l

Politicai EconomY

''ll*i:;.,

Chapter 2

81

5. J'

more than just should be broadened to include factors does other What ;;;;;;. development' of assessment an in il;ht;k rhorrldb" included views Sen's of ;;;l"p*""t? How might-adoption you think Sen Do influence got"**""'policy? is il;;;;; ?hut dtu"lop*ent about more than development? Explain' 1rr* ".ott"*ic that has to choose Yor., ur. the CEO of a company in ;;;"" making a $100 miliion investment i,rrri" or rhe Czech Republic' Both investments in" same long-run return' so your choice the vari' ".t**. [;;i;;;b, risk considerations' Assess oi doi'lg business in each of these na-

the Venezuela? How would you characterize

b.

political system? Ho* do you think that Chavez's unilaterat oil compa' changes to contracts with foreign by nies will impact upon future investment
foreigners in Venezuela?

c.

How will the high levei of pubhc- corrup-tion in V.rr"r,-,"Iu impact future growth ratesJ

d.

e.

"".-tttf.t ,it"r. Wt *h investment would you favor

why?

and

from- a Currently Venezuela is benefiting t""t"1".tt prices' What do you think might current t upp.t, if oii prices retreat from their hlgh level? progln your estimation, what is the long-run a this Is economy? ,rort fo, the Venezuelan international to .ol,rrr*y that is attractive
businesses?

6.

Venezuela' Read the Country Focus on Chavez's then answer the following questions:

a. Under Chavez's

leadership' what klnd of place in economic system is being put in

BgggAg,eEg YmWk Qgrobate*cx stohatedqe.mst:.eder Economy National Differences ln Political

to comptete the following Use ttre globalEDGE'M site
exerclses:

Exercise 2

ideas can have The defi.ritlon of words and political worldwide' In differ.n, meanings in different contexts ,iio.,-rfr" Freedoln in the Worl'd.tYl""y evaluates, the and civil liberties around the "tt"s of this survey and,a rank='.., -ffiiJ."",*;;i'+;;;$;i') =.i##;;;inLri ia. pr.tide a description

*is

'h' into consideration in ...;il;e- \Uhat factors are taken

survey?

or

world's leaders and

in different One wav that experts anatyze conditions in transition is through Marker Potenaal In' the use of economic indictors' The Michigan ir" lltipll i, u v"rttv studv conducted bv the Edu' Business State University Center for lntemational emerg' compare IrrJ" ""a Research (MSU-CIBER) to a ins markets on a variety of dimensions' Provide proceindexing J"I"''.ti"" of the indicators used in the greater impora"l"l ixrnnft of the indicators would have laptop- computers? tance for a company that markets 6;;i;;*c tr,. Mpi rankings' which developing coun'

""j,!,ffifi;il;Jil.ult"t'

;rJ;;iJ"ro.,

"d"ise

such a company to enter first?

years to get permissron to ment permission. It could ake of heavy industry' diversify into a new product' Mt"h was te;;h;;'^;., chemical, and steel production' Production quotas served for state-owned enterprises' the development ,"i frigtt tariffs on imports also stunted laws that made it labor of a healthy private sec[or' as did

difficult to fire emPloYees'

82

Part2

l;,.;:r.:','

iiterences

L ^/r,\
politicians, who fear that if barriers come down, a flood tf i.,e*pe.r.ive Chinese products will enter lndia' The privatization program continues to hit speed bumps,h. lu,"t. in September 2003 when the Indian Supreme Court ruled that the government could not privatize two state-owned oil companies without explicit approval from the parliament. State-owned firms still account for 38 percent of national output in the nonfarm sector, yet lndia's private firms are 30+0 percent more productive than their state-owned enterprises. There has also been strong resistance to reforming many of India's laws that *ak. it difficult for private business to operate efficiently. For example, labor laws make it almost impossible for firms with more than 100 employees to fire workers, creating a disincentive for entrepreneurs to grow their enterprises beyond 100 employees' Other 1""r0, *u.rdute that certain products can be manufactured only by small companies, effectively making it impossible for cornpanies in these industries to attain the scale required to compete intemationally.T2

