Lecture 3: Major Economic Systems THE INTERNATIONAL BUSINESS ENVIRONMENT DR(PROF) M AMBASHANKAR

OVERVIEW OF ECONOMIC SYSTEMS The planned economy – total ownership and control by the state The market economy – ownership and control in private hands, but with state intervention to ensure fair and competitive markets The mixed economy – mixture of state ownership/control and private enterprises DR(PROF) M AMBASHANKAR

LAISSEZ-FAIRE CAPITALISM Freedom of enterprise, allowing individuals and organizations to accumulate private wealth Competitive markets, guided by supply and demand Protection of private property, including land and other assets, including intellectual property While termed a free-market model, it is not without governmental regulation: note the role of regulation in curtailing harmful, unfair and anti-competitive activities DR(PROF) M AMBASHANKAR

PORTER’S FIVE-FORCES MODEL OF INDUSTRY STRUCTURE – USED TO ASSESS THE DEGREE OF COMPETITIVENESS IN AN INDUSTRY Potential entrants – if there are high barriers to entry (such as huge capital investment) new entrants will be deterred Intensity of rivalry among existing competitors – where firms are evenly balanced in terms of investment needed or products offered, rivalry is more intense Pressure from substitute products Bargaining power of buyers, such as powerful supermarket chains Bargaining power of sellers, such as oil companies DR(PROF) M AMBASHANKAR

MARKET STRUCTURES Markets are characterized by degrees of competitiveness In the most competitive markets, there are few barriers to entry and exit. At the opposite extreme, in a monopoly, there is only one player and no competition In an oligopoly there are two players who dominate the market DR(PROF) M AMBASHANKAR

Divergent capitalisms DR(PROF) M AMBASHANKAR

THE SOCIAL MARKET MODEL OF CAPITALISM Significant state involvement in the economy High level of regulation Extensive social welfare programmes and protective employment legislation Corporate governance emphasizing stakeholder rather than shareholder values Weak market for corporate takeovers DR(PROF) M AMBASHANKAR

ASIAN CAPITALISM Japan – developmental state model, based on state guidance of corporations towards national goals, but without extensive state ownership; groups of companies. Asian tiger economies, such as S. Korea, Taiwan, Singapore – strong state intervention; groups of companies, often family owned. DR(PROF) M AMBASHANKAR

CHINA’S ECONOMIC MODEL Rapid economic growth driven by export-led manufacturing and foreign direct investment (FDI) Transition from state-owned enterprises to private enterprises, which are now driving economic growth Growing consumer society, but divergence between the prosperous coastal areas and poorer rural areas DR(PROF) M AMBASHANKAR

TRANSITION ECONOMIES OF CENTRAL AND EASTERN EUROPE Privatization of former state-owned industries Setting up of new legal and regulatory frameworks Uneven progress in overcoming problems of unemployment and inflation New democratic institutions following the fall of Communist regimes Economic integration with EU structures, culminating in EU membership for 10 countries in 2004 DR(PROF) M AMBASHANKAR

ECONOMIC DIVERGENCE AND EU ENLARGEMENT Accession 10 and aspiring countries are generally poorer than EU-15 countries (see figure below). Aspiring countries have large agricultural sectors of over 30% of employment. Figure: Accession 10 states as percentage of EU GDP DR(PROF) M AMBASHANKAR

CONCLUDING SUMMARY AND QUESTIONS Liberalization and the opening of markets globally offer unprecedented opportunities for international business. European social market capitalism has undergone liberalizing changes – what are the effects on these economies and societies? Asian countries represent divergent capitalist models, the most recent of which is China. How sustainable is the Chinese model in the long term? DR(PROF) M AMBASHANKAR