CHAPTER-4 / Unit-II

Economic Environment / Economic systems and

Development
Semester-I: Aug. Dec. 2023
Economic Environment – Economic Systems: Centrally Planned Economy,
Mixed Economy and Market Economy

(Chapter 4, Pg. 128 – 137)

from 7th Edition, Global Edition of John J.Wild and Kenneth L. Wild,
International Business –The Challenges of Globalization, Pearson

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 Explain different types of economic systems

 Examine the effect of economics on International

Business

 Discuss on economic development

 Understand the difficulties of emerging market

economies
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 India achieving in services industry

 China achieving in manufacturing industry

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 Founded in 1945
 Then…..the main product – “cooking oil”
 Today – top provider of IT services to …. Blue chip
companies throughout the world
 Has 120,000 employees [March 31, 2011] [in 2009 –
23,000 only]
 Total revenue $ 6.98 billion [in 2009 $ 1 billion only]
 Strategy – “cost leadership”
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 Was not sure of Free market reforms [International companies hesitated to enter]

 Resulted in the emergence of homegrown companies like “Infosys”

 Founded in 1981 with an initial capital outlay of $250 or 700 Saudi Rials; Today into global
Soft-ware and IT Consultancy Services with 151000 employees today and $7 billion in
revenue

 India had foundations of market economy [private enterprises, democratic government,

western accounting practices]

 Transparent and efficient capital markets

 Advanced legal systems

 Bottom-up approach to development (local people’s need is prioritized)

 Relies on brain power of people to advance …

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 Not a democratic economy but communist economy prevails
 Has developed its economy by opening up – to FDI [Foreign Direct
Investment]
 Capital market less efficient
 Legal systems not so much developed
 Top-down approach to development (need of the people at higher
positions is prioritized)
 Relies on natural resources and cheap labor

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 Centrally Planned Mixed Market
Economy Economy Economy

Government ownership of economic Mostly private (individual or business)

resources and state planning – China, Cuba ownership of economic resources –
& N.Korea USA, Australia, New Zealand

Government and private ownership of economic resources split rather evenly –

France, Netherlands, India, Malaysia, Germany, Norway, Pakistan, Spain, Argentina

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 Centrally Planned Economy (pg.130)
[Beginning of 19th century by Karl Marx – a German Philosopher]

Also called Socialist Economy,

Government owns most land, factories,
and other economic resources and plans Origin:
nearly all economic activity Asia
Central Europe
Eastern Europe
➢ Welfare of the group Latin America
is paramount
Russia (1917)
➢ Economic and social
China (1949)
equality is the goal
Cuba (1959)
➢ “Communist” system
is needed

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Reasons for Decline of Centrally Planned economies [late
1980’s]– (pg.131)

▪ Failure to create economic value [failed to offer quality goods and services
at the lowest possible prices]

▪ Failure to provide incentives to business individuals [to create new

technologies, new products and new production methods - resulted in no
economic growth and low standards of living] – such as North Korea

▪ Failure to achieve high rates of economic growth [unlike countries like –

Hong Kong, Singapore, South Korea, and Taiwan]

▪ Failure to satisfy consumer needs [unable to provide even the essentials to

all the people] – parallel black marketing or hoarding occurred

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 Government and private parties share ownership of land,
factories, and other economic resources rather evenly. Controls
the economic sector of national security (such as military
equipments and oil & gas production).

Noble goals: But stagnant:

 Low unemployment
and low poverty
 Steady economic growth
 Equitable distribution
of wealth
 State-owned businesses
uncompetitive
 Prices and taxes higher,
living standards mixed
 Privatized state firms to
boost competitiveness

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 Also called Capitalist Economy, Private parties (individuals or
businesses) own vast majority of land, factories, and other
economic resources, the prices of goods are determined by
market forces of demand & supply

Supply Demand

Quantity of a good or Quantity of a good or

service that producers are service that buyers are
willing to provide at a willing to purchase at a
specific selling price specific selling price

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 Origin of Market Economy is based on the concept of ‘Laissez-
Faire System’– (pg.136):

➢ The concept of ‘Laissez-Faire’ suggest an approach in which there is less

government interference in commerce and greater individual economic freedom.
Example economies of USA, Canada and Poland

➢ Therefore, to function smoothly a market economy three things are required:

• Free choice to consumers while purchasing goods or services
• Free choice to companies to enter which goods or services to produce and markets
to compete
• Price flexibility which completely depends on the forces of supply & demand.

➢ A free market economy creates entrepreneurs in a very flexible business

environment

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In market economy the government has relatively little or direct involvement in
business activities but still it plays four important roles:

➢ Enforce antitrust laws (prevent monopoly and consumer exploitation; prices are
kept low by the forces of competition)

➢ Preserve property rights (encourage individuals to start new business, invent

new products or invest in technology by protecting their assets and future
earnings)

➢ Provide fiscal stability (by controlling inflation through taxation & government
spending policies)

➢ Provide monetary stability (through money supply & interest rate policies)

➢ Preserve political stability (protection of businesses against terrorism,

kidnapping and other political threats)

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 The economic development of any nation is reflected in the well-being of that nation’s
people. And several economic and human indicators of economic development of any nation
is – a country’s economic output (agricultural and industrial), infrastructure (power and
transportation facilities), and its people’s physical health and level of education.

 A nation’s economic development reflects …..several human and economic indicators like
……………. Few of the indicators, of economic development of any nation, are:

▪ Economic output (agricultural & industrial) – GNP & GDP (pg.140)

▪ Purchasing Power Parity (PPP) (pg.141)

▪ It’s people’s health and level of education i.e. HDI (pg.144)

▪ Classification of countries (pg.145)

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 Developed countries
countries that are highly industrialized, highly efficient and whose
people enjoy a high quality of life [US, Australia, Canada, Japan etc.,]

 Newly industrialized countries

countries that recently increased the portion of their national
production and exports derived from industrial operations [Hong kong, South
Korea, Singapore and Taiwan]

 Developing countries (less-developed)

nations with the poorest infrastructure and lowest personal income
[Some nations in africa, asia etc.,]

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