Chapter 05

Economic Development

The increase in the economic well-being, quality of life, and general welfare of a nation’s people.

Advanced Country

A country that is highly industrialized, efficient, and whose people enjoy a high quality of life.

Ex. Australia, Canada, Japan, US

Emerging Market

A country that has recently increased the portion of its national production and exports derived from industrial operations.

Primarily located in Asia, Central and Eastern Europe,and Latin America

Developing Country

A nation that has low-quality infrastructure and personal incomes, often characterized by a high degree of technological dualism.

Gross Domestic Product (GDP)

The total value of goods produced and services provided in a country during one year.

Gross National Product (GNP)

The total value of goods produced and services provided by a country during one year, including incomes from overseas investments.

Shadow Economy

Economic activities that have market value but are not formally registered.

Can be as high as 70% to 7%

Purchasing Power Parity (PPP)

The relative ability of two countries’ currencies to buy the same ‘basket’ of goods.

Human Development Index (HDI)

A measure of the extent to which a government provides its people with a long and healthy life, an education, and a decent standard of living.

Political Risk

The likelihood of political actions that will positively or negatively affect a business.

Macro Risk

Political risk that threatens the activities of all domestic and international companies in every industry.

Micro Risk

Political risk that threatens companies only within a particular industry or more narrowly defined group.

Ex. Energy tariffs for oil and gas sectors

Local Content Requirements

Laws stipulating that a specified amount of a good or service be supplied by producers in the domestic market.

Economic Transition

The process by which a nation changes its fundamental economic organization and creates new free-market institutions.

Cultural Differences

Variations in cultural values and practices that may affect the ease of transition in various countries.

Adaptation

Incorporating political risk into business strategies, often with the help of local officials.

Lobbying

The policy of hiring people to represent a company's views on political matters with the aim of influencing legislation.

Requirements for Economic Development

1. Economic Growth

2. Gains in Productivity

3. Productivity increase in entrepreneurial activity and innovation

Technological Dualism

Combination of good technology and traditional processes

Ex. In Ethiopia, a city could have good new technology but if go 200 km out of the city people may have never seen a laptop before

Characteristics of Developing Country

• High degree of technological dualism

• Includes nations in Africa, Middle East etc.

How is GDP calculated

Per Capita figures for GDP or GNP used determine whether country’s population is wealthy enough to begin purchasing its products

What does it mean if a country has a higher PPP than another country but a lower GDP

Inaccurate GDP

Problems of Average

1. Urban areas tend to be more developed and have a higher per capita income than rural areas

2. Regions near goods harbors or other transport centers tend to be more economically developed than interior regions isolated by less efficient means of transport

How to reduce exposure to political risk

Have solid understanding of local values, customs, and traditions

Adaptation

Incorporating risk into business strategies, often with the help of local officials

How do companies incorporate risk

1. Partnerships

2. Localization

3. Development Assistance

4. Insurance

Sources companies use to conduct accurate political risk forecasting

• Current employees who have worked in the country to gain insights into culture and politics

• Agencies specialized in political-risk services

Economic Transition

Process by which a nation changes its fundamental economic organization and creates a new free-market institution

Key reform measures in economic transition

• Stabilizing the economy

• Allow prices to reflect supply and demand

• Legalizing private business and selling state owned companies

• Reducing barriers to trade and investment and allowing currency conversion

• Encouraging innovation through investment and entrepreneurship

Key obstacles for countries in Transition

1. Hard to find people with good managerial experience

2. Shortage of Capital

3. Cultural differences (Some may be resistant to change)