Chapter 4: Economic Development of Nations

Developing Country (less developed)

nation that has a poor infrastructure and extremely low personal incomes. Also called less-developed countries

Emerging Markets

newly industrialized countries plus those with the potential to become newly industrialized

Expropriation

forced transfer of assets from a company to the government with compensation

Confiscation

forced transfer of assets from a company to the government without compensation

Developed Country

country that is highly industrialized and highly efficient, and whose people enjoy a high quality of life

Human Development Index

measure of the extent to which a government equitably provides its people with a long and healthy life, an education, and a decent standard of living

Newly Industrialized Country

A country that has recently increased the portion of its national production and exports derived from industrial operations

Describe China's and Russia's experiences with economic transition.

China: -Today, private businesspeople can even join China's Communist Party, and workers can elect local representatives to the official trade union. -Today, China's leaders describe its economic philosophy as "socialism with Chinese characteristics," and glistening skyscrapers dominate the Shanghai and Beijing cityscapes. The country's immense population, rising incomes, and expanding opportunities attract huge sums of investment. -China's leadership must deal with increasingly rapid economic and social change. Political and social problems pose threats to China's future economic performance. -Another potential problem is unemployment, largely the result of the collapse of state-owned industry, intensified competition, and the entry of international companies into China. -Another key issue is reunification of "greater China." Russia: -Russia's experience with communism began in 1917. For the next 75 years, factories, distribution, and all other facets of operations, including the prices of labor, capital, and products, were controlled by Russia's government. -In the 1980s, the former Soviet Union entered a new era of freedom of thought, freedom of expression, and economic restructuring. -Transition away from government ownership and central planning was challenging. Except for politicians, bureaucrats, and wealthy businesspeople (called "oligarchs" in Russia), ordinary people had difficulty maintaining their standard of living and affording many basic items. -As in so many other transitional economies, Russia must continue to foster managerial talent. Years of central planning delayed the development of managerial skills needed in a market-based economy. -Political instability, especially in the form of intensified nationalist sentiment, is another potential threat to progress. Strong ethnic and nationalist sentiments in the region can cause misunderstandings to spiral out of control quickly. -Russia's unstable investment climate is another concern among international businesses. Tense uneasiness between Russia's government and its business community stems from the government's attacks on business owners who disagree with official policy and on firms that it wants to control.

Explain economic development and how it is measured.

Economic development refers to an increase in the economic well-being, quality of life, and general welfare of a nation's people. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy over a one-year period. GDP is a narrower figure than gross national product (GNP) in that it excludes a nation's income generated from exports, imports, and the international operations of its companies. Purchasing Power -Value of goods and services that can be purchased with one unit of a country's currency Purchasing Power Parity (PPP) -Relative ability of two countries' currencies to buy the same "basket" of goods in those two countries

Foreign Corrupt Practices Act

Law that forbids U.S. companies from bribing government officials or political candidates in other nations

Describe economic transition and its main obstacles.

Over the past two decades, countries with centrally planned economies have been remaking themselves in the image of stronger market economies. This process, called economic transition, involves changing a nation's fundamental economic organization and creating entirely new free-market institutions. Key obstacles for countries in transition: -First, is a lack of managerial expertise. Central planners had little need for management skills in areas such as strategy, production, distribution, or advertising. But the gap between managers from the former communist nations and Western nations is narrowing. Second, is a capital shortage. Transition is expensive and requires funding to develop a telecommunications and infrastructure system, to set up financial institutions, and to educate people in market economics. Third, are cultural changes. Transition causes cultural change and replaces dependence on the government with greater emphasis on individuals. Cuts are often needed in welfare, unemployment benefits, and guaranteed government jobs. -Fourth, is environmental degradation. Economic and social policies of former communist governments were often disastrous for the natural environment.

Outline the various sources of political risk.

Political Risk: Likelihood that a society will undergo political change that negatively affects local business activity Conflict and violence: Local conflict can discourage international companies from investing in a nation and set back economic development significantly. Terrorism and Kidnapping: Terrorist activities are a means of making political statements. Kidnapping and the taking of hostages for ransom may be used to fund a terrorist group's activities. Executives of large international companies are often prime targets for kidnappers because their employers have "deep pockets" to pay large ransoms. Property Seizure: Governments sometimes seize the assets of companies doing business within their borders. Asset seizures fall into one of three categories: confiscation, expropriation, or nationalization. -Confiscation: Forced transfer of assets from a company to the government without compensation. -Expropriation: Forced transfer of assets from a company to the government with compensation. -Nationalization: Government takeover of an entire industry. Policy Changes: Government policy changes are the result of a variety of influences, including the ideals of newly empowered political parties, political pressure from special interests, and civil or social unrest. Local Content Requirements: Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market

Explain how companies can manage political risk.

The three main methods of managing political risk are adaptation, information gathering, and political influence. Adaptation means incorporating risk into business strategies, often with the help of local officials. Companies can incorporate risk in four ways. -First, partnerships help companies leverage expansion plans. They can be informal arrangements or include joint ventures, strategic alliances, and cross-holdings of company stock. -Second, localization entails modifying operations, the product mix, or some other business element—even the company name—to suit local tastes and culture. -Third, development assistance allows an international business to assist the host country or region in improving the quality of life for locals. -Fourth, insurance against political risk can be essential to companies entering risky business environments. Information Gathering: International firms attempt to gather information that will help them predict and manage political risk. Political Influence: Lobbying is the policy of hiring people to represent a company's views on political matters. Lobbyists meet with a local public official to influence his or her position on issues relevant to the company. Bribes often represent attempts to gain political influence. But the Foreign Corrupt Practices Act forbids U.S. companies from bribing government officials or political candidates in other nations (except when a person's life is in danger).

Nationalization

government takeover of an entire industry

Economic Development

increase in the economic well-being, quality of life, and general welfare of a nation's people

Local Content Requirements

laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market

Political Risk

likelihood that a society will undergo political change that negatively affects local business activity

Lobbying

policy of hiring people to represent a company's views on political matters

Economic Transition

process by which a nation changes its fundamental economic organization and creates new free-market institutions

Purchasing Power Parity

relative ability of two countries' currencies to buy the same "basket" of goods in those two countries

Technology Dualism

use of the latest technologies in some sectors of the economy coupled with the use of outdated technologies in other sectors

Purchasing Power

value of goods and services that can be purchased with one unit of a country's currency