By the early 1990s, it was clear that this system was iflcapable of delivering the kind of economic progress that many Southeastern Asian nations had started to enjoy. In 1994, India's economy was still smalter than B.igir*'r, despite having a popuiation of 950 million' trc GDp per cipita was a paltry $310; less than half the population .orrid r."d; only 6 million had access to tele' pht"".; only 14 percent had access to clean sanitation; ihe World Bank estimated that some 40 percent of the worid's desperately poor iived in lndia; and only Z'3 per' cent of the population had a household income in excess

ii1

;
i't

l
=

i)

ot$7,484. The lack of progress led the government to embark on an ambitious economic reform program' Starting in 1991, much of the industrial licensing system was dismantted, and several areas once closed to the private sector were opened, including electricity generation, parts of the oii industry, steelmaking, air transport, and ,o*. u."u, of the telecommunications industry' lnvestment by foreign enterprises-formerly allowed only grudgingly andiubject to arbitrary ceilings, was suddenly *.l.L*"d. Approval was made automatic for foreign equity srakes of up to 51 percent in an lndian enterprise, uni tOO p.r..rrt foreign ownership was allowed under certain circumstances. Raw materials and many indus' trial goods could be freely imported and the maximum arifflhat could be levied on imports was reduced from 400 percent to 65 percenr. The top income tax rate was also ieduced, and corporate tax fell from 57'5 percent to 46 percent in 1994, and then to 35 percent in 1997' The government also announced plans to start privatizing india's state-owned businesses, some 40 percent of which were losing money in the early 1990s. to these ecoJudged by some measures' the response ex' economy The nomic reforms has been impressive. from percent 6.3 panded at an annual rate of about 1994 to 2004, and then accelerated io 9 percent per annum during 2005-2008. Foreign investment, a key indicator of how attractive foreign companies thought the Indian economy was, jumped from $150 million in 1991

Gase Discussion Ouestions

(t.^lWt'r^t \--l
is

klnd of economic system did Indla operate under during 1947 to 1990? What kind of system

it moving toward today? What

are the impedi-

f, \-/

. ments to completing this transformation? ) How might *id..p..ud public ownership of businesses and extensive government regutations have impacted ( 1) the efficiency of state and pri' vate businesses, and (2) the rate ofnew business {ormation in India during the 1947-1990 time frame? How do you think these factors affected the rate of economic growth in lndia during this deregulation, and the removal of barriers to foreign direct investment affect the efficiency of business, new business formation, and the rate of economic growth in India during the post-1990 time periodl t.,at, now has pockets of strengths in key high-

/ ^ time frame? () Ao* would privatization,

to $36.7 biltion in 2008. Some economic sectors have done particularly well, such as the information technology ...,o. where India has emerged as a vibrant global .Ir,r", for software development with sales of $50 billion in 2007 (about 5.4 percent of GDP) up from just $150 million in 1990. In pharmaceuticals too, lndian companies are emerging as credible players on the primarily by selling low-cost' geglobal marketplace, -of ieric version. d.,rgt that have come off patent in the
developed world.

Q) v

technology industries such as software and pharmaceuticals. Why do you think India is developing strength in these areas? How might success in these industries help to generate growth in the other sectors of the lndian
economy?

However, the country still has a long way to go' At' tempts to further reduce import tariffs have been stalled by pohtical opposition from employers, employees, and
-",****rr*,r**r,**ra=*ai_.*rr,*,
_--,,.

Given what is now occurring in the lndian economy, do you think the country represents an attra;tive target for inward investment by foreign multinatlonals selling consumer prod'
ucts? \Vhy?

_-*B@e4dak,

!ffi*ir

it:,is!*]*nr:r$!&11?4lPi1;1W?;3"16qW/.rM..-$

Partl I

::

'l'': j ,-''-:-

"

for possible implications of such a development (b) monworld the system' irl rtr. worid trading ,y.r.*, (c) the business strategy of today's

c.

"iur, European and

U.S.-based global corporations' and (d) global commoditY Prices' and Reread the Management Focus on Vizio answer the following questions: a. Why is the manufacturing of flat panel,TVs to different locations around the

What would happen if the U'S' govemmerrt ..qr.ri..a thrt flai panel displays sold in tlre U"ir"a States hui to atso be made in the U"ir.a States? On balance, would this be a
good or a bad thing?

d.

*igtuti"g
world?

