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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
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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
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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.
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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.
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■ 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.
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(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
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(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
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◘ 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-
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◘ 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.
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(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
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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
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