibit corruption. In your opinion, would Nigeria be better off following the example of countries like Finland and Canada? Why or why not? Discussion Points: Many students will probably suggest that even if Nigeria explicitly prohibits corrupt behavior, it is unlikely to have little effect on the real way of doing business in the country. In fact, they will probably point out that Nigeria’s current president, Olusegun Obasanjo, promised to put an end to corruption in the country, but so far has only succeeded in lowering it. Other students however, might see his efforts as a starting point, and view the future more optimistically. Teaching Tip: The CIA’s World Factbook on Nigeria { provides a wealth of information on the country. Teaching Tip: To learn more about Transparency International’s corruption ranking of Nigeria, and general perspective of the country go to {

30 The Protection of Intellectual Property
Intellectual property is property, such as computer software, a screenplay, or the chemical formula for a new drug, that is the product of intellectual activity Internet Extra: Focus on Intellectual Property Rights is the U.S government’s web page on intellectual property rights. The site is at { 1. Click on What is Intellectual Property. List some examples of intellectual property. 2. Next, click on The Cost of Developing a New Drug. What protections do you feel should be awarded to pharmaceutical firms? Why? 3. Last, click on Taking Action. How are countries fighting intellectual property rights violations?

31 The Protection of Intellectual Property
Intellectual property rights include patents (documents giving the inventor of a new product or process exclusive rights to the manufacture, use, or sale of that invention) copyrights (exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and dispose of their work as they see fit) trademarks (designs and names, often officially registered, by which merchants or manufacturers designate and differentiate their products) Management Focus: Starbucks Wins Key Trademark Case in China Summary This feature focuses on intellectual property laws in China. When Starbucks entered China in 1999, the company was quickly challenged by a look-alike competitor, Shanghai Xing Ba Ke Coffee Shop. Not only did the name Xing Ba Ke mimic the Starbucks name, but Xing Ba Ke’s stores were virtual replicas of those operated by Starbucks. In 2003, Starbucks sued Xing Ba Ke for trademark violations. In 2006, Starbucks won its case, and Xing Ba Ke was fined $62,000 and ordered to stop using its name. The case was seen as a break through of sorts, a signal that China was finally caving to pressure from other nations and the World Trade Organization to respect intellectual property rights. Today, Starbucks operates over 300 stores in China and expects the market to become second only to the U.S. Suggested Discussion Questions 1. Discuss the concept of property rights protection and why it is so important to companies. What does he court ruling against Xing Ba Ke mean for other companies that are already doing business in China, or are considering entering the market? Discussion Points: Most students will recognize that firms that depend on proprietary property such a brand name or technology for their competitive advantage probably also rely on property rights protection to ensure that competitors cannot benefit from their efforts. The finding against Xing Ba Ke is a symbol that property rights protection should be taken seriously, and that blatant violations of property rights will not be tolerated. 2. How important is the Chinese market to Starbucks? Does the presence of look-alike companies like Xing Ba Ke deter firms from entering the market? Discussion Points: With its growing middle class, the potential in the Chinese market is vast. Some students might argue that the presence of Xing Ba Ke is actually a positive force for Starbucks in that the coffee shop helps to promote the idea of coffee consumption in the Starbucks’ way. Most students however, will probably suggest that companies like Xing Ba Ke are a nuisance because they could potentially damage the reputation of Starbucks if customers have a negative experience at the stores, and because they require constant monitoring, and are a drain on profits. Teaching Tip: To explore Starbucks in more depth, go to the company’s web site at { Click on “International” to explore individual country sites.

32 The Protection of Intellectual Property
The protection of intellectual property rights differs greatly from country to country The Paris Convention for the Protection of Industrial Property is an agreement signed by 96 countries to protect intellectual property rights The Trade Related Aspects of Intellectual Property Rights (TRIPS) requires WTO members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years

33 Product Safety and Product Liability
Product safety laws set certain safety standards to which a product must adhere Product liability involves holding a firm and its officers responsible when a product causes injury, death, or damage Liability laws are usually least extensive in less developed countries Firms must decide whether to adhere to the standards of the home country or the standards of the host country

34 The Determinants of Economic Development
A country’s level of economic development affects its attractiveness as a possible market or production location for firms

35 Differences in Economic Development
One common measure of economic development is a country’s gross national income (GNI) per head of population A purchasing power parity (PPP) adjustment allows for a more direct comparison of living standards in different countries Because both GNI and PPP data only provide a static picture of development, it is also important to consider growth rates

