d270 final

Three types of economic systems

Command, mixed, and market. They differ in who owns resources and who makes economic decisions (government vs. private individuals).

Command economy

Government owns most or all resources and makes production decisions through central planning; favors centralized, large-scale, capital-intensive production; "visible hand" of the state and collectivism; associated with communism.

Mixed economy

Government and private ownership of resources mixed in varying proportions; aims to optimize efficiency, promote egalitarianism, and check self-interest; associated with socialism / social democracy.

Market economy

Mostly private ownership; individuals and firms make most decisions through supply and demand; decentralized, entrepreneurial innovation; "invisible hand," laissez-faire, property rights, individualism; associated with capitalism.

State capitalism

A system that combines market mechanisms with significant government ownership or direction of key firms and sectors so growth serves state goals (e.g., China). Debated as both a "detour" and a "destination."

Developed (advanced) economies

High income, high industrialization, efficient capital movement, advanced infrastructure, significant international trade, stable institutions, high economic freedom.

Emerging economies / economies in transition

About 24-30 economies moving from developing toward developed: strong GDP growth, manufacturing exports, rising incomes, modernizing infrastructure and institutions, FDI targets, liberalization, high aspirations.

Developing economies

Low incomes, inefficient capital movement, uneven economic environment and infrastructure, trade restrictions, unstable institutions, limited competition, cronyism and corruption, low economic freedom.

How many economies are there?

Over 217 discrete economies: about 190 countries plus about 28 other territories (autonomous regions, micro-states, territories).

Emerging economies' share of the world

About 86% of world population, 61% of world GDP (PPP), about 60% of global growth in recent decades, and roughly 2x the growth potential of advanced economies.

Old view vs. new reality of emerging economies

Old view: cheap labor, low incomes, places Western firms manufacture. New reality: customers, competitors, innovators, suppliers, talent, and power.

Why emerging economies matter to managers

Markets (future consumer growth), competition (new global challengers), careers (every major touches them), and supply chains (manufacturing, tech, commodities, and talent depend on them).

LDC

Less developed countries.

BEM

Big emerging markets.

BRIC

Brazil, Russia, India, China (four countries).

RDE

Rapidly developing economies.

NIC

Newly industrialized countries.

CIVETS

Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa.

G7

The most economically advanced group: Canada, France, Germany, Italy, Japan, United Kingdom, United States.

G20

Forum of major advanced and emerging economies; commonalities include large territories, large populations, market growth, and liberalization.

Commonalities of big emerging markets

Large territory and natural resources; big populations (consumers and labor); major economic policy reforms (liberalization) that attract FDI; massive infrastructure needs; aspirations of technological leadership; growth spillovers to their region; significant political influence.

New reality for advanced economies

Their firms look to emerging economies as growth markets; their influence in global governance is reduced; their governments treat emerging economies as partners on regional and global problems; their citizens may see emerging economies as a competitive threat for jobs.

Challenges of doing business in emerging economies

Weak communication, power, and transportation infrastructure; inefficient distribution channels; underdeveloped financial markets; high economic and political volatility; difficulty finding suitable partners; heavy government involvement; high corruption.

Altasia

Group of Asian economies (e.g., Japan, South Korea, Taiwan, Philippines, Vietnam, India) that global firms are eyeing as alternatives to manufacturing in China.

Economic center of gravity

The approximate geographic center of total world economic production; it is shifting from West to East.

China's Belt and Road Initiative (One Belt One Road)

China's plan to modernize the ancient Silk Road through infrastructure investment, improving connectivity, promoting cooperation, and expanding commerce.

OECD

Organization for Economic Cooperation and Development; made up mostly of developed countries.

Base (bottom) of the pyramid

The roughly 4 billion people who make up the largest and poorest economic group in the world.

Bottom of the Pyramid approach

Partnering with governments and NGOs to develop products and services for the poorest consumers.

Where-To-Be-Born Index (WTBBI)

Ranks 80 countries on 11 indicators (including geography, demography, quality of life, per capita income, life expectancy) to show where a baby would have the best opportunities.

Four cautions on economic measurement

System complexity, market dynamism, market interdependence, and data overload.

System complexity

There are roughly 188-225 economies, and each one functions uniquely.

Market dynamism

External and internal conditions are constantly changing, so yesterday's explanations may not hold today.

Market interdependence

No country is isolated; actions in one market affect others.

Data overload

A flood of data of differing quality, which can create analysis paralysis.

Overall economic system factors for firms

Country type / development level, economic system type, economic freedom score, and role of the government (its view of foreign firms and of your industry).

Macroeconomic factors for firms

Size of the economy (GDP, GNI), rate of growth, degree of stability, population, per capita income, PPP, balance of payments, unemployment, inflation, plus sustainability measures (HDI, Gini, happiness indexes).

Economic freedom

The right of individuals to work, produce, consume, save, and invest as they prefer, with government protecting those liberties without excessive constraint; strongly linked to standard of living.

