CHAPTER E6. OPPORTUNITIES IN DEVELOPING ECONOMIES

Topics covered in this chapter:

1. the natures of lesser developed countries

2. managerial and entrepreneurial decision making in lesser developed economies

3. entrepreneurial capacity as comparative advantage

4. cultural environments of lesser developed countries

5. the underdevelopment of infrastructure

6. the scarcity of capital

8. labor in the lesser developed economy

9. the aappropriateness of technology

10. the potential of trade for development

11. the role of the government in the developing economy

12. entrepreneurial opportunities in the developing economy

CHAPTER E6. OPPORTUNITIES IN DEVELOPING ECONOMIES

Developing Economy Terminology

We choose the term "lesser developed country" (LDC) as perhaps the least problematic of the terms which have been employed in the literature to refer to low-income countries in the "third world" which are characterized by primary product production and the use of primitive productive techniques. (The "first world" consists of the industrialized market economies of Europe and North America; the "second world" encompasses the socialistic economies of the former Sino-Soviet bloc; the "third world" consists of the low-income and underdeveloped countries of the South and East.) The distinction between the "first" and "second" worlds is being made obscure by the transitions from socialism to market economy in the latter, and by experimentations with statism in the former.

The concept of "lesser developed" is of course relative. All economies except some in the very most remote and primitive parts of the world have experienced some development, some income growth, some adoption of advanced technologies, some industrialization. And many technologically advanced, financially mature economies surely still are underdeveloped relative to their resource endowments and potentials for continued development.

We shall take the term LDC to refer to countries which lag behind the technological conditions and income levels of the typical higher income, more industrialized, more technologically advanced economies of North America, Europe, and the Pacific rim. The term "newly industrialized country" (NIC) signifies countries in an intermediate state which are making progress from conditions of underdevelopment toward development.

Risk Factors

Managerial and entrepreneurial decision making in LDC economies should employ the same benefit-cost criteria as employed in advanced economies when considering either domestic or international operations. The problems of LDC decision making center about even greater market imperfections, even less market information, and ever greater market externalities than are found in more advance economies. This means that risks may be greater in any or all decision settings in the LDC economy. It also means that decision making in regard to business operations in LDC economies should be characterized more as entrepreneurial than managerial.

As we noted in Chapter A2 of Volume 1, the decision maker must compile a storehouse of experience upon which to base assessments of risk. And as noted above in discussing prospects for international operations, the best way to do this is to become as familiar as possible with the LDC decision setting. This may prove difficult without direct involvement within the LDC environment.

The Role of Entrepreneurship

Development economists have come to the conclusion that one of the most significant reasons for underdevelopment in the third world is lack of entrepreneurship. A region may have a rich endowment of various natural resources, but it will not be exploited without entrepreneurs to assume risk in innovation. Another region may be essentially devoid of natural resource endowments, but an entrepreneur may still perceive a productive opportunity and "make it happen."

A prerequisite to initiating an on-going development process is to provide conditions conducive to entrepreneurship and tolerant of entrepreneurship. Where enterprise is essentially lacking in a third world country, the avenues of international trade and investment may provide just the "jump start" necessary to promote on-going development.

We may hypothesize that one of the important comparative advantages of the developed part of the world lies in its endowment of entrepreneurial capacity. The exercise of entrepreneurship may be one of the most valuable contributions of the multinational enterprise to the LDC economies within which they operate. The problem for the LDC then is to indiginize the entrepreneurial process so that it will be taken over by local business interests.

The Cultural Environment

Foreign involvement in the LDC environment begs even greater questions about cross-cultural differences than occur when firms become involved in other economies which are similar to their own. Customs and dress are even more exotic. Business practices are likely to be even more closely tied to cultural heritage than the standards of business dealings which have emerged among European and North American countries. In many third-world countries, women do not enjoy the same acceptance in business dealings as do male managers.

A wide variety of national and tribal languages and dialects are spoken in the third world, although nineteenth and early-twentieth century colonialism has left a legacy of European language blocs in the third world. But the managers of a multinational enterprise attempting to do business in a third-world country should not expect to rely upon his or her native language or that studied in high school or college even though many people in the LDC may understand it as a second or third language. The foreign manager will find greater acceptance and business dealings will be facilitated if he or she can speak (even meagerly) the language of the realm and avoid faux pas related to cultural differences.

Infrastructure

One of the crucial problems of the LDC decision setting is the underdeveloped nature of infrastructure facilities which can be taken for granted in a more advanced economy. Transportation and communications facilities may be primitive; electricity and gas generation and transmission facilities may be lacking; sanitation and health care may be at an entirely different level than in the more advanced economy. The firm may find itself having to provide various of these services or facilities simply to be able to conduct its intended lines of business. Indeed, the scarcity of such infrastructure facilities may constitute rich entrepreneurial opportunities for both domestic and foreign firms.

