CHAPTER 4

Economic Development of Nations

1. Economic Development
1) Classifying Countries
- Developed Countries are highly industrialized and highly efficient whose
people enjoy a high quality of life.
- Newly Industrialized Countries(NICs) are those that have recently
increased the portion of their national production and exports derived
from industrial operations. (often called emerging markets)
- Developing Countries are nations with the poorest infrastructures and
lowest personal incomes.
2) National Production
- Gross domestic product (GDP) is the value of all goods and services produced
by a domestic economy over a one-year period.
- Gross national product (GNP)
GDP and GNP Drawbacks
- Uncounted Transactions
- Question of Growth
- Problem of Averages
- Pitfalls of Comparison
3) Purchasing Power Parity
- Purchasing power is the value of goods and services that can be
purchased with one unit of a country’s currency.
- Purchasing power parity (PPP) is the relative ability of two countries’
currencies to buy the same “basket” of goods in those two countries.
4) Human Development
United Nations’ Human Development Index (HDI)
- Long and Healthy Life
- Education
- Decent Standard of Living
(*Based on data from Human Development Report 2016)

2. Economic Transition
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.
Typically involves several key reforms:
- Stabilizing the economy
- Allowing prices
- Legalizing private business
- Reducing barriers
Key obstacles for countries in transition:
- lack of managerial expertise
- capital shortage
- cultural differences
- sustainability (environmental degradation)
3. Political Risk
The likelihood that a government or society will undergo political changes that
negatively affect local business activity. It can threaten an exporter’s market,
manufacturing facilities, and the ability to repatriate profits. Political risk levels
vary from nation to nation.
Main sources of political risk include:
- Conflict and violence
- Terrorism and kidnapping
- Property seizure: confiscation, expropriation, or nationalization
* Confiscation is the forced transfer of assets from a company to the
government without compensation.
* Expropriation is the forced transfer of assets from a company to the
government with compensation.
* Nationalization involves government takeover of an entire industry and is
more common than confiscation and expropriation.
- Policy changes
- Local content requirements

4. Managing Political Risk

Three main methods of managing political risk
1)Adaptation means incorporating risk into business strategies, often with the
help of local officials. Companies can incorporate risk in four ways:
- Partnerships help companies leverage expansion plans. They can be informal
arrangements or include joint ventures, strategic alliances, and cross-holdings of
company stock.
- Localization entails modifying operations, the product mix, or some other
business element—even the company name—to suit local tastes and culture.
- Development assistance allows an international business to assist the host
country or region in improving the quality of life for locals.
- Insurance against political risk can be essential to companies entering risky
business environments.

2) Information Gathering: International firms attempt to gather information that

will help them predict and manage political risk.
3) 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.

Relations among countries can influence the political economy of nations and the
pace of economic development. Favorable and strong political relationships
foster stable business environments.

The United Nations (UN; www.un.org) was formed after the Second World War
to provide leadership in fostering peace and stability around the world. The UN
receives its funding from member contributions based primarily on gross
national product (GNP).
5. Emerging Markets and Economic Transition
1)China
Profile
- Communist after civil war ended in 1949
- Agricultural reforms began in 1979
- Township and Village Enterprises legal in 1984
- “Socialism with Chinese characteristics”
Challenges
- Political and social problems
- Unemployment and migrant labor
- Reunification of “greater China”

2) Russia
Profile
- Operated under a staunchly communist system for about 75 years
- 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
- Opaque legal system, a fair amount of corruption, and shifting business
laws
Challenges
- Developing managerial talent
- Political instability
- Unstable investment climate