Index of Economic Freedom (Heritage Foundation)

Scores economies 0-100 (higher = more free). 12 economic freedoms, grouped into 4 categories, each graded 0-100 and averaged with equal weight into one overall score.

Four categories of the Index of Economic Freedom

Rule of law, government size (limited government), regulatory efficiency, and open markets.

12 components of the Index of Economic Freedom

Rule of law: property rights, judicial effectiveness, government integrity. Government size: tax burden, government spending, fiscal health. Regulatory efficiency: business, labor, monetary freedom. Open markets: trade, investment, financial freedom.

Economic freedom score categories

Free (80-100), Mostly Free (70-79.9), Moderately Free (60-69.9), Mostly Unfree (50-59.9), Repressed (below 50).

Economic freedom and income

The greater a country's economic freedom, the higher its per capita income tends to be.

Other benefits associated with high economic freedom

Higher standard of living, lower inflation and unemployment, stronger competitiveness and innovation.

Is economic freedom required for growth?

Generally linked, but some authoritarian / state-capitalist countries (e.g., China) have achieved strong growth with low economic freedom.

Mostly unfree vs. repressed income anomaly

Average income in some repressed economies exceeds mostly unfree ones because a few repressed countries are rich in natural resources, which skews the results.

Economic freedom ranking of the six D270 case countries (2026)

Australia 80.1, Norway 78.8, Chile 74.3, United States 72.8, India 52.5, China 48.3.

Highest and lowest economic freedom among the six case countries

Highest: Australia (80.1). Lowest: China (48.3).

Largest economy by GDP (PPP) among the case countries

China, about $41.2 trillion (vs. U.S. about $30.8 trillion); the U.S. has much higher GDP per capita (PPP).

GDP (gross domestic product)

Market value of all final goods and services produced within a country's borders, regardless of whether the producer is domestically or foreign owned. Answers WHERE value was produced. Example: a Toyota built in the U.S. counts toward U.S. GDP.

GNI (gross national income)

GDP plus income residents receive from abroad, minus income paid to nonresidents. Measures what a country's citizens and companies earn wherever they are located. Answers WHO receives the income.

Broadest measure of a country's economic activity

GNI (along with GDP).

Per capita income

GDP or GNI divided by population; a rough indicator of average income per person that does not show income distribution.

Manager takeaway on GDP, GNI, per capita

Use GDP for market/production size, GNI for resident income, and per capita measures to compare economies with very different populations.

Most desirable market potential (GDP/GNI)

Countries with large populations and high per capita income.

Countries where GDP exceeds GNI

Countries where foreign-owned firms produce a lot domestically and send profits home, so more income flows out to nonresidents than flows in.

Purchasing power parity (PPP)

Adjusts income for differences in price levels by comparing what a universal "basket of goods" costs with one unit of a country's currency vs. an equivalent amount in another country; gives a more useful view of real income and living standards.

Why PPP is needed

Prices differ across countries due to costs of land, labor, capital, productivity, and regulation, so unadjusted GDP/GNI can distort how much income is really worth.

Big Mac Index

The Economist's informal PPP measure comparing the price of a Big Mac across countries.

Human Development Index (HDI)

United Nations composite score of a country's average achievement in health (life expectancy), education, and income.

Gini Index

Measures income inequality: 0 = perfect equality, 100 (or 1) = perfect inequality.

Sustainability and happynomics measures

Alternatives to monetary output measures, e.g., HDI, Gini index, Gross National Wellness, Gross National Happiness, Happy Planet Index, Better Life Index, Genuine Progress Indicator.

Shadow economy

Economic activity that escapes official statistics and taxation, including illegal activity and unreported legal work.

World Competitiveness Index

Measures a nation's ability to create and sustain a business environment that lets enterprises compete and prosper.

International manager's economic dashboard (6 areas)

Market size (GDP + population), purchasing power (GDP per capita PPP + income distribution), growth (real GDP growth), stability (inflation + exchange rate), labor market (unemployment + wages/skills), global position (trade/current account + FDI).

How managers read the dashboard

Compare against peers; watch the direction of trends, not just the level; connect indicators (fast growth + high inflation + currency pressure can be a warning).

Why perform a country analysis / PESTEL

To choose the most suitable countries, the order of expansion, the most suitable products or services, the most effective entry mode, and to identify a country's opportunities and risks.

PESTEL

Political, Economic, Social, Technological, Environmental, Legal factors used to analyze a country's business environment.

Opportunity-risk matrix

Plots countries by opportunity (horizontal) and risk (vertical) against the world average, now and projected in 5 years, to compare where to invest.

Chapter 4 conclusions

Benefits of a market depend on its size, consumer wealth, openness, stability, and growth; the economic system strongly predicts performance and prospects; good analysis depends on choosing the right indicators; key challenges are data quality and predicting change.

