Essay of international business including the following topics: Globalization, cross culture business, political economy and ethics, economy devolpment of nation, and international trade theory. 8 pages single spaced. book used as a refrence : internatio

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Home >Business & Finance homework help >Economics homework help >Essay of international business including the following topics: Globalization, cross culture business, political economy and ethics, economy devolpment of nation, and international trade theory. 8 pages single spaced. book used as a refrence : internatio

Chapter Four Economic Development of Nations

Chapter 4-1

This chapter presents the economic development of nations and the main ways to measure development. We then explore economic transition, political risk and how it can be managed, and China’s and Russia’s experiences with economic transition.

Learning Objectives

Explain economic development and how it is measured.

Describe economic transition and its main obstacles.

Outline the various sources of political risk.

Explain how companies can manage political risk.

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

Chapter 4-2

India’s Tech King

Infosys is a global provider of IT services.

India has organic-led path to development.

Brainpower is driving development.

Chapter 4-3

India’s organic-led path to economic growth gave rise to Infosys, a global provider of information technology services.

Infosys has benefited from the fact that India has long had the basic foundations of a market economy. These features include private enterprise, democratic government, a transparent legal system, and Western accounting practices.

India’s bottom-up approach to development and the brainpower of its people looks set to spawn many more homegrown firms in knowledge-based industries.

Economic Development Classifying Countries

Chapter 4-4

Nations are commonly classified as being developed, newly industrialized, or developing based on a quantifiable economic measure.

Developed Countries: Countries that are highly industrialized and highly efficient, and whose people enjoy a high quality of life.

Newly Industrialized Countries: Countries that have recently increased the portion of their national production and exports derived from industrial operations.

When we combine newly industrialized countries with countries that have the potential to become newly industrialized, we arrive at a category often called emerging markets.

Developing Countries: Nations with the poorest infrastructures and lowest personal incomes.

Developed Country

Developing Country

Newly Industrialized Country

Emerging Markets

Economic Development National Production

Chapter 4-5

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.

A country’s GDP per capita is simply its GDP divided by its population to measure a nation’s income per person.

Marketers often use GDP or GNP per capita figures to determine whether a country’s population is wealthy enough to begin purchasing its products.

Gross National Product (GNP)

Gross Domestic Product (GDP)

Popular Indicators of Economic Development

Economic Development National Production (Cont.)

Chapter 4-6

Although GDP and GNP are the most popular indicators of economic development, they have several important drawbacks.

Uncounted Transactions: For a variety of reasons, many of a nation’s transactions do not get counted in either GDP or GNP. Some activities not included are: volunteer work, unpaid household work, illegal activities such as gambling and black market (underground) transactions, and unreported transactions conducted in cash. In some cases, the unreported (shadow) economy is so large and prosperous that official statistics such as GDP per capita are almost meaningless

Question of Growth: Gross product figures do not tell us whether a nation’s economy is growing or shrinking—they are simply a snapshot of one year’s economic output.

Problem of Averages: Recall that per capita numbers give an average figure for an entire country. These numbers are helpful in estimating national quality of life, but averages do not give us a very detailed picture of development.

Pitfalls of Comparison: Country comparisons using gross product figures can be misleading. When comparing gross product per capita, the currency of each nation being compared must be translated into another currency unit (usually the dollar) at official exchange rates. But official exchange rates only tell us how many units of one currency it takes to buy one unit of another. They do not tell us what that currency can buy in its home country. Therefore, to understand the true value of a currency in its home country, we apply the concept of purchasing power parity.

Uncounted Transactions

Question OF Growth

Problem of Averages

Pitfalls of Comparison

GDP and GNP Drawbacks

Purchasing Power Parity

Chapter 4-7

Let’s see what happens when we compare the wealth of several countries to that of the United States by adjusting GDP per capita to reflect PPP. If we convert Swiss francs to dollars at official exchange rates, we estimate Switzerland’s GDP per capita at $47,900. This is higher than the official GDP per capita of the United States ($39,700). But adjusting Switzerland’s GDP per capita for PPP gives us a revised figure of $34,700, which is lower than the U.S. GDP figure of $39,700. Why the difference? GDP per capita at PPP is lower in Switzerland because of that nation’s higher cost of living. It simply costs more to buy the same basket of goods in Switzerland than it does in the United States. The opposite phenomenon occurs in the case of the Czech Republic. Because the cost of living there is lower than in the United States, the Czech Republic’s GDP per capita rises from $10,600 to $18,600 when PPP is considered.

Purchasing Power

Purchasing Power Parity (PPP)

Value of goods and services that can be purchased with one unit of a country’s currency

Relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries

Economic Development Human Development

Chapter 4-8

So far we see that adjusting figures on national production for purchasing power provide numerical measures for comparing nations. But we also see that they do not capture development’s qualitative aspects. Also, the PPP concept does a fairly good job of revealing different levels of economic development, but is a poor indicator of a people’s total well-being.

The United Nations’ human development index (HDI)—the 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.