36 Differences in Economic Development
GNI per Capita, 2006

37 Differences in Economic Development
GNI PPP per Capita, 2006

38 Differences in Economic Development
Growth Rate in GDP per Capita,

39 Broader Conceptions of Development: Amartya Sen
Nobel Prize winning economist Amartya Sen argued that development should be assessed less by material output and more by the capabilities and opportunities that people enjoy To reflect Sen’s ideas and gauge a country’s economic development and likely future growth rate, the United Nations created the Human Development Index based on life expectancy, education attainment, and whether average incomes are sufficient to meet the basic needs of life in a country

40 Broader Conceptions of Development: Amartya Sen
Human Development Indicators, 2005

41 Political Economy and Economic Progress
Question: What is the relationship between political economy and economic progress? There is broad agreement among experts that innovation (new products, new processes, new organizations, new management practices, and new strategies) and entrepreneurship are the engines of long-run economic growth Entrepreneurs first commercialize innovative new products and processes Some experts argue that economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or mixed economy Country Focus: Emerging 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 land holders 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 land holders are granted 40 – 70 year leases, and rural land holders 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. Suggested Discussion Questions 1. What prompted the new property law in China? Why did it take so long to actually develop the law? Discussion Points: China’s economy has undergone significant changes over the last 30 years. The country has shifted from a centrally planned economy where state ownership ruled, to a dynamic market based system where some two thirds of economic activity is now conducted by private companies. So, while the state technically still controls all land, the new law means that private enterprises have a greater opportunity to behave as true land owners. The new law took 14 years to create thanks to significant opposition from Communist Party activists who believe that it violates basic communist policies. 2. China’s new law has implications for both urban land holders and rural land holders, but it is especially important for the latter group. Explain what China’s new property law means for farmers. Discussion Points: The new law is important for both farmers and other land holders because it grants land holders the right to a long lease and the opportunity to renew the lease. In the past, many farmers found themselves evicted from their farms without compensation when the state took the land for housing or factories. Under the new law, while the state technically still controls all land, and could therefore, appropriate it, farmers have a more stable, secure environment. If the state needs the land, the farmer must be compensated. Still, the law fails to give farmers ownership rights to their land, and effectively prevents them from either acquiring additional land and taking advantage of scale economies, or selling their land, and moving into a more productive situation. Lecture Note: More details on China’s new property law are available at {

42 Political Economy and Economic Progress
Strong legal protection of property rights is another requirement for a business environment conducive to innovation, entrepreneurship, and economic growth It seems likely that democratic regimes are more conducive to long-term economic growth than a dictatorship, even one of the benevolent kind It also seems evident that the subsequent economic growth leads to establishment of democratic regimes

43 Geography, Education, and Economic Development
In addition to the political and economic systems, other factors can influence a country’s rate of economic development Geography can influence economic policy, and thus economic development Countries with favorable geography are more likely to engage in trade which can promote economic growth Education levels also influence economic development Countries that invest more in the education of their young people develop faster economically

44 States in Transition Since the late 1980s, a wave of democratic revolutions has swept the world, and many of the previous totalitarian regimes collapsed There has been a move away from centrally planned and mixed economies towards free markets

45 The Spread of Democracy
Democracy has spread to new countries because many totalitarian regimes failed to deliver economic progress to the majority of their population new information and communication technologies have broken down the ability of the state to control access to uncensored information 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

46 The Spread of Democracy
Political Freedom in 2007

47 The New World Order and Global Terrorism
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 International businesses must be aware of geopolitical forces that could affect their ability to operate in certain countries

48 The Spread of Market-Based Systems
Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies In general, command and mixed economies failed to deliver the kind of sustained economic performance that was achieved by countries that had adopted market-based systems, prompting many countries to shift to a market-based system

49 The Spread of Market-Based Systems
Distribution of Economic Freedom in 2008

50 The Nature of Economic Transformation
The shift toward a market-based economic system typically involves at least three distinct activities deregulation privatization the creation of a legal system to protect property rights

51 Deregulation 1. Deregulation
Involves removing legal restrictions on the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate

52 Privatization 2. Privatization
Transfers the ownership of state property into the hands of private investors Because private investors are motivated by potential profits to increase productivity, privatization should increase economic efficiency

53 Legal System A well-functioning market economy requires laws protecting private property rights and providing mechanisms for contract enforcement Without a legal system that protects property rights, and without the machinery to enforce that system, growth is hampered Many countries have made significant strides toward creating a strong legal system, but more work is necessary