Industrial Revolution I

Began ~1784; water and steam-powered production; transition from agrarian to industrial economy.

Industrial Revolution II

Began ~1870; electricity, division of labor, mass production; more jobs, rise of the middle class and democracy.

Industrial Revolution III

Began ~1970; electronics and information technology; digital connectivity and the rise of knowledge workers.

Industrial Revolution IV

Began ~2020; connectivity, AI, big data, robotics; transformed production and efficiency.

India vs. China population

India passed China in April 2023 as the most populous country, creating a large job-creation challenge.

Hans Rosling / Gapminder

Used real data on income and life expectancy over time to show global development progress and that trade is positive-sum.

MNC love-hate relationship

The same multinational can create major value (jobs, capital, technology) and intense opposition (power, labor, environmental concerns) at the same time; stakeholders experience it differently.

Why host countries want MNCs

Investment (capital, productivity, local suppliers), jobs and skills (training, managerial know-how), technology (R&D, equipment, knowledge transfer), trade and consumers (exports, choice, lower prices), standards (cleaner technology, better practices).

Why host countries worry about MNCs

Power over governments and markets, labor (low wages, weak bargaining power, displacement), outdated technology or loss of know-how, displacement of local competitors, environmental harm (pollution havens, regulatory arbitrage, lobbying).

Possible positive contributions of MNEs

Investment (capital formation, links to local firms, productivity), human resources (training, employment, managerial skills), technology (R&D, upgrading, new equipment), trade (export expansion, lower-cost imports), environment (clean technologies, company-wide standards).

Possible criticisms of MNEs

Investment (size threatens host country, tool of home-country foreign policy), human resources (exploits cheap labor, weakens home unions and wages), technology (outdated tech abroad, gives away technology), trade (raises imports, kills local firms), environment (moves pollution abroad, seeks lax rules, lobbies to delay rules).

Five filters that shape how people see an MNC

Economic impact ("Am I winning or losing?"), identity and nationalism ("Is this company one of us?"), social and environmental ("What is it doing to our community?"), politics and security ("Is this just business?"), information and narrative ("What story are people hearing?").

Drivers of societal views toward international business

Historical events, perceived impact of globalization, trade and economic policy, national security, economic conditions, environmental/health/safety issues, nationalism and ethnocentrism, views on immigrants and refugees, media influence.

MNC action-perception chain

MNC action → stakeholder lens → perception → reaction (buy, work, protest, boycott, regulate, welcome, restrict).

Stakeholders

The groups an organization must satisfy to survive long term; their aims must be adequately met or the firm may not survive.

MNC stakeholder groups

Financial (shareholders, lenders, investors), operational (customers, employees, suppliers), and societal/regulatory (governments, communities, NGOs, media and civil society).

What financial stakeholders want

Returns, growth, cash flow, risk control, repayment, transparency, good governance, long-term value.

What operational stakeholders want

Customers: value, quality, safety, trust. Employees and suppliers: fair pay, safe work, opportunity, reliable relationships, fair terms.

What societal and regulatory stakeholders want

Governments: jobs, taxes, compliance. Communities and NGOs: environment, human rights, accountability. Media: transparency and consistency between words and actions.

Shareholder primacy vs. stakeholder equity

Debate over whether a firm should maximize returns for shareholders or balance the interests of all stakeholders.

License to operate

The acceptance and trust a firm must earn from local stakeholders and government to operate in a community.

AI data center dilemma

Benefits are broad (AI services, investment and tax revenue, construction jobs, competitiveness) but many costs are local (power demand, noise, land and water use, utility bills, residents not consulted).

Barbie in Russia

Warner Bros. stopped releasing films in Russia after the Ukraine invasion; Russians watched pirated copies anyway; Russia's Culture Ministry said the film did not support "traditional spiritual values." Lesson: governments shape rules, but consumer preferences push back.

Hyundai-LG in Georgia

A $7.6B U.S. EV/battery investment; Sept. 4, 2025 ICE raid detained 475 workers (300+ South Korean). Triggered backlash in South Korea and visa talks. Lesson: a compliance problem can become a reputation, diplomatic, talent, and investment problem.

Coca-Cola "America the Beautiful" ad

2014 Super Bowl ad with the song in multiple languages; drew backlash at home, showing nationalism in reactions to global firms.

Balance of payments (BOP)

Summarizes all economic transactions between a country and the rest of the world.

Current account

Part of the BOP covering exports and imports of goods and services, income, and transfers (including aid).

Capital (financial) account

Part of the BOP covering long-term and short-term capital flows, such as foreign investment and the return of investment proceeds.

Host country BOP effects of FDI

Net import effect (positive if local production replaces imports), net export effect (positive if FDI generates exports), net capital flows (positive with inflows to build plants, negative when profits are repatriated).

BOP capital flows over time

FDI is usually positive for the host country and negative for the home country at first (capital enters), then reverses later as profits are sent home.