CHAPTER-4 / Unit-II: Economic Environment / Economic Systems and Development

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
1
 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
2
 India achieving in services industry
 China achieving in manufacturing industry
3
 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”
4
 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 …
5
 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
6
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
7
8
9
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
10
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
11
12
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  State-owned businesses
and low poverty uncompetitive
 Steady economic growth  Prices and taxes higher,
living standards mixed
 Equitable distribution
of wealth  Privatized state firms to
boost competitiveness
13
14
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
15
16
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
17
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)
18
 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)
19
 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.,]
End 20

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CHAPTER-4 / Unit-II

Economic Environment / Economic systems and

(Chapter 4, Pg. 128 – 137)

 Examine the effect of economics on International

 Discuss on economic development

 Understand the difficulties of emerging market

 China achieving in manufacturing industry

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

 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 …

Government ownership of economic Mostly private (individual or business)

Government and private ownership of economic resources split rather evenly –

Also called Socialist Economy,

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

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

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

Noble goals: But stagnant:

Quantity of a good or Quantity of a good or

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

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

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

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

➢ Preserve political stability (protection of businesses against terrorism,

▪ 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)

 Newly industrialized countries

 Developing countries (less-developed)

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