'What does the example of Vizio tell you about the future ofproduction in an increasingly int"grrted glotal economy? What does It iell you about the strategies that enterin highly orises must adopt in order to rhrive
competitive global markets?

b.

flat Vi4ro benefits from the globalization of the tVho are the losers? panel display industry?

ffieSgAf mk YAglf ff
Globalization

globarrmnr Et*hated6e":{tap}x.edu

following Use the globalEDGE'M site to complete the

exercises:

be listed also average population growth rates should

for

'

management's consideration'

Exercise

Exercise 2

that has Your company has developed a new product fact' it ln cultures' and rlar*"tt"t ,ppart u.,o,, to"t'tries in all the rates penetration. ;;-;".*d to a.hie're high averof the regardtess where it is lntroduied,
ccuntries

in' You are working for a company that is considering countries in in a foieign countty' Investing

r"ra*g

*trfl'itff*"n, ,rrii,io"s

of the local populace' Considering the costs ;;;;;*. has de' ;?-;;;fficr launch, iht *ut''gtment.team in countries

.ia"J t" introduce

the product initially only to afr* t urr. a sizeable population base' You are required

the top 10 ;;.;r.. a preli*inaiy report about of management member A size' i.r i.r*. of population Popula-

countries

t irral.u,"i ihu, u ,"rot"ce called the "\Uorld ", Data Sheet" may be useful for the report' Since tion

the growth opportunities are another major concern'

is an important element of strategic goals' As such' ;;;; ;;r;"y's long-term the at**rg.-.rr, iru, ..q"tted a report regarding the on based ,rr.ai""""tt of alteinative countries of ranking the of FDI' Accordinglv' ;;;-1;t.,* a is attractiveness ih" ,op 25 countries in terms of FDI mencolleague A ;;.i;i iugredient for your report' the "FDI Confi,anJ, p?t..,tully "seful toot called Find this il;" lnilt," which is updated periodically' regarding il;; ;;J provide additional information how the index is constructed'

G ;;;d"J,

Thomas Edison and now the largest industrial conglomerate i"-a*..i.r, produces u 'ild" array of goods and serjet ,i."r, fro* medical equipment' power generators'
ensines, and home

uppii''-""'' tolinancial services and ;;:;^;;i;;i;io., u'oui.ustine (cE owns NBc' one of

I ot Z globally in every business in which it rrrit.i""i.a. To fi,tth.r this goal, \Velch sanctioned and often opportunistic foreign direct il;;;;;ile strategy. GE took advantage of economic ;";;;", to invest weakness in Europe ftom 1989 to1995
be number

$rz!uiiltt"

A*".i.r',

big three network broadcasters)' This giant is no .o*p""v witi-l rerenues of close to $180 billion operatbeen has ,rr".,.g.r'ro international business' GE selling overseas for decades' During the tenure r"g to ""a ofl"g"rautv 6fO ]u.t \X/elch, GE's main goal was

in the region, half of which was use{ 11 some 50 companies'^\When the Mexican?eso ".q,ri.. ..,ii;;t; trr". t" iq95, G,E took advantage of the

J;ffi

purchase companies through' when Asian slipped into a And out in Latin America. in crisis in1997-1998 due to turmoil *u1o. ".o.,omic

;;..tl"t"i, .

GeL
Welch's GE, however, was stilivery much an American company doing business abroad. Under the leadership oi his successor, J"tr".V Immeh, GE,seems to be intent on be-

Chapter

37

the Asian currency rnarkets, Welch urged his managers to view it as a buying opportuniry. I., japa., alone,"the company spent $15 biilion on acquisition in jusr six months. As a resuk, by the ..d oi \7elch,s tenure in 2001, GE earned over 4C percent of its revenues from intemarional sales, up frorn 20 percent in 1985.

local needs. For example, GE Health Care rrlakes MRI million each, but its Chinese research center is designing MRI scanners that can.be priced for $500,000 and are more likely to gain sales in the developing world.
scanners that cosr $1.5

China; and. Bangalore, India. The beliei'is thal by locating in those economies where it i, g.ori.rg rapidly, GE can berter design equipment that is best suited to
'-

GE has also shifted research overseas. Since 2004 it has opened R&D centers in Munich, Germany; Shanghai,