One of the consequences of infrastructure underdevelopment is that it may not be possible to rely upon the commercial environment of the LDC to provide input supplies, complementary services, maintenance and repair support, or even marketing channels for distribution of outputs. A productive facility in an LDC is much more likely to have to be more vertically integrated, self-contained, and stand-alone than needs to be planned for and achieved in a more advanced economy.

Capital Scarcity

A common problem of most of the LDC economies is that directly productive capital is scarce and technologies are primitive. The so-called "vicious circle of poverty" turns upon the capital scarcity which ensures low labor productivity. The low productivity enables only meager wages. Incomes which are near (or below) the threshhold of subsistence needs limit the capacity of the society to save. Little indigenous saving limits the investment potential of the society. Finally, inadequate investment ensures that capital will remain scarce.

But the circle of poverty may be broken at numerous points, any of which may provide entrepreneurial opportunities for interests within or from outside the LDC economy. The capital scarcity itself may pose investment opportunities since interest rates should provide higher returns than available in capital abundant parts of the world. Higher interest rates should attract foreign savings either through portfolio or direct foreign investment, or through international bank lending. Foreign lenders will also insist upon even higher interest rates than warranted by capital scarcity so as to include risk premiums against the unknown and uncertain conditions in the LDC environment. Low wages should attract footloose industries from other parts of the world, but they may be perceived to be attempting to exploit an impoverished population.

Labor and Technology

In an LDC the manager should expect to employ labor of pre- or early-industrial attitudes and conditioning. Such a labor force may be attuned to the agricultural sector during peak planting and harvesting seasons, and may thus be absent from the commercial or industrial work place at those times. Labor in an LDC is typically not (yet) attuned to the discipline of the clock or to required manufacturing tolerances.

A critical problem of decision making in the LDC setting is choice of "appropriate technologies." The newest and most advanced technology employed in "the West" is not likely to be appropriate to the LDC, but numerous mistakes have been made in adopting Western technologies in LDC economies. The "appropriateness" of a technology should be judged with respect to the resource endowments of the region.

A region which enjoys an abundance of labor but a scarcity of capital should employ labor-using and capital-saving technologies. Unfortunately for many LDC economies, the technologies employed in the West have been developed in capital abundant settings to conserve upon scarce labor, and thus are not appropriate to the LDC setting without extensive adaptation.

Trade and Development

International trade and foreign direct investment are recognized by development economists to be two of the potentially most effective routes to the further development of an LDC economy. Specialization according to comparative advantage and trade can allow the LDC to develop its latent potentials. Foreign direct investment may help to change comparative advantages by relieving capital scarcity and technological backwardness. It may also help to diversity the LDC economy so that it is not so reliant upon one or a few crops or industries.

The operations of international and multinational firms can bring labor skills, managerial expertise, and new technologies to the LDC when the firms function as international transfer agents. Multinational enterprises prefer to establish subsidiaries or affiliates in the foreign environment in order to earn rents form their superior knowledge assets while maintaining control over them. The LDC economy will be the beneficiary of the employment and training provided by the multinational firm, and inevitably knowledge asset transfers to people in the LDC will occur deliberately or by leakage.

The Role of the Government

The government of the LDC may pose additional dimensions in the managerial decision setting which are not significant factors in the Western economy. An enlightened government will welcome both international trade and foreign direct investment by multinational enterprises; some have been willing to provide "tax holidays" as inducements to new foreign investment. However, governments of some LDC economies are suspicious of foreign involvements in their economies to the point of regulating and constraining the operations of foreign firms in their economies. One reason is that a multinational enterprise may generate larger gross revenues from its worldwide operations than the annual gross domestic product of the LDC.

It is not unusual for LDC governments to subsidize domestic "infant industries" in their economies, and to protect them from foreign competition with restrictive import quotas or tariffs. The government of the LDC may limit foreign investors to only minority (less than 50 percent) positions in domestic ventures, and may also impose a "sunset law" requiring the foreign investor to withdraw within a specified time period. Laws may also require the progressive indigenization of the labor force and the management. Affiliates of multinational enterprises may find difficulties in importing materials requirements or needed machinery.

The multinational firm is likely to face high taxes on inventories, sales, and plant and equipment, and tax rates may be unexpectedly increased after local operations are started. The multinational may also encounter difficulties in repatriating profits earned by its affiliate in the LDC. Finally, we should note that in some LDCs there are distinct risks of nationalization of foreign-owned facilities, and there is no guarantee that the government will provide adequate (or any) compensation for the assets nationalized.

Entrepreneurial Opportunities

Our discussion of the LDC setting has of course not been exhaustive; it is intended only to give the reader an overview of some of the problems to be encountered in decision settings in lesser developed countries. But we do not intend with this overview to discourage the manager from considering operations within the LDC. There are great opportunities to be considered in the LDC decision setting. A rational approach to such involvement is to identify all of the relevant benefits and costs emanating from such involvement, carefully assess the attendant risks, make adjustments to estimates of benefits and costs to account for the risks, and proceed if the involvement appears viable after allowing for the risks.

CHAPTER E6 SUMMARY

1. Lesser developed countries are those which lag behind the technological conditions and income levels of the typical higher income economies of North America, Europe, and the Pacific rim.

1. Managerial and entrepreneurial decision making in LDC economies should employ the same benefit-cost criteria as employed in advanced economies, but decision making in LDCs involve greater market imperfections, less information, and more externalities.

3. The decision maker should compile a storehouse of experience with the LDC environment upon which to base assessments of risk.

4. One of the most significant reasons for under-development is lack of entrepreneurship; on-going development requires conditions conducive to entrepreneurship.

5. Comparative advantage of advanced countries may lie in their endowments of entrepreneurial capacity, the exercise of which may benefit the economies of LDCs.

6. Cross-cultural differences with LDC economies are greater than with foreign markets in economies which are similar to the multinational enterprise.

7. The foreign manager will find greater acceptance and business dealings will be facilitated if he or she can speak the language of the LDC realm.

8. The underdevelopment of infrastructure facilities severely limit conducting business in the LDC, but may also constitute rich entrepreneurial opportunities.

9. Because of the underdevelopment of infrastructure facilities, a productive facility in the LDC is likely to have to be more vertically integrated, self-contained, and stand alone than in an advanced economy.

10. Capital scarcity is at the heart of a vicious circle of poverty in the LDC, but the circle can be broken by entrepreneurship from within or outside the LDC economy.

11. In an LDC the manager should expect to employ labor of pre- or early-industrial attitudes and conditioning.

12. The appropriateness of the technology for implementation in an LDC economy should be judged with respect to the resource endowments of the region.

13. International trade and foreign direct investment are potentially the most effective routes to further development of the LDC economy.

14. The operations of international and multinational firms can bring labor skills, managerial expertise, and new technologies to the LDC when the firms function as international transfer agents.

15. An enlightened host government will welcome both international trade and foreign direct investment by multinational enterprises, but the government may also be suspicious of the motives of the multinational.

16. Governments of LDCs are prone to protect and subsidize their domestic industries, and to limit the involvement of multinational enterprises in their economies.

17. Multinational enterprises often face high taxes in LDCs, and may be subject to risks of nationalization.

18. A rational approach to involvement in an LDC economy is to identify all of the relevant benefits and costs emanating from such involvement, assess the attendant risks, make risk adjustments to benefits and costs, and proceed if involvement still appears viable.

CHAPTER E6 SIGNIFICANT TERMS

lesser developed country
first, second, third world
advanced technologies
advanced economy
benefit-cost criteria
market imperfections
externalities
entrepreneurial, managerial decision making
comparative advantage
cross-cultural differences
language of the realm
infrastructure
vertically integrated
capital scarcity
circle of poverty
interest rates
risk premiums
foot-loose industries
appropriate technologies
international trade
foreign direct investment
multinational enterprise
infant industries
protection
sunset law
repatriating profits
nationalization
opportunities, threats

CHAPTER E6 QUESTIONS FOR DISCUSSION

1. Why is the concept of "lesser developed" a relative term?

2. Explain why the terms "first world," "second world," and "third world" may have begun to lose meaning.

3. Why are risks typically greater in lesser developed countries? What are the entrepreneurial risks that one should expect to confront?

4. How can the risks encountered in dealings in lesser developed countries be handled?

5. Why is entrepreneurship critical to development?

6. Discuss the relationship between entrepreneurial capacity and comparative advantage in advanced and developing countries.

7. How does the cultural environment of a lesser developed country bear upon managerial and entrepreneurial decision making there?

8. Discuss the implications of the inability of a manager of the subsidiary of a multinational enterprise to speak the language where the subsidiary is located.

9. Discuss the consequences and identify the opportunities of infrastructure underdevelopment in a lesser developed economy.

10. Discuss the managerial and entrepreneurial implications of capital scarcity in lesser developed countries.

11. Why might "vicious circles of poverty" not be nearly so vicious as they are described?

12. Discuss entrepreneurial opportunities found in "vicious circles of poverty."

13. Identify the likely problem of employment of labor in a lesser developed country by the subsidiary of a multinational enterprise.

14. Why are Western technologies often not appropriate for implementation in lesser developed economies?

15. Identify the economic criterion for selection of an appropriate technology.

16. Discuss the potential for trade and foreign direct investment to contribute to the development experience of a lesser developed economy.

17. Explain how the operations of multinational enterprises may benefit the development processes in lesser developed economies; what are the risks to the lesser developed countries of accepting such operations?

18. What problems with government administration do multinational enterprises typically encounter in developing countries? What are the managerial and entrepreneurial implications?

19. Discuss the consequences of protectionism in lesser developed economies for development and for entrepreneurial decision making.

20. Discuss the implications for a multinational enterprise's local operations in a lesser developed country if it has a history of nationalizing foreign-owned facilities.

21. What is the evidence that the opportunities outweigh the threats of involvement by multinational firms in lesser developed countries?