Lesson 1.Opening Case: CHINA versus INDIA: Who will win?

India and China are among the world's fastest-growing economies, contributing nearly

30 percent to global economic growth. Both China and India are not emerging economies

they're actually "reemerging," having spent centuries at the center of trade throughout history:

"These two Asian giants, which until 1800 used to make up half the world economy, are not,

like Japan and Germany, mere nation states. In terms of size and population, each is a

continentand for all the glittering growth rates, a poor one" (Economist, 2010).

Both India and China are in fierce competition with each other as well as in their quest

to catch up with the major economies in the developed world. Each have particular strengths

and competitive advantages that have allowed each of them to weather the recent global

financial crisis better than most countries. China's growth has been mainly investment and

export driven, focusing on low-cost manufacturing, with domestic consumption as low as 36

percent of gross domestic product (GDP). On the other hand, India's growth has been derived

mostly from a strong services sector and buoyant domestic consumption. India is also much

less dependent on trade than China, relying on external trade for about 20 percent of its GDP

versus 56 percent for China. The Chinese economy has doubled every eight years for the last

three decadesthe fastest rate for a major economy in recorded history. By 2011, China is

the world's second largest economy in the world behind the United States (Ethiraj, 2010). A

recent report by PricewaterhouseCoopers forecasts that China could overtake the US

economy as early as 2020 (Rosselet, 2010).

China is also the first country in the world to have met the poverty-reduction target set

in the UN Millennium Development Goals and has had remarkable success in lifting more than

400 million people out of poverty. This contrasts sharply with India, where 456 million people

(i.e., 42 percent of the population) still live below the poverty line, as defined by the World

Bank at $1.25 a day (Rosselet, 2010). Section 4.1 "Classifying World Economies" will review

in more detail how we classify countries. China has made greater strides in improving the

conditions for its people, as measured by the HDI. All of this contributes to the local business

conditions by both developing the skill sets of the workforce as well as expanding the number

of middle-class consumers and their disposable incomes.

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India has emerged as the fourth-largest market in the world when its GDP is measured

on the scale of purchasing power parity. Both economies are increasing their share of world

GDP, attracting high levels of foreign investment, and are recovering faster from the global

crisis than developed countries. "Each country has achieved this with distinctly different

approachesIndia with a 'grow first, build later' approach versus a 'top-down, supply driven'

strategy in China" (Rosselet, 2010).

The Chinese economy historically outpaces India's by just about every measure.

China's fast-acting government implements new policies with blinding speed, making India's

fractured political system appear sluggish and chaotic. Beijing's shiny new airport and wide

freeways are models of modern development, contrasting sharply with the sagging

infrastructure of New Delhi and Mumbai. And as the global economy emerges from the Great

Recession, India once again seems to be playing second fiddle. Pundits around the world

laud China's leadership for its well-devised economic policies during the crisis, which were so

effective in restarting economic growth that they helped lift the entire Asian region out of the

downturn (Schuman, 2010).

As recently as the early 1990s, India was as rich, in terms of national income per head.

China then hurtled so far ahead that it seemed India could never catch up. But India's longterm

prospects now look stronger. While China is about to see its working-age population

shrink, India is enjoying the sort of bulge in manpower which brought sustained booms

elsewhere in Asia. It is no longer inconceivable that its growth could outpace China's for a

considerable time. It has the advantage of democracyat least as a pressure valve for

discontent. And India's army is, in numbers, second only to China's and America's...And

because India does not threaten the West, it has powerful friends both on its own merits and

as a counterweight to China (Economist, 2010).

India's domestic economy provides greater cushion from external shocks than

China's. Private domestic consumption accounts for 57 percent of GDP in India compared

with only 35 percent in China. India's confident consumer didn't let the economy down.

Passenger car sales in India in December jumped 40 percent from a year earlier (Schuman,

2010).

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Since 1978, China's economic growth and reform have dramatically improved the lives

of hundreds of millions of Chinese, increased social mobility. The Chinese leadership has

reduced the role of ideology in economic policy by adopting a more pragmatic perspective on

many political and socioeconomic problems. China's ongoing economic transformation has

had a profound impact not only on China but on the world. The market-oriented reforms China

has implemented over the past two decades have unleashed individual initiative and

entrepreneurship. The result has been the largest reduction of poverty and one of the fastest

increases in income levels ever seen (International Business, 2012).

