Question
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
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
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