Moreover, it gave country managers more power. !7hy is GE doing this? The company b,".li.rr.s thrt to succeed internationally, it must be close to its customers. Movi"g 9E Money ro London, for example, was promptecl by a desire to be closer ro cus[omers in Europe and Asia. Execurives at GE Healrh Care like Lo"J;; because ir allows easier flights to anywhere* i., th" *o.ld.

headquarters for the unit rh]at sells eq,lipm".rt ro oil a.rd gas companies to Florence, ltaly. And in 2008, the com_ pany moved the headquarters for GE Money to London.

controlled from the center. Then in 2004, GE moved the head office of its health care business from the United States to London, the home of Amersham, a company GE had just bought. Next, GE relocared tire

made some major changes in the wiy GE'is organized and operates. Until recently, all of GE,s major businesses had head offices in the United States ,.,j rr"."

coming atrue globalcompany. For.rne thing, intemational revenues continue to grow faster tlan domestic revenues, passing 50 percent of the total inZa./i-This expansion is increasingly being powered by the dy,,rf;r,i. economies of Asia,.particularly India and China.'Ct' .o* sells more wide-bodled ier engines to India than in the Untied Srates, and GE is a major beneficiary of the huge ini,.astrucrure investmenm now taking place in China as rhal couniry rapidly in airports, railways, and power srarrons., By llI.j" 2012, analysts estimare that GE will be generating ,5 rto 60 percent of its business intemationally. To reflect the shifting cenrer of graviry, Immelt has

past were often American expatriates, in"creasingly come from the regions in where they work. GE ha, fo.,nd that localnationals are invaluabie when t.yingi; s.llto local companies and governments, where a deep understand-

,tro.,g work ethic, foreign accents are now frequently heari among the higher ranks. Counrry *rrr"g..r, who in the

hire- managers from the Midwest

GE is also rapidly internationalizing its senior man_ agement. Once viewed as a compu,ly thrt

L*"rr. .iif,.i.

preferred to

gain.

China, for example, the govemment is a large customer, and working closely with govern..r".rt b,r.?r.,crars requires a cultural sensitivity that is difficult for outsiders to

tl,g of local language and culture is often critical. In

tightly

with jet lag," according to the head of the u.rlt.oo Case Discussion Ouestions

moved its annual sales meeting to Sorrento, Italy from Florida. "lt was time that the America.r"l.r..r,

management ranks, GE,s American managers are increasingly traveling overseas-for managemerit trainlng and company evenrs. In 2008, in a highly symbolic g.I.,rr", GE Tiansporrarion, which is based in b.il, p*.rf1rrrrri",

In addition to the internarionalization of their

to deal

Wfry do you thtnk GE has invested so aggressively in foreign expansion? What opporruniries z.-- is it trying to exploit? is GE rrying ro achieve by moving ()Ynl, some of

C)

the company? Do these

States
?

rhe headquarters of its global businesses ro foreign locations? How might s,_rch moves benefit

.*.r.,

benefit the United

is the goal behind trying to ,,inremational_ ize" the.sen-ior management ranks at GE? What clo you think it means to,,internationalize,,these

What

ranks

CD

nature of true global businessesl

What does the GE example tell you about the

-,--ii'w?i:+gt_h*1iqjti.,+u:a:ji&

ftfo&es
1. Sources: G. Colvin, ,,Think your Job Can,t Be Senr ro Fortune, December 13, ZOO4, p. g0, A. pollack, llilut" "\il/ho's Reading your X-Ray,,, The New yrrk T,_.s, November 16,2003, pp. 1, 9; ,,Sun, Sand S.alp"[s,;,The "nd Economist, March 10, 2OO?, p.6; ,,Op"ru,i.,g
"Hips Abroad," Reason, May 2d0i9, p. 14.'

2. Tiade sraristics from !7orld Tiade Organizarion, trade sra.

from Bank for Intematio.rrl

tistics database, accessed May 12, 2059, athttp://stat.wto. org/ HomefMSDBHome.aspx. Foreign t,..l,r"g" srarisrics

R ofit,,, The Economist, August 16, 200d, pp Zi*le; r"J n. Bailey,

bis.org/index.htm. 3. Thomas L. Friedman, The\X/orld.Is Flar (New york: Farrar, Straus and Giroux, 2005).

S"ttl"ir..rt" ui-tittp 77***.