54 Implications of a Changing Economy
The changes in the political and economic systems have significant implications for international firms Markets that were formerly off-limits to Western business are now open China (population of 1.2 billion) could be a bigger market than the U.S., the EU, and Japan combined India (population 1.1 billion) is also a potentially huge market However, just as the potential gains are large, so are the risks

55 Implications for Managers
Question: What are the implications of the political economy for international businesses? There are two main implications the political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business the political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

56 Benefits The long-run benefits of doing business in a country are a function of market size, and current and future consumer purchasing power By identifying and investing early in a potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market)

57 Costs Firms must be prepared to deal costs of doing business in foreign markets Political costs include the cost of paying bribes or lobbying for favorable or fair treatment Economic costs relate primarily to the sophistication of the economic system, including the infrastructure and supporting businesses Legal costs can be higher in countries with dramatically different product, workplace, and pollution standards, or where there is poor legal protection for property rights

58 Risks Doing business in foreign markets involves risk
Political risk (the likelihood that political forces will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise) Economic risk (the likelihood that economic mismanagement will cause drastic changes in a country's business environment that adversely affects the profit and other goals of a business enterprise) Legal risk (the likelihood that a trading partner will opportunistically break a contract or expropriate property rights)

59 Overall Attractiveness
The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country Generally, the costs and risks are lower in economically developed and politically stable markets However, the potential for growth may be higher in less developed nations Internet Extra: The U.S. State Department produces a series of annual "Country Reports“. The site is { 1. Click on Doing Business in International Markets. Discuss the ways the State Department helps American companies doing business in other countries. 2. Next, click on More Business Information and then on Investment Climate Statements. Compare the investment climate in several countries. Where would you invest? Which countries would you avoid?

60 Classroom Performance System
Which type of risk involves the likelihood that a trading partner will opportunistically break a contract or expropriate intellectual property rights? Contract risk Economic risk Legal risk Political risk Classroom Performance System Answer: c

61 Critical Discussion Question
1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth! Discuss. Answer: In a market economy, private individuals and corporations are allowed to own property and other assets. This right of ownership provides a powerful incentive for people to work hard, introduce new products, develop better advertising campaigns, invent new products, etc., all in the hopes of accumulating additional personal capital and wealth. In turn, the constant search on the part of individuals and corporation to accumulate wealth enriches the entire economy and creates economic growth. In contrast, in a command economy, private individuals and corporations are not allowed to own substantial quantities of property and other assets. The objective of a command economy is for everyone to work for “the good of the society.” Although this sounds like a noble ideal, a system that asks individuals to work for the good of society rather than allowing individuals to build personal wealth does not provide a great incentive for people to invent new products, develop better advertising campaigns, find ways to be more efficient, etc. As a result, command economies typically generate less innovation and are less efficient than market economies.

62 Critical Discussion Question
2. A democratic political system is an essential condition for sustained economic progress. Discuss. Answer: This question has no clear-cut answer. In the West, we tend to argue that democracy is good for economic progress. This argument is largely predicated upon the idea that innovation is the engine of economic growth, and a democratic political system encourages rather than stifles innovation. However, there are examples of totalitarian regimes that have fostered a market economy and strong property rights protection and experienced rapid economic growth. The examples include four of the fastest growing economies of the past 30 years – South Korea, Taiwan, Singapore, and Hong Kong – all of which have grown faster than Western economies. However, while it is possible to argue that democracy is not a necessary precondition for the establishment of a free market economy, it seems evident that subsequent economic growth leads to establishment of democratic regimes. Several of the fastest-growing Asian economies have recently adopted more democratic governments.

63 Critical Discussion Question
3. What is the relationship between corruption (i.e., bribe taking by government officials) in a country and economic growth? Is corruption always bad? Answer: Economic evidence suggests that high levels of corruption significantly reduce the economic growth rate in a country. By siphoning off profits, corrupt politicians and bureaucrats reduce the returns to business investment, and hence, reduce the incentive that both domestic and foreign businesses have to invest in that country. The lower level of investment that results has a negative impact on economic growth. However, while most students will probably agree that corruption is bad, some may point out that the U.S., despite its Foreign Corrupt Practices Act, does allow “grease payments” to expedite or secure the performance of a routine governmental action. According to Congress, “grease payments” while technically bribes are not being used to obtain or maintain business, but rather are simply made to facilitate performance of duties that the recipients are already obligated to perform.

