978-0134324838 Chapter 7 Solution Manual Part 1

7-1. Describe the nature of government intervention in India? What is the likely

effect on business activities?

(LO 7.1; LO 7.3; AACSB: Application of knowledge)

■ Government intervention creates a bureaucratic nightmare for businesses- trade

barriers, business regulations, import taxes, and controls on foreign investment are

substantial- with tariffs averaging over 15% on many products, compared to less than

4% in Europe, Japan, and the United States.

7-2. Why has the Indian government hindered the entry of Walmart, Carrefour, and

other large retailers into the country?

(LO 7.2; AACSB: Application of knowledge)

■ There are 10 million ‘mom-and-pop’ shops scattered across 500,000 cities/villages.

7-3. Describe how India’s government is attempting to liberalize the nation’s

regulatory environment.

(LO 7.2; AACSB: Application of knowledge)

■ Only recently, has the Indian government employed pro-business incentives such as:

◘ Abolished/minimized import licenses

■ To enhance India’s significant entrepreneurial potential:

■ Special Economic Zones (SEZs) were introduced- territories that offer foreign firms

■ Example-

◘ The Mahindra City SEZ, an 840-acre development, is focusing on a $277

SUGGESTED SOLUTIONS TO CASE QUESTIONS

Inc. 1 | Page

7-4. Where do you stand? Do you think EU subsidies and soft loans to Airbus are

fair? Why or why not? What advantages are gained by Airbus from free financial

support from the EU governments? Are complaints about the EU subsidies fair in

light of Europe’s history of democratic socialism?

(LO 7.2; LO 7.3; AACSB: Reflective thinking)

■ This case underscores the complexities and interdependencies of political and

economic systems. In Europe, where democratic, socialist regimes prevail, mixed

Totalitarianism Command economies

● Most government interference

● Least innovation

● Adverse commercial environment

● Some government interference

■ The political/economic context defines the expectation and extent of government

subsidies. These are very much a part of the supply chain in Europe. If, however,

■ For capitalist, market economies such as the U.S., military contracts sustain a firm,

although are not equivalent to subsidies. The U.S. government does not see contracts

■ What about the fact that Boeing has turned the tables on Airbus’ subsidies by getting

its own subsidies- from the Japanese – the new Boeing 787 is built in an alliance with

Inc. 2 | Page

7-5. Do you believe U.S. military contracts with Boeing amount to subsidies?

Have these types of payments provided Boeing with unfair advantages? Justify

your answer.

(LO 7.2; LO 7.3; AACSB: Reflective thinking)

■ 2005- the U.S. Trade Representative brought its case to the World Trade Organization

(WTO).

■ It arose because EU member states approved $3.7 billion in new subsidies and soft

■ The case alleged that financial aid for the A350, A380, and earlier aircraft qualified as

subsidies under the WTO’s Agreement on Subsidies and Countervailing Measures

■ Under the ASCM, subsidies to specific firms or industries from a government or other

■ Airbus confirmed that it had applied to the governments of Britain, France, Germany,

■ U.S. officials, concluding that EU subsidies and soft loans to Airbus constitute unfair

■ The WTO’s subsidy definition contains three basic elements:

■ All three of these elements must be satisfied in order for a subsidy to exist.

■ Military contracts are not subsidies. Performance is a condition of payment. Although

7-6. Assuming that Airbus cannot compete without subsidies and loans, is it likely

that the EU will discontinue its financial support of Airbus? Is it in the EU’s

interests to continue supporting Airbus? Justify your answer.

■ Most likely, the European Union would continue providing subsidies to Airbus unless

the WTO prohibits such activity.

Inc. 3 | Page

7-7. If the WTO rules against Airbus and tells it to stop accepting subsidies and

soft loans, how should Airbus management respond? What new approaches can

management pursue to maintain Airbus’s lead in the global commercial aircraft

industry?

■ If the WTO blocks subsidies and soft loans provided to Airbus by the consortium,

alternative means to support Airbus may be sought.

■ Financial resources through government contracts, similar to what has helped Boeing,

 MyManagementLab: Watch It! 3

Airbus vs. Boeing

Apply what you have learned by watching a video on the rivalry between the world’s two

leading aircraft manufacturers.

Go to MyManagementLab to view the video.

V. END OF CHAPTER QUESTIONS

● TEST YOUR COMPREHENSION

7-8. Explain tariffs, nontariff trade barriers, investment barriers, and government

subsidies. What are their main characteristics? How do they differ?

(LO 7.1; AACSB: Application of knowledge)

■ Protectionism refers to national economic policies designed to restrict free trade and

protect domestic industries from foreign competition.

Inc. 4 | Page

■ Subsidies– Governments also provide subsidies, a form of payment or other material

■ Critics – unfair advantages– subsidies artificially reduce the cost of business for the

7-9. In what ways do government subsidies amount to protectionism?