United Nations’ Human Development Index (HDI)

Long and Healthy Life

Education

Decent Standard of Living

Chapter 4-9

HDI Rank	Country	HDI Value	GNI per Capita Rank	Life Expectancy at Birth (Years)
Very High Human Development
1	Norway	0.955	5	81.3
3	United States	0.937	9	78.7
5	Germany	0.920	15	80.6
9	Switzerland	0.913	11	82.5
11	Canada	0.911	16	81.1
20	France	0.893	24	81.7
23	Spain	0.885	31	81.6
26	United Kingdom	0.875	21	80.3
45	Argentina	0.811	52	76.1
High Human Development
55	Russia	0.788	55	69.1
61	Mexico	0.775	65	77.1
85	Brazil	0.730	77	73.8
Medium Human Development
101	China	0.699	90	73.7
112	Egypt	0.662	106	73.5
121	South Africa	0.629	79	53.4
Low Human Development
153	Nigeria	0.471	147	52.3
185	Mozambique	0.327	176	50.7

Table 4.1 Human Development Index (HDI)

Source: Based on data obtained from Human Development Report 2013 (New York: United Nations Development Programme, 2013), Table 1, pp. 144–146, available at ww w .undp.o r g.

Table 4.1 also illustrates the disparity that can be present between a nation’s wealth and the HDI.

Quick Study 1

An increase in the economic well-being, quality of life, and general welfare of a nation’s people is called what?

What are the drawbacks of using national production to measure economic development?

The human development index measures what aspects of a nation’s development?

Chapter 4-10

Economic Transition

Reforms

Stabilizing the economy, reducing budget deficits, and expanding credit availability

Allowing prices to reflect supply and demand

Legalizing private business, selling state-owned companies, and supporting property rights

Reducing barriers to trade and investment and allowing currency convertibility

Obstacles

Managerial expertise

Shortage of capital

Cultural differences

Sustainability

Chapter 4-11

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.

The process typically involves several key reform measures to promote economic development:

Stabilizing the economy, reducing budget deficits, and expanding credit availability

Allowing prices to reflect supply and demand

Legalizing private business, selling state-owned companies, and supporting property rights

Reducing barriers to trade and investment and allowing currency convertibility

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.

Quick Study 2

What does the economic transition process involve?

What are the key obstacles for countries in transition?

Transition replaces dependence on the government with greater emphasis on what?

Chapter 4-12

Political Risk

Political Risk: Likelihood that a society will undergo political change that negatively affects local business activity

Main sources of political risk include:

Conflict and violence

Terrorism and kidnapping

Property seizure: confiscation, expropriation, or nationalization

Policy changes

Local content requirements

Chapter 4-13

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

Quick Study 3

How does political risk abroad affect companies?

Companies fear open violence and conflict abroad because it can threaten the ability to do what?

What is the name given to the forced transfer of assets from a company to the government with compensation?

Chapter 4-14

Managing Political Risk Methods

Chapter 4-15

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).

Managing Political Risk

Adaptation

Information Gathering

Political Influence

Managing Political Risk Relations Between Countries

International Relations

Favorable and strong political relationships

Foster stable business environments

Expand business opportunities

Lower risk

Promote economic development

Multilateral agreements

The United Nations

Six main bodies

The General Assembly

The Security Council

The Economic and Social Council

The Trusteeship Council

The International Court of Justice

UN Economic and Social Council

Chapter 4-16

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. Favorable political relations among countries expand business opportunities, lower risk, and promote economic development.

To generate stable business environments, some countries have turned to multilateral agreements—treaties concluded among several nations, each of whom agrees to abide by treaty terms even if tensions develop.

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 and its many agencies provide food and medical supplies, educational supplies and training, and financial resources to poorer member nations. The UN receives its funding from member contributions based primarily on gross national product (GNP). Practically all nations in the world are UN members—except for several small countries and territories that have observer status.

Quick Study 4

How can a company incorporate political risk into its business strategies?

What is a good source of information to help conduct accurate political risk forecasting?

What might result from unfavorable political relations among countries?

Chapter 4-17

Emerging Markets and Economic Transition 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”

Chapter 4-18

China began its experiment with central planning in 1949, after the communists defeated nationalists in a long and bloody civil war.

From 1949 until reforms were initiated in the late 1970s, China had a unique economic system.

Agricultural production was organized into groups of people who formed production “brigades” and production “units.”

In 1979, China initiated agricultural reforms that strengthened work incentives in this sector. At about the same time, township and village enterprises (TVEs) began to appear. The government initially regarded TVEs as illegal and unrelated to the officially sanctioned communes. But they were legalized in 1984 and helped lay additional groundwork for a market economy.

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.”

Emerging Markets and Economic Transition 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, rampant corruption, and shifting business laws

Challenges

Developing managerial talent

Political instability

Unstable investment climate

Chapter 4-19

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.

An opaque legal system, rampant corruption, and shifting business laws make Russia a place where non-Russian businesspeople must operate cautiously.

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.

Quick Study 5

During what time period did China undergo its most rigorous experience with central planning?

What challenges might pose a threat to China’s future economic performance?

Over what aspects of Russia’s centrally planned economy did planners exercise control?

What might challenge Russia’s future economic prospects?

Chapter 4-20

Mamoun benmamoun Assistant Prof of International Business Boeing Institute of International Business John Cook School of Business Saint Louis University

Chapter 4-22