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MGT520 - International Business - Lecture Handout 13

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NATIONAL DIFFERENCES IN POLITICAL ECONOMY

The Determinants of Economic Development:

  1. Different countries have dramatically different levels of development, as shown in Map 2.1. GDP/capita is a good yardstick of economic activity, as it measures average value of the goods and services produced by an individual.
  2. But GDP/capita does not consider the differences in costs of living. The UN's PPP index as shown in Table 2.1 shows the differences in the standards of living of people in different countries.
  3. A problem with both GDP/capita and PPP is that they are static in nature. From an international business perspective it is good to look at the rate of growth in the economy as well as the status of its people. Map 2.3 shows that some of the fastest growing countries economically are those have been slower to develop.
  4. A broader approach to assessing the overall quality of life in different countries is the Human Development Index. This is based on life expectancy, literacy rates, and whether (based on PPP indices) incomes are sufficient to meet the basic needs of individuals. Map 2.4 shows the Human Development Index. Notice that some of the worse off countries are heavily populated and have rapidly expanding populations.
  5. What is the relationship between political economy and economic progress? This is a difficult issue. One thing that is generally accepted is that innovation is the engine of long-run economic growth. Another thing that we have come to generally accept in recent years is that a market economy is better at stimulating innovation than a command economy that does not have the same types of incentives for individual initiative.
  6. Innovation also depends on a strong protection of property rights, as innovators and entrepreneurs need some level of assurance that they will be able to reap the benefits of their initiative.
  7. While it is possible to have innovation and economic growth in a totalitarian state, many believe that economic growth and a free market system will eventually lead a country to becoming more democratic.
  8. Geography can also affect economic development. A landlocked country with an inhospitable climate, poor soil, few natural resources, and terrible diseases is unlikely to develop economically as fast as country with the opposite characteristics on each of these attributes.
  9. While it can be hard to do much about unfavorable geography, education is something that governments can affect. Numerous studies suggest that countries that invest more in the education of their young people develop faster economically. Examples include, Japan, South Korea and many Asian countries.

Other regulatory issues:

  1. Countries often impose protectionist policies, such as tariffs, quotas, and other trade restrictions, to give preference to their own products and industries.
  2. Tax systems influence the attractiveness of investing in a given country and affect the relative level of profitability for the MNC. Tax issues include: foreign tax credits, holidays and exemptions, depreciation allowances, and profit or value added tax rates. Definitions of key items such as income and profit vary across countries, as do reporting requirements.
  3. The level of government involvement in the economic and regulatory environment varies a great deal among countries and has a varying impact on management practices.

The Technological Environment:

  1. In a global information society, it is clear that corporations must incorporate into their strategic planning and their everyday operations the accelerating macro-environmental phenomenon of technoglobalism, in which the rapid developments in information and communication technologies (ICTs) are propelling globalization and vice-versa. Investment-led globalization is leading to global production networks, which results in global diffusion of technology to link parts of the valueadded chain in different countries.
  2. The Internet is propelling electronic commerce around the world. In fact, the ease of use and pervasiveness of the Internet raises difficult questions about ownership of intellectual property, consumer protection, residence location, taxation, and other issues.
  3. New technology specific to a firm’s products represents a key competitive advantage to firms and challenges international businesses to manage the transfer and diffusion of proprietary technology, with its attendant risks. Whether it is a product, a process, or a management technology, an MNCs major concern is the appropriability of technology—that is, the ability of the innovating firm to profit from its own technology by protecting it from competitors. Especially difficult is managing the transfer of technology to venture partners who might become future competitors.
  4. An MNC can enjoy many technological benefits from its global operations. Advances resulting from cooperative research and development (R&D) can be transferred among affiliates around the world, and specialized management knowledge can be integrated and shared. However, the risk of technology transfer and pirating is considerable and costly.
  5. Although firms face few restrictions on the creation and dissemination of technology in developed countries, less developed countries often impose restrictions on licensing agreements, royalties, and so forth, and have other legal constraints on patent protection.
  6. The most common methods of protecting proprietary technology are through patents, trademarks, trade names, copyrights, and trade secrets. The International Convention for the Protection of Industrial Property, often referred to as the Paris Union, is adhered to by over 80 countries for protection of patents.

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