China used to be the third-largest economy in the world but has overtaken Japan to

become the secondlargest in August 2010. It has sustained average economic growth of over

9.5 percent for the past 26 years. In 2009 its $4.814 trillion economy was about one-third the

size of the United States economy (Bureau of East Asian and Pacific Affairs, US Department

of State, 2010). China leapfrogged over Japan and became the world's number two economy

in the second quarter of 2010, as receding global growth sapped momentum and stunted a

shaky recovery.

India's economic liberalization in 1991 opened gates to businesses worldwide. In the

mid- to late 1980s, Rajiv Gandhi's government eased restrictions on capacity expansion,

removed price controls, and reduced corporate taxes. While his government viewed

liberalizing the economy as a positive step, political pressures slowed the implementation of

policies. The early reforms increased the rate of growth but also led to high fiscal deficits and

a worsening current account. India's major trading partner then, the Soviet Union, collapsed.

In addition, the first Gulf War in 1991 caused oil prices to increase, which in turn led to a major

balance-of-payments crisis for India. To be able to cope with these problems, the newly

elected Prime Minister Narasimha Rao along with Finance Minister Manmohan Singh initiated

a widespread economic liberalization in 1991 that is widely credited with what has led to the

Indian economic engine of today. Focusing on the barriers for private sector investment and

growth, the reforms enabled faster approvals and began to dismantle the License Raj, a term

dating back to India's colonial historical administrative legacy from the British and referring to

a complex system of regulations governing Indian businesses (History of India, 2011).

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Since 1990, India has been emerging as one of the wealthiest economies in the

developing world. Its economic progress has been accompanied by increases in life

expectancy, literacy rates, and food security. Goldman Sachs predicts that India's GDP in

current prices will overtake France and Italy by 2020; Germany, the United Kingdom, and

Russia by 2025; and Japan by 2035 to become the third-largest economy of the world after

the United States and China. India was cruising at 9.4 percent growth rate until the financial

crisis of 2008-9, which affected countries the world over (Badkar, 2011).

Both India and China have several strengths and weaknesses that contribute to the

competitive battleground between them (Keidel, 2007).

China's Strengths

Strong government control. China's leadership has a development-oriented ideology,

the ability to promote capable individuals, and a system of collaborative policy review.

The strong central government control has enabled the country to experience

consistent and managed economic success. The government directs economic policy

and its implementation and is less susceptible than democratic India to sudden

changes resulting from political pressures.

WTO and FDI. China's entry into the World Trade Organization (WTO) and its foreign

direct investment (FDI) in other global markets has been an important factor in the

country's successful growth. Global businesses also find the consistency and

predictability of the Chinese government a plus when evaluating direct investment.

Cheap, abundant labor. China's huge population offers large pools of skilled and

unskilled workers, with fewer labor regulations than in India.

Infrastructure. The government has prioritized the development of the country's

infrastructure including roads and highways, ports, airports, telecommunications

networks, education, public health, law and order, mass transportation, and water and

sewer treatment facilities.

Effectiveness of two-pronged financial system. "The first prong is a well-run directedcredit

system that channels funds from bank and postal deposits to policy-determined

public uses; the second is a profit-oriented and competitive system, albeit in early and

inefficient stages of development. Both prongs continue to undergo rapid governmentsponsored

reforms to make them more effective."

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India's Strengths

Quality manpower. India has a technologically competent, English-speaking

workforce. As a major exporter of technical workers, India has prioritized the

development of its technology and outsourcing sectors. India is the global leader in

the business process outsourcing (BPO) and call-center services industries.

Open democracy. India's democratic traditions are ingrained in its social and cultural

fabric. While the political process can at times be tumultuous, it is less likely than China

to experience big uncertainties or sudden revolutionary changes as those recently

witnessed in the Middle East in late 2010 and early 2011.

Entrepreneurship. India entrepreneurial culture has led to global leaders, such as the

Infosys cofounder, Narayana Murthy. Utilizing the global network of Indians in

business and Indian business school graduates, India has an additional advantage

over China in terms of entrepreneurship oriented bodies, such as the TiE network (The

Indus Entrepreneurs) or the Wadhwani Foundation, which seek to promote

entrepreneurship by, among other things, facilitating investments (INSEAD, 2011).

Reverse brain drain. Historically many emerging and developing markets experienced

what is known as brain drainwhere its best young people, once educated, moved to

developed countries to access better jobs, incomes, and prospects for career

advancement. In the past decade, economists have observed that the fast-growing

economies of China and India are experiencing the reverse. Young graduates are

remaining in India and China to pursue dynamic domestic opportunities. In fact, older

professionals are returning from developed countries to seek their fortunes and career

advancements in the promising local economieshence the term reverse brain drain.

