Country Attractiveness

Managerial Implications

•          Two broad implications for international business

–        Political, economic, and legal systems of a country raise important ethical issues that have implications for the practice of international business

–        The political, economic, and legal environment of a country clearly influences the attractiveness of that country as a market and/or investment site

Benefits

•          In the most general sense, the long-run monetary benefits of doing business in a country are a function of the size of the market, the present wealth (purchasing power) of consumers in that market, and the likely future wealth of consumers. International businesses need to be aware of this distinction, but they also need to keep in mind the likely future prospects of a country.

•          In 1960 South Korea was viewed as just another impoverished Third World nation. By 2003 it was the world’s 11th largest economy, measured in terms of Gross Domestic Product (GDP).

•          GDP is one of the ways of measuring the size of its economy. It is defined as the total market value of all final goods and services produced within a given country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.

•          By identifying and investing early in a potential future economic star, international firms may build brand loyalty and gain experience in that country’s business practices.

•          In contrast, late entrants may find that they lack the brand loyalty and experience necessary to achieve a significant presence in the market.

•          In the language of business strategy, early entrants into potential future economic stars may be able to reap substantial first-mover advantages, while late entrants may fall victim to late-mover disadvantages.

•          First-mover advantages are the advantages that accrue to early entrants into a market.

•          Late-mover disadvantages are the handicap that late entrants might suffer from.

Costs

•          A number of political, economic, and legal factors determine the costs of doing business in a country.

•          With regard to political factors, the costs of doing business in a country can be increased by a need to pay off the politically powerful to be allowed by the government to do business.

•          With regard to economic factors, one of the most important variables is the sophistication of a country’s economy. It may be more costly to do business in relatively primitive or undeveloped economies because of the lack of infrastructure and supporting businesses.

•          As for legal factors, it can be more costly to do business in a country where local laws and regulations set strict standards with regard to product safety, safety in the workplace, environmental pollution, and the like (since adhering to such regulations is costly). Also, local laws that fail to adequately protect intellectual property can lead to the “theft” of an international business’s intellectual property, and lost income.

Risks

•          As with costs, the risks of doing business in a country are determined by a number of political, economic, and legal factors.

•          Political risk has been defined as the likelihood that political forces will cause drastic changes in a country’s business environment that adversely affect the profit and other goals of a business enterprise. Social unrest can result in abrupt changes in government and government policy or, in some cases, in protracted civil strife. 

•          On the economic front, economic risks arise from economic mismanagement by the government of a country.

–        Economic risks can be defined as the likelihood that economic mismanagement will cause drastic changes in a country’s business environment that hurt the profit and other goals of a particular business enterprise.

–        When legal safeguards are weak, firms are more likely to break contracts and/or steal intellectual property if they perceive it as being in their interests to do so.

•          Thus, legal risks might be defined as the likelihood that a trading partner will opportunistically break a contract or expropriate property rights.

Overall Attractiveness

•          The overall attractiveness of a country as a potential market and/or investment site for an international business depends on balancing the benefits, costs, and risks associated with doing business in that country.

Political Economy and Economic Progress

•          It has been argued that a country’s economic development is a function of its economic and political systems

•          Generalizations regarding the nature of the relationship between political economy and economic progress

–        Innovation and Entrepreneurship are the engines of growth

–        Innovation and Entrepreneurship require a market economy

–        Innovation and Entrepreneurship require strong property rights

–        The required political system is in place

–        Economic progress begets/leads to democracy

The Nature of Economic Transformation

•          Deregulation

–        Removal of legal restriction to the free play of market systems

–        Allowing establishment and operations of private enterprises

•          Privatization

–        Transfer of ownership of state owned enterprise to private individuals

•          Legal systems

–        Laws that support a market economy

Hill, C. (2011) International Business: Competing in the Global Marketplace 8/e . McGraw-Hill Irwin, New York, Chapter 2 (National Differences in Political Economy) p40-85.