1. Global Business Today 8e © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. by Charles W.L. Hill

2. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-2 Chapter 3 Political Economy and Economic Development

3. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-3 Introduction Question: What are the implications of a country’s political economy on its level of economic development and its environment for doing business? Answer: A country’s political economy influences its level of economic development Higher levels of economic development create a more favorable environment for international business

4. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-4 Differences in Economic Development  A country’s level of economic development affects its attractiveness as a possible market or production location for firms  One common measure 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

5. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-5 Differences in Economic Development  Amartya Sen - development should be assessed less by material output and more by the capabilities and opportunities that people enjoy  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

6. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-6 Political Economy and Economic Progress Question: What factors influence a country’s rate of economic development? 1.Innovation (new products, new processes, new organizations, new management practices, and new strategies) and entrepreneurship promote long-run economic growth 2.Geography - influences economic policy, and thus economic development 3.Education levels

7. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-7 States in Transition  Since the late 1980s:  A wave of democratic revolutions has swept the world  Many totalitarian regimes have collapsed  Countries have moved from centrally planned and mixed economies towards free markets

8. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-8 States in Transition  Democracy has spread to new countries because:  Many totalitarian regimes failed to deliver economic progress to the majority of their population  New technologies have broken down the ability of the state to control access to uncensored information  Economic advances have led to the emergence of prosperous middle and working classes who demand democratic reforms

9. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-9 States in Transition  The shift toward a market-based economic system involves: 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 2.Privatization - transfers the ownership of state property into the hands of private investors 3.Legal system - that protects property rights and the machinery to enforce that system

10. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-10 Implications of a Changing Economy Question: What are the implications of a changing economy for international firms? Markets that were formerly off-limits to Western business are now open China (population of 1.3 billion) could be a bigger market than the U.S., the EU, and Japan combined India (population 1.2 billion) is also a potentially huge market However, just as the potential gains are large, so are the risks

11. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-11 Implications for Managers Question: What are the benefits of doing business in foreign markets? The long-run monetary benefits of doing business in a foreign market are a function of the market’s size, and of the present and likely future wealth of its consumers Consider: First mover advantages – advantages that accrue to early entrants in a market Late mover disadvantages – handicaps that late entrants might suffer

12. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-12 Implications for Managers Question: What are the costs of doing business in foreign markets? Political, economic, and legal factors determine the costs of doing business in a country It may be necessary to pay bribes Infrastructure problems can raise the cost of doing business in underdeveloped markets Local regulations can raise the cost of doing business

13. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-13 Implications for Managers  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

14. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 3-14 Implications for Managers  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