1. Global Business Today 8e
by Charles W.L. Hill

2. Political Economy and Economic Development
Chapter 3
Political Economy and Economic Development

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. Differences of Economic Development
A country’s level of economic development affects its attractiveness as a possible market or production location for firms
A common measure is gross national income (GNI)
A purchasing power parity (PPP) adjustment provides a more direct comparison of living standards in different countries

5. Differences in Economic Development
GNI per Capita in U.S. Dollars

6. Differences in Economic Development
Purchasing Power Parity in International Dollars

7. Differences in Economic Development
Economic Data for Select Countries

8. Differences in Economic Development
GNI and PPP data provide a static picture of development. It is also important to consider growth rates.
Average Annual Growth Rate GNP

9. Broader Conceptions of 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
Reflects Sen’s ideas and gauges a country’s economic development and likely future growth rate

10. Broader Conceptions of Development
Levels of Human Development

11. Political Economy and Economic Progress
Question: What is the relationship between political economy and economic progress?
Answer:
Economic freedom in a market economy creates greater incentives for innovation and entrepreneurship than in 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 {

12. Innovation and Entrepreneurship are the Engines of Growth
For a country to sustain long term economic growth, the business environment needs to be conducive to innovation and entrepreneurial activity
Innovation - new products, new processes, new organizations, new management practices, and new strategies
Entrepreneurs first commercialize innovative new products and processes
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 {

13. Putting it into Practice
Entrepreneurs from China:
The new game changers?
Some of the world’s most successful entrepreneurs call China home.

14. Innovation and Entrepreneurship Require a Market Economy
Countries with high economic freedom have high economic growth and richer citizens
Hong Kong, Singapore, the U.S., Canada, and Germany
Countries that lack economic freedom also fail to achieve respectable economic growth

15. Innovation and Entrepreneurship Require Strong Property Rights
Strong legal protection of property rights is another requirement for a business environment conducive to innovation, entrepreneurship, and economic growth
Individuals and businesses must have the opportunity to profit from innovative ideas

16. The Required Political System
Democratic regimes tend to be more conducive to long-term economic growth than dictatorships – even the benevolent kind
Limiting human freedom also suppresses human development and therefore limits progress
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 {

17. Economic Progress Begets Democracy
Democracy is often a consequence of economic growth
South Korea and Thailand
This has contributed to the attitude of many Western governments towards human rights violations in China
If China establishes a free market system, it is hoped that greater individual freedom and democracy will follow

18. Geography, Education, and Economic Progress
Other factors influencing a country’s rate of economic development include:
Geography - influences economic policy, and thus economic development
Countries with favorable geography are more likely to engage in trade which can promote economic growth
Education levels
Countries that invest more in the education of their young people develop faster economically

19. 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

20. 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

21. The Spread of Democracy
Political Freedom

22. 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
Geopolitical forces can affect how companies operate in certain countries

23. The Spread of Market-Based Systems
Since the late 1980s there has been a transformation from centrally planned command economies to market-based economies
Command and mixed economies failed to deliver the sustained economic performance achieved by countries that had adopted market-based systems
Many countries shifted to a market-based system

24. The Spread of Market-Based Systems
Economic Freedom

25. The Nature of Economic Transformation
The shift toward a market-based economic system involves:
Deregulation
Privatization
The creation of a legal system to safeguard property rights

26. Deregulation
Deregulation – involves removing legal restrictions on the free play of markets, the establishment of private enterprises, and the manner in which private enterprises operate
Removing price controls
Abolishing laws limiting private enterprise
Removing restrictions on foreign investment and trade
Country Focus: India’s Economic Transformation
Summary
This feature explores the economic transformation in India over the last two decades. After implementing a series of deregulation reforms, India’s economy has been expanding rapidly and the country has been the recipient of significant investment by foreign companies particularly in information technology and pharmaceuticals. These investments are helping India to become a force in global markets. Still, the country has some way to go. Recent efforts to reduce tariffs have met with opposition and laws still limit the operation of private enterprises. Discussion of this feature can begin with the following questions.
 Question 1: What kind of economic system did India operate during 1947 to 1990? What kind of system is it moving toward today? What are the impediments to completing this transformation?
Answer 1: From 1947 to 1990, India operated under a mixed economy that included several large state-owned enterprises, central planning, and subsidies. Today, the country is moving towards a market economy. Already a number of economic reforms have been implemented allowing for more privatization of key industries and attracting more foreign investment. However, tariffs are still high and efforts to lower them are meeting with opposition from companies that fear lower tariffs will bring in too much competition. Antiquated labor and manufacturing laws are also making it difficult for firms to operate competitively.
Question 2: How might widespread public ownership of business 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 1947 to 1990 time frame? How do you think these factors affected the rate of economic growth in India during this time frame?
Answer 2: Many students will probably agree that introducing privatization at a much earlier date could have led to greater corporate efficiency and generated more economic growth in India. Extensive government regulations also hampered the efforts of businesses to expand prior to In fact, it was India’s lack of growth that forced the government to implement the reforms in 1990 that have been responsible for prompting the economic turnaround the country is currently experiencing.
Question 3: 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?
Answer 3: Since 1990, India has been much more open to foreign investment, and extensive privatization of numerous industries has introduced a new level of competition to the market – competition that forces firms to become more efficient. Foreign investment in the county is up from just $150 million in 1991 to $36.7 billion in 2007, and the overall economy has grown at a much quicker rate. Growth rates from 1994 to 2004 were about 6.3 per year, but about 9 percent per year from 2005 to 2008.
Question 4: 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?
Answer 4: India’s information technology sector and pharmaceutical sector have been particularly successful in recent years. For example, in 2007, India’s software development sector had sales of $50 billion as compared to just $150 million in Many students will probably attribute much of the country’s success in these sectors to a combination of factors including a well-educated, low-cost workforce, and the country’s growing middle class. Students will probably note that success in these industries should have a spillover effect for other sectors of the economy.
Question 5: Given what is now occurring in the Indian economy, do you think the country represents an attractive target for inward investment by foreign multinationals selling consumer products? Why?
Answer 5: Many students will probably suggest that despite the many recent changes in India, consumer products manufacturers could still face significant challenges in the country. India’s laws make it difficult for private companies to operate efficiently, companies are limited in their ability to manufacture some products, and may also find it hard to fire workers. Still, the country’s new prosperity and large potential market could make it attractive to many companies.
Teaching Tip: Information on doing business in India is available at {

27. Privatization
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
Privatization efforts are more successful when they are accompanied by more general deregulation and opening of the economy

28. Market economies require a well-functioning legal system
Legal Systems
Market economies require a well-functioning legal system
It should protect property rights and the machinery to enforce that system
Many countries have made significant strides toward creating a strong legal system, but more work is necessary

29. Implications of Changing Political Economy
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

30. Putting it into Practice
Now open for business!
Economic and political reforms have transformed the country formerly known as Burma. Myanmar’s transition from a mostly closed economy to one that is wooing foreign investment has not gone unnoticed by MNEs. To learn more, consider { { and {

31. Implications for Managers
Question: What are the implications of the political economy for international businesses? Answer: The overall attractiveness of a country depends upon the balance between the likely benefits of doing business in that country against the likely costs and risks

32. Benefits
The 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 potential future economic stars, firms may be able to gain first mover advantages (advantages that accrue to early entrants into a market)

33. Costs
Firms must be prepared to deal with the 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

34. 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

35. 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?

36. Overall Attractiveness
Country Attractiveness

37. Putting it into Practice
Which market is more attractive?