Economic principles are theoretical generalizations that contain assumptions expressing certain trends in the development of the economic system. As opposed to economic laws, principles do not objectively exist. They are specially created to systematize the process of economic knowledge and act as certain postulates, which can be viewed as a form of the implementation of economic laws. Economic principles are less stable and binding than the laws. Nevertheless, they can be applied in various situations that occur in the economy (Baumol & Blinder, 2012).
The following paper is dedicated to the overview of the joint venture agreement signed July 24, 2014 between Eaton Corporation, the power management company, and Shaanxi Fast Gear Co. Ltd., the Chinese producer of commercial vehicle transmissions and auto gears. In accordance with the joint venture agreement, both companies will combine their efforts to support the Chinese commercial vehicle clutch market, which is currently experiencing a rapid growth. The joint venture will focus on developing, manufacturing, assembling, selling, and servicing clutches and associated components for the Chinese commercial vehicle market. The details of the agreement are not disclosed, but it is known that Shaanxi Fast Gear will own