The average age of the Indian returnees is thirty years old, and these adults are well

educated66 percent hold a master's degree, while 12 percent hold PhDs. The

majority of these degrees are in management, technology, and science. Indians

returning home are encouraged by the increasing transparency in business and

government as well as the political freedoms and the prospects for economic growth

(Wadhwa, 2009).

Indian domestic-market growth. According to the Trade and Development Report

2010, for sustainable growth, policies "should be based on establishing a balanced

mix of domestic and overseas demand (The Pioneer, 2010). India has a good mix of

both international and domestic markets.

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Each country has embraced the trend toward urbanization differently. Global businesses

are impacted in the way cities are run:

China is in much better shape than India is. While India has barely paid attention to its

urban transformation, China has developed a set of internally consistent practices across

every element of the urbanization operating model: funding, governance, planning, sectorial

policies, and shape. India has underinvested in its cities; China has invested ahead of demand

and given its cities the freedom to raise substantial investment resources by monetizing land

assets and retaining a 25 percent share of valueadded taxes. While India spends $17 per

capita in capital investments in urban infrastructure annually, China spends $116. Indian cities

have devolved little real power and accountability to its cities; but China's major cities enjoy

the same status as provinces and have powerful and empowered political appointees as

mayors. While India's urban planning system has failed to address competing demands for

space, China has a mature urban planning regime that emphasizes the systematic

development of run-down areas consistent with long-range plans for land use, housing, and

transportation (Dobbs & Sankhe, 2010).

Despite the urbanization challenges, India is likely to benefit in the future from its younger

demographics: "By 2025, nearly 28 percent of China's population will be aged 55 or older

compared with only 16 percent in India" (Dobbs & Sankhe, 2010). The trend toward

urbanization is evident in both countries. By 2025, 64 percent of China's population will be

living in urban areas, and 37 percent of India's people will be living in cities (Dobbs & Sankhe,

2010). This historically unique trend offers global businesses exciting markets.

So what markets are likely to benefit the most from these trends? In India, by 2025,

the largest markets will be transportation and communication, food, and health care followed

by housing and utilities, recreation, and education. Even India's slower-growing spending

categories will represent significant opportunities for businesses because these markets will

still be growing rapidly in comparison with their counterparts in other parts of the world. In

China's cities today, the fastest-growing categories are likely to be transportation and

communication, housing and utilities, personal products, health care, and recreation and

education. In addition, in both China and India, urban infrastructure markets will be massive

(Dobbs & Sankhe, 2010).

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While both India and China have unique strengths as well as many similarities, it's

clear that both countries will continue to grow in the coming decades offering global businesses exciting new domestic markets (Economist, 2010).

I. What is the Case Summary

II. What is the Case Problem

III. What is Case Facts

IV. Explain the Alternative Courses of Action

V. Explain the Evaluation of Alternatives and Solution to the Problem

VI. what is the Recommendation

VII. What is the Conclusion

Lesson 2. Opening Case: Making Sense of the Economic

Chaos in the European Union

In, you saw how political and legal factors impacted trade. In this chapter, you'll learn

more about how governments seek to cooperate with one another by entering into trade

agreements in order to facilitate business (International Business, 2012).

The European Union (EU) is one such example. The EU started after World War II,

initially as a series of trade agreements between six European countries geared to avoid yet

another war on European soil. Six decades later, with free-flowing trade and people, a single

currency, and regional peace, it's easy to see why so many believed that an economic union

made the best sense. However, the EU is facing its first major economic crisis, and many

pundits are questioning how the EU will handle this major stress test. Will it survive? To better

answer this question, let's look at what really happened during the financial crisis in Europe

and in particular in Greece *International Business, 2012).

At its most basic level, countries want to encourage the growth of their domestic

businesses by expanding trade with other countriesprimarily by promoting exports and

encouraging investment in their nations. Borders that have fewer rules and regulations can

help businesses expand easier and more cheaply. While this sounds great in theory,

economists as well as businesspeople often ignore the realities of the political and

sociocultural factors that impact relationships between countries, businesses, and people

(International Business, 2012).

Critics have longed argued that while the EU makes economic sense, it goes against

the long-standing political, social, and cultural history, patterns, and differences existing

throughout Europe. Not until the 2010 economic crisis in Greece did these differences become

so apparent (International Business, 2012).

