Chapter 3- National Differences in International Business

11th Edition, Charles Hill

Economic Development

Syed Ali Naqi Kazmi

MSPM-NDU
25-10-2020
Learning Outcomes

• Explain what determines the level of economic development of a

Nation
• Describe how transition economies are moving toward market-
based systems
• Understand Economic Systems and Types of Economies
• Explain the implications for management practice of national
difference in political economy
Opening Case

• Democracy and Economic Development in Sub-Saharan

Africa
Economic Systems

An economic system is a means by

which societies or governments
organize and distribute available
resources, services, and goods
across a geographic region or
country. Economic
systems regulate the factors of
production, including land, capital,
labor.
Economic Systems

There are three broad types of economic systems :

• Market Economy / Capitalist Economy

• Command Economy / Planned Economy

• Mixed Economy

Today the world largely operates under a global economic system based
on the free market mode of production.
Market / Capitalist Economy

The economic system in which most businesses are owned and operated
by individuals is the free market system, also known as “ capitalism. ”
There are following features:
• Production is carried out to maximize private profit.
• Decisions regarding investment and the use of the means of
production are determined by competing business owners in the
marketplace.
• Production takes place within the process of capital accumulation.
• The means of production are owned primarily by private enterprises
and decisions regarding production and investment determined by
private owners in capital markets.
Command / Planned Economy

A command economy is a system where the government, rather

than the free market, determines what goods should be
produced, how much should be produced, and the price at which
the goods are offered for sale. It also determines investments
and incomes. The command economy is a key feature of any
communist society.
Command / Planned Economy

Modern command economies can be identified by the following

characteristics:
• Economic plans are centrally created by the government for the
majority, if not all, sectors and regions.
• The government distributes the nation’s capital, labor, and natural
resources in the means it deems most efficient.
• Production and prices are dictated by the government.
• Businesses in the finance, utilities, and automotive industries are
owned and monopolized by state authorities.
• Government policies are created to carry out the centralized
economic plan.
Mixed Economy

• A mixed economy is variously defined as an economic system blending

elements of a market economy with elements of a command economy,
free markets with state interventionism, or private enterprise with
public enterprise.
• Under this system, industries that provide essential services, such as
utilities, banking, and health care, may be government owned. Other
businesses are owned privately. Central planning allocates the goods
and services produced by government-run industries and tries to
ensure that the resulting wealth is distributed equally. In contrast,
privately owned companies are operated for the purpose of making a
profit for their owners.
• Governments also tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests
(i.e AIG – 2008, Citi Group and General Motors by US Government)
Differences in Economic Development

• One common measure of economic development is a country’s Gross

National Income.

• The Gross National Income (GNI), previously known as gross national

product (GNP), is the total domestic and foreign output claimed by
residents of a country, consisting of gross domestic product (GDP),
plus factor incomes earned by foreign residents, minus income earned in
the domestic economy by nonresidents.

• GNI is regarded as yardstick for the economic activity of a country.

Gross National Income Per Capita of Pakistan

• Pakistan GNI per capita for 2019 was $1,530, a 3.77%

decline from 2018.
• Pakistan GNI per capita for 2018 was $1,590, a 6% increase from
2017.
• Pakistan GNI per capita for 2017 was $1,500, a 5.63%
increase from 2016.
• Pakistan GNI per capita for 2016 was $1,420, a 4.41%
increase from 2015.
Purchasing Power Parity (PPP)

• Purchasing power parity (PPP) is a measurement of prices in

different countries that uses the prices of specific goods to
compare the absolute purchasing power of the
countries' currencies.
• In many cases, PPP produces an inflation rate that is equal to the
price of the basket of goods at one location divided by the price
of the basket of goods at a different location. The PPP inflation
and exchange rate may differ from the market exchange
rate because of poverty, tariffs, and other transaction costs.
Human Development Index (HDI)

• Amartya Sen has argued that development should be assessed less by

material output measures such as GNI per capita and more by the
capabilities and opportunities that people enjoy.
• The Human Development Index (HDI) is a summary measure of average
achievement in key dimensions of human development: a long and healthy
life, being knowledgeable and have a decent standard of living. The HDI is
the geometric mean of normalized indices for each of the three dimensions.
• The health dimension is assessed by life expectancy at birth, the education
dimension is measured by mean of years of schooling for adults aged 25
years and more and expected years of schooling for children of school
entering age. The standard of living dimension is measured by gross national
income per capita
Human Development Index (HDI)
Innovation and Entrepreneurship are the Engines of
Growth
• Business innovation is when companies implement new processes, ideas,
services, or products with the goal of boosting the bottom line. It could
mean launching new and improved products or services (which can lead to
higher revenue), making an existing process more efficient, or solving a
current business problem (both of which cut down on costs and save time).
The key element of innovation is that it drives revenue for the company.
• Innovation is the specific tool of entrepreneurs, the means by which they
exploit change as an opportunity for a different business or a different
service. It is capable of being presented as a discipline, capable of being
learned, capable of being practiced.
The Nature of Economic Transformation

The shift toward a market-based economic system often entails a number of

steps: deregulation, privatization and creation of a legal system to
safeguard property rights.
• Deregulation is the process of removing or reducing state regulations,
typically in the economic sphere. It is the repeal of governmental regulation
of the economy. Deregulation often refers to removing barriers to
competition.
• For example, in the UK, many industries used to be a state monopoly – BT,
British Gas, British Rail, local bus services, Royal Mail. However,
deregulation allowed new firms to enter these markets and reduce the
monopoly power of these state owned industries. This process of
deregulation was often accompanied by privatization (Selling of state-
owned assets to private sector).
The Nature of Economic Transformation

• Privatization occurs when a government-owned business, operation, or

property becomes owned by a private, non-government party. Note that
privatization also describes the transition of a company from being publicly
traded to becoming privately held.
• Proponents of privatization argue that privately-owned companies run
businesses more economically and efficiently because they are profit
incentivized to eliminate wasteful spending.
• Privatisation was also seen as a way of reducing trade union power,
widening share ownership and increasing investment, as privatised
businesses were now free to raise finance through the stock market.
Privatisation was also regarded as an important supply-side policy designed
to drive competition and improve productive and dynamic efficiency.
Benefits, Costs, Risks and Overall Attractiveness
of Doing Business Internationally
• Benefits

• Costs

• Risks
Political Risk
Economic Risk
Legal Risk

• Overall Attractiveness