International Business - Political Economy and Economic Development - Chapter 3

Gross National Income

A common measure of economic development is a country's gross national income (GNI) per head of population. GNI is regarded as a yardstick for the economic activity of a country; it measures the total annual income received by residents of a nation. GNI per person figures can be misleading because they don't consider differences in the cost of living.

What are the factors that determine the costs of doing business in a country?

A number of political, economic, and legal factors determine the costs of doing business in a country. With regard to political factors, a company may have to pay off politically powerful entities in a country before the government allows it to do business there. With regard to economic factors, one of the most important variables is the sophistication of a country's economy. As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly).

Explain why a well-functioning market economy requires strong legal systems?

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, the incentive to engage in economic activity can be reduced substantially. Private and public entities, including organized crime, can expropriate the profits generated by the efforts of private-sector entrepreneurs.

Is privatization by itself enough to guarantee economic growth? Why? Explain using an example.

As privatization has proceeded around the world, it has become clear that simply selling state-owned assets to private investors is not enough to guarantee economic growth. If the newly privatized firms continue to receive subsidies from the state and if they are protected from foreign competition by barriers to international trade and foreign direct investment, they will have little incentive to restructure their operations to become more efficient. For privatization to work, it must also be accompanied by a more general deregulation and opening of the economy. For example, when Brazil decided to privatize the state-owned telephone monopoly, Telebras Brazil, the government also split the company into four independent units that were to compete with each other and removed barriers to foreign direct investment in telecommunications services. This action ensured that the newly privatized entities would face significant competition and thus would have to improve their operating efficiency to survive.

First-mover Advantages

First-mover advantages are the advantages that accrue to early entrants into a market. By identifying and investing early in a country with high potential for future growth, international firms may build brand loyalty and gain experience in that country's business practices. These will pay back substantial dividends if that country achieves sustained high economic growth rates. For example, eBay was the first company to take the auction process online. Coca-Cola was the first cola producer, and began selling its product to the public in 1886; this has given it considerable advantage over competitors.

What are the conditions required to encourage innovation and entrepreneurship?

It has been argued that the economic freedom associated with a market economy creates greater incentives for innovation and entrepreneurship than either a planned or a mixed economy.In a market economy, any individual who has an innovative idea is free to try to make money out of that idea by starting a business (by engaging in entrepreneurial activity). Similarly, existing businesses are free to improve their operations through innovation. To the extent that they are successful, both individual entrepreneurs and established businesses can reap rewards in the form of high profits. Thus, market economies contain enormous incentives to develop innovations.

Why does education lead to economic development?

Nations that invest more in education will have higher growth rates because an educated population is a more productive population. A survey of 14 statistical studies that looked at the relationship between a country's investment in education and its subsequent growth rates concluded investment in education did have a positive and statistically significant impact on a country's rate of economic growth.

Why are democratic regimes more conducive to economic growth than dictatorships?

Some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. However, there is no guarantee that a dictatorship will continue to pursue such progressive policies. Dictators are rarely benevolent. Many are tempted to use the apparatus of the state to further their own private ends, violating property rights and stalling economic growth. Totalitarian states, by limiting human freedom, also suppress human development and therefore are detrimental to progress. Given this, it seems likely that democratic regimes are far more conducive to long-term economic growth than are dictatorships, even benevolent ones.

Explain how geography of a nation influences its economic development.

The influential Harvard University economist Jeffrey Sachs argues that by virtue of favorable geography, certain societies are more likely to engage in trade than others and are thus more likely to be open to and develop market-based economic systems, which in turn promotes faster economic growth. He also argues that, irrespective of the economic and political institutions a country adopts, adverse geographical conditions, such as the high rate of disease, poor soils, and hostile climate that afflict many tropical countries, can have a negative impact on development.

What are the factors that contribute to the risks of doing business in a country?

The risks of doing business in a country are determined by a number of political, economic, and legal factors. Political risk has been defined as the likelihood that political forces will cause drastic changes in a country's business environment that adversely affect the profit and other goals of a business enterprise. An economic risk can be defined as the likelihood that economic mismanagement will cause drastic changes in a country's business environment that hurt the profit and other goals of a particular business enterprise. A legal risk can be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights.

Discuss the three main reasons for the spread of democracy.

There are three main reasons for the spread of democracy. First, many totalitarian regimes failed to deliver economic progress to the vast bulk of their populations. Second, new information and communication technologies have broken down the ability of the state to control access to uncensored information. Third, in many countries the economic advances of the past quarter-century have led to the emergence of increasingly prosperous middle and working classes who have pushed for democratic reforms.

GNI's relation to purchasing power parity?

To account for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows for a more direct comparison of living standards in different countries.