What Really Happened in Greece? What is the European debt crisis? While experts

continue to debate the causes of the crisis, it's clear that several European countries had been

borrowing beyond their capacity (International Business, 2012).

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Let's look at one such country, Greece, which received a lot of press attention in 2010

and has been considered to have a very severe problem. The financial crisis in the EU, in

large part, began in Greece which had concealed the true levels of its debts. Once the

situation in Greece came to light, investors began focusing on the debt levels of other EU

countries (International Business, 2012).

In April 2010, following a series of tax increases and budget cuts, the Greek prime

minister officially announced that his country needed an international bailout from the EU and

International Monetary Fund (IMF) to deal with its debt crisis (International Business, 2012).

The crisis began in 2009 when the country faced its first negative economic growth

rate since 1993. There was a fast-growing crisis, and the country couldn't make its debt

payments. Its debt costs were rising because investors and bankers became wary of lending

more money to the country and demanded higher rates. Economic historians have accused

the country of covering up just how bad the deficits were with a massive deficit revision of the

2009 budget (International Business, 2012).

This drastic bailout was necessitated by the country's massive budget deficits, the

economy's lack of transparency, and its excess corruption. In Greece, corruption has been so

widespread that it's an ingrained part of the culture. Greeks have routinely used the terms

fakelaki, which means bribes offered in envelopes, and rousfeti, which means political favors

among friends. Compared with its European member countries, Greece has suffered from

high levels of political and economic corruption and low global-business competitiveness

(International Business, 2012).

What's the Impact on Europe and the EU?

In the ashes of Europe's debt crisis, some see the seeds of long-term hope. That's

because the threat of bankruptcy is forcing governments to implement reforms that

economists argue are necessary to help Europe prosper in a globalized worldbut were long

viewed politically impossible because of entrenched social attitudes. "Together, Europe's

banks have funneled $2.5 trillion into the five shakiest euro-zone economies: Greece, Ireland,

Belgium, Portugal, and Spain" (Theil, 2010).

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So if it's just a handful of European countries, why should the other stronger

economies in the EU worry? Well, all of the sixteen member countries that use the euro as

their currency now have their economies interlinked in a way that other countries don't.

Countries that have joined the euro currency have unique challenges when economic times

are tough. A one-size-fits-all monetary policy doesn't give the member countries the flexibility

needed to stimulate their economies (discusses monetary policy in greater detail). But the

impact of one currency for sixteen markets has made countries like Portugal, Spain, and

Greece less cost competitive on a global level. In practice, companies in these countries have

to pay their wages and costs in euros, which makes their products and services more

expensive than goods from cheaper, low-wage countries such as Poland, Turkey, China, and

Brazil. Because they share a single common currency, highly indebted EU countries can't just

devalue their currency to stimulate exports (International Business, 2012).

Rigid EU rules don't enable member governments to navigate their country-specific

problems, such as deficit spending and public works projects. Of note, a majority of the sixteen

countries in the monetary union have completely disregarded the EU's Stability and Growth

Pact by running excessive deficitsthat is, borrowing or spending more than the country has

in its coffers. Reducing deficits and cutting social programs often comes at a high political cost

(International Business, 2012).

As Steven Erlanger noted in the New York Times: The European Union and the 16

nations that use the euro face two crises. One is the immediate problem of too much debt and

government spending. Another is the more fundamental divide, roughly north and south,

between the more competitive export countries like Germany and France and the

uncompetitive, deficit countries that have adopted the high wages and generous social

protections of the north without the same economic ethos of strict work habits, innovation,

more flexible labor markets and high productivity (International Business, 2012).

As Europe grapples with its financial crisis, the more competitive, wealthier countries

are reluctantly rescuing more profligate economies, including Greece and Ireland, from fiscal

and bank woes, while imposing drastic cuts in spending there (Erlanger, 2010).

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Early on, EU critics had expressed concern that countries wouldn't want to give up

their sovereign right to make economic and political policy. Efforts to European

constitution and move closer to a political union fell flat in 2005, when Belgium and France

rejected the efforts. Critics suggest that a political union is just not culturally feasible. European

countries have deep, intertwined histories filled with cultural and ethnic biases, old rivalries,

and deep-rooted preferences for their own sovereignty and independence. This first major

economic crisis has brought this issue to the forefront (International Business, 2012).