64 Critical Discussion Question
4. The Nobel prize-winning economist Amartya Sen argues that the concept of development should be broadened to include more than just economic development. What other factors does Sen think should be included in an assessment of development? How might adoption of Sen’s views influence government policy? Do you think Sen is correct that development is about more than just economic development? Explain. Answer: Sen has argued that development be assessed less by material output measures such as GNP per capita, and more by the capabilities and opportunities that people enjoy. Sen suggests that development be seen as a process of expanding real freedoms that people experience, and as such, that development requires the removal of major impediments to freedom. Governments influenced by Sen might ensure that basic health care and education programs are available especially for women. Many students will agree with Sen and the notion that development is not just an economic process, but a political one too, and that to succeed citizens must be given a voice in the important decisions made for the country.

65 Critical Discussion Question
5. You are the CEO of a company that has to choose between making a $100 million investment in either Russia or the Czech Republic. Both investments promise the same long-run return, so your choice of which investment to make is driven by considerations of risk. Assess the various risks of doing business in each of these nations. Which investment would you favor and why? Answer: When assessing the risks of investment, one should consider the political, economic, and legal risks of doing business in either Russia or the Czech Republic. Today, the risk in Russia would probably be considered higher than the risk in the Czech Republic. The Czech Republic has recently been accepted as a member of the EU, and as such gains the benefits and stability offered by the EU. Russia, by contrast, is still many years away from even being in a position to be considered by the EU for membership. Depending upon when you are using the book, this situation could be different. (You also may want to substitute other countries into this question depending on current events and the countries with which you feel your students will be most familiar.)

66 Critical Discussion Question
6. Read the Opening Case on India in this chapter and answer the following questions: a. What kind of economic system did India operate during ? What kind of system is it moving towards today? What are the impediments to completing this transformation? b. How might widespread public ownership of businesses 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 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 that the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why? Answer: a. The economic system that developed in India after 1947 was a mixed economy characterized by a large number of state-owned enterprises, centralized planning, and subsidies. In 1991, India’s government embarked on an ambitious economic reform program. Much of the industrial licensing system was dismantled, and several areas once closed to the private sector were opened. In addition, investment by foreign companies was welcomed, and plans to start privatizing state-owned businesses were announced. India has posted impressive gains since 1991, however there are still impediments to further transformation. Attempts to reduce import tariffs have been stalled by political opposition from employers, employees, and politicians. Moreover, the privatization program has been slowed thanks to actions taken by the Supreme Court. Finally, extreme poverty continues to plague the country. b. The mixed economy that developed in India after 1947 was characterized by a large number of state-owned enterprises, centralized planning, and subsidies. This system not only constrained the growth of the private sector, but it also consequently limited the effects of competition that typically promote efficiency and productivity in a free market system. The system even limited the actions of private companies, requiring them to get government approval for routine business activities. Production quotas and high import tariffs also stunted the development of a healthy private sector, as did restrictive labor laws that made it difficult to fire employees. Foreign exchange restrictions, limitations on foreign investment, controls on land use, and managed prices further exacerbated the situation. It would appear that India’s rate of economic growth was negatively affected during this time frame. By 1994, India’s economy was still smaller than Belgium’s despite having a large population. Both GDP and literacy rates were very low, and a huge percentage of the population lived in poverty. c. In 1991, India’s government embarked on an ambitious economic reform program. So far, the response to the program has been impressive. The economy expanded at an annual rate of about 6.3 percent from 1994 to 2004, and 9 percent annually from 2005 to Foreign investment is up from $150 million in 1991 to $15.3 billion in Certain sectors of the economy including information technology and pharmaceuticals have done particularly well. Still, problems persist. Actions taken by the government continue to limit efficiency gains for private companies and the country’s high rate of poverty is still a major problem. d. India’s gains in information technology and pharmaceuticals are impressive. The country has emerged as a vibrant global center for software development, and India’s pharmaceutical companies have taken a strong global position by selling low cost generic versions of drugs that have come of patent in the developed world. As these industries continue to prosper, other sectors of the economy should also see the benefit of spillover effects. e. Foreign investment is up in India. In fact, foreign investment rose from $150 million in 1991 to $15.3 billion in However, whether India is an attractive destination for foreign multinationals selling consumer products remains to be seen. Certainly, the large population will serve to attract some companies, but the fact that some 40 percent of the world’s population living in abject poverty are in India will scare other companies away. Moreover, it is still not easy to run a company in India thanks to laws limiting everything from who can be fired to who can manufacture certain products.

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