(LO 7.2; AACSB: Application of knowledge)

■ Protectionism refers to national economic policies designed to restrict free trade and

protect domestic industries from foreign competition.

 7-10. What is the rationale for intervention? Why do governments engage in

protectionism?

Visit MyManagementLab for suggested answers.

(LO 7.1; AACSB: Application of knowledge)

7-11. Describe various company strategies to manage government intervention.

Inc. 5 | Page

(LO 7.4; AACSB: Application of knowledge)

Strategies for Managers

■ Emerging markets, e.g. China, India, and countries in Africa, Asia, Latin America,

Eastern and Central Europe are characterized by extensive trade barriers and

(1) Research to gather knowledge and intelligence Firms should first undertake

(2) Choose the most appropriate entry strategies. Most firms choose exporting as

(3) Take advantage of foreign trade zones Governments establish foreign trade zones

■ Example- A successful experiment with FTZs has been the maquiladoras—

(4) Seek favorable customs classifications for exported products. Reduce

(5) Take advantage of investment incentives and other government support

Inc. 6 | Page

(6) Lobby for freer trade and investment. Increasingly, nations are liberalizing

7-12. What is the role of FDI, licensing, and joint ventures in reducing the impact

of import tariffs?

(LO 7.3; AACSB: Application of knowledge)

7-13. What is a regional economic integration bloc (also called an economic

bloc)?

(LO 7.5; AACSB: Application of knowledge)

7-14. What is the difference between a free trade area and a customs union?

Between a customs union and a common market?

(LO 7.5; AACSB: Analytical Thinking)

Free Trade Area

■ The simplest and most common arrangement, in which member countries agree to

Inc. 7 | Page

◘ Example- NAFTA

●The free trade area emphasizes the pursuit of comparative advantage for

Customs Union

■ Second level of regional integration- similar to a free trade area except that the

◘ Example- MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)

●. The adoption of a common tariff system means that an exporter outside

Common Market – (Single Market)

■ Third stage of regional integration- trade barriers are reduced or removed, common

external barriers are established and products, services, and factors of production such

◘ Example- EU

● Reduced/eliminated restrictions on immigration and the cross border

flow of capital

Challenges:

◘ Require substantial cooperation from the member countries on labor and

economic policies.

◘ As labor and capital can flow freely inside the bloc, benefits to individual

Economic Union– (Monetary Union- sometimes)

■Fourth stage of regional integration- member countries enjoy all the advantages of

early stages, but also strive to have common fiscal and monetary policies.

■ At the extreme–

Inc. 8 | Page

◘ Example- the EU

■ Monetary unions:

◘ EU has made great strides toward this. Nineteen EU countries have

■ Economic unions:

◘ Member countries strive to eliminate border controls, harmonize product and

■ Fictitious Example-

U.S. provides a good analogy for an economic union. Imagine each state is like an

individual country, but all are joined together in a union. The members have a common

currency, a single central bank with a uniform monetary policy, trade among the

■ Political Union: (ultimate)

◘ Perfect unification of all policies by a common organization- submersion of all

separate national institutions

◘ Example– Remains an ideal, yet to be achieved.

7-15. What are the worlds’s leading economic blocs? Explain their key features.

Inc. 9 | Page

(LO 7.6; AACSB: Application of knowledge)

■ Exhibit 7.8 illustrates the most active economic blocs.

The European Union (EU)

■1957– Treaty of Rome- European Economic Community (EEC) alliance formation-

origins of the EU -Belgium, France, West Germany, Italy, Luxembourg, and the

Netherlands- sought to promote peace and prosperity through economic and political

cooperation (www.europa.eu).

The European Union has taken specific steps to become an economic union:

Market access

Common market

■ Barriers to the cross-national movement of production factors—labor, capital, and

Trade rules

■ Customs procedures and regulations have been eliminated, streamlining

transportation and logistics within Europe.

Standards harmonization

■Technical standards, regulations, and enforcement procedures related to

Inc. 10 | Page

Common fiscal, monetary, taxation, and social welfare policies -in the long run

■ The euro (common currency since 2002):

●Simplified the process of cross-border trade and enhanced Europe’s

international competitiveness.

●Eliminated exchange rate risk in much of the bloc and forced member

countries to improve their fiscal and monetary policies.

●Unified consumers and businesses to think of Europe as a single market

●Forced national governments to relinquish monetary power to the

European Central Bank, in Luxembourg, which oversees EU monetary functions.

■ Common Agricultural Policy (CAP) is a long-standing fixture of the EU.

◘ CAP- system of agricultural subsidies and programs that guarantees a

minimum price to EU farmers and ranchers

Inc. 11 | Page