There were two original arguments against the creation of the EU and euro zone: (1)

fiscal independence and sovereignty and (2) centuries-old political, economic, social, and

cultural issues, biases, and differences (International Business, 2012).

Despite these historical challenges, most Europeans felt that the devastation of two

world wars were worse. World War I started as a result of the cumulative and somewhat

convoluted sequence of political, economic, and military rivalries between European countries

and then added in Japan and the United States. World War II started after Germany, intent

on expanding its empire throughout Europe, invaded Poland in 1939. All told, these two wars

led to almost one hundred million military and civilian deaths, shattered economies, destroyed

industries, and severely demoralized and exhausted the global population. European and

global leaders were determined that there would never be another world war. This became

the early foundations of today's global and regional economic and political alliances, in

particular the EU and the United Nations (UN) (International Business, 2012).

Of course, any challenges to the modern-day EU have brought back old rivalries and

biases between nations. Strong economies, like Germany, have been criticized for

condescending to the challenges in Greece, for example when German commentators used

negative Greek stereotypes. Germany was also initially criticized for possibly holding up a

bailout of Greece, because it was unpopular with German voters (International Business,

2012).

European leaders first joined with the IMF in May 2010 and agreed on a $1 trillion

rescue fund for financially troubled countries. Then, Greece announced deep budget cuts,

Spain cut employer costs, and France raised its retirement age. France also joined Germany

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and the United Kingdom in imposing harsh budget cuts. Governments now face a crucial test

of political will. Can they implement the reforms they've announced? The short-term response

to those moves has been a wave of strikes, riots, andin Spain, Italy, Ireland, and France

demonstrations (International Business, 2012).

Yet supporters of the EU argue that the mutual common interests of the EU countries

will ensure that reforms are implemented. Memories of the fragility of the continent after the

wars still lingers. Plus, more realistically, Europeans know that in order to remain globally

competitive, they will be stronger as a union than as individual countriesparticularly when

going up against such formidable economic giants as the United States and China

(International Business, 2012).

The first and most relevant reminder is that global business and trade are intertwined

with the political, economic, and social realities of countries. This understanding has led to an

expansion of trade agreements and country blocs, all based on the fundamental premise that

peace, stability, and trade are interdependent. Both the public and private sectors have

embraced this thinking (International Business, 2012).

Despite the crises in varying European countries, businesses still see opportunity. UKbased

Diageo, the giant global beverage company and maker of Ireland's famous Guinness

beer, just opened a new distillery in Roseisle, Scotland, located in the northern part of the

United Kingdom (International Business, 2012).

The new distillery is a symbol of optimism for the industry after the uncertainty of the

global economic downturn. The scotch industry had been riding high when the financial crisis

hit and the subsequent collapse in demand in 2009 ricocheted through important markets like

South Korea, where sales contracted by almost 25 percent. Sales in Spain and Singapore

were down 5 percent and 9 percent respectively. There was also evidence of drinkers trading

down to cheaper spiritssuch as hard-up Russians returning to vodka (International

Business, 2012)

David Gates, global category director for whiskies at Diageo, says emerging markets

are leading the recovery: "The places we're seeing demand pick up quickest are Asia, Latin

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America and parts of Eastern Europe. Southern Europe is more concerning because Spain

and Greece, which are big scotch markets, remain in very difficult economic situations."...

The renaissance of Scotland's whisky industry has had little to do with Scottish

consumption. Drinks groups have concentrated on the emerging middle-class in countries

such as Brazil, where sales shot up 44 percent last year (International Business, 2012).

In Mexico whisky sales were up 25 percent as locals defected from tequila (Wood,

2010) While Europe continues to absorb the impact of the 2008 global recession, there is

hope for the future. It is too soon to write off the EU. It remains the world's largest trading

block. At its best, the European project is remarkably liberal: built around a single market of

27 rich and poor countries, its internal borders are far more porous to goods, capital and labor

than any comparable trading area....

For free-market liberals, the enlarged union's size and diversity is itself an advantage.

By taking in eastern countries with lower labor costs and workers who are far more mobile

than their western cousins, the EU in effect brought globalization within its own borders. For

economic liberals, that flexibility and dynamism offers Europe's best chance of survival

(Economist, 2010).

I. What is the Case Summary

II. What is the Case Problem

III. What is Case Facts

IV. Explain the Alternative Courses of Action

V. Explain the Evaluation of Alternatives and Solution to the Problem

VI. what is the Recommendation

VII. What is the Conclusion