These days the media constantly bombards us with references to emerging countries. These are nations – such as China, India and Brazil – that are undergoing rapid economic growth and industrialization. As a leading business school with an especially international outlook, much of INSEAD’s research and Executive Education teaching focuses particularly on emerging countries. Two of our experts in economics, Professors Ilian Mihov and Antonio Fatás have devised a framework for understanding the mechanisms for economic growth on a national scale. Their view is that, in order to develop fast, countries must exhibit what they call, "The 4 I’s of Economic Growth”: Innovation; Initial Conditions; Investment and Institutions…
“Over a long period of time,” say Mihov and Fatás, “the increase in the economic well‐being in the world can come only from innovation.” They point out that innovation is not always to be associated with new technology or new products. Sometimes it is to do with finding new ways of producing the same old things, for example through better management and better organization of production.
The INSEAD professors point out, “The logic is rather simple – when a country is poor, it means that there is little production, hence there are few factories and labor is cheap.” It can be a very good idea to build a factory in such a country, at least if the product is easily tradable. Alternatively, the factory can be used to satisfy local demand that did not previously exist. Again, this can prove rather profitable, at least if there is a lack of competition.
Mihov and Fatás say: “If we imagine a country as a large factory (at the end that is what GDP measures, the production of all final goods and services that firms produce in a given country over a period of time), for output per worker to grow, we need a bigger factory, more machines, new technologies, new ways of organizing production, a more qualified labor force.” And none of this is possible without investment.
Indeed, if we look at the countries where so-called economic miracles have occurred, such as China and Singapore (or formerly Japan and Korea), we see growth rates of 6% or more accompanied by investment rates of 30 to 45% of GDP. Conversely, say the INSEAD professors, countries where investment rates are less than 10% of GDP, are historically proven to become poorer over time. Of course, there is such a thing as foreign direct investment, but – for example – in China, this is has not been significant. Nevertheless, according to Mihov and Fatás, overseas investment can be very important in providing know-how.
So far, so simple. The recipe for a poor country to become rich is to invest more, ideally in innovation. However, Mihov and Fatás claim that this alone is not enough. In a poor country, there simply is no money to invest. And, even if living conditions can be squeezed enough to provide funds, governments inevitably misdirect investment and build symbols of national pride with little practical benefit. What they really need is a thriving private sector to make sure that the investment brings economic returns. And this is only possible in a healthy regulatory structure… which brings us to Mihov and Fatás’s fourth “I”. “In short,” they say, “the environment for doing business matters and it matters a lot. This environment we call institutions.”
To support continued economic growth and investment in Asia, INSEAD has developed a special Asian leaders management development training course, the Asian International Executive Programme. Professor Ilian Mihov, who teaches Economics on the programme, is among INSEAD’s world-class faculty who live, work and carry out research in the region. If you are based in Asia and moving into general management or your company is expanding internationally in the region, it could be the perfect program for you. Alternatively, if you are a general manager whose company is moving into Asia for the first time, the program is a quick, efficient way to pick up all the insights you need. In the meantime, click here to download a copy of the original article, "The 4 I’s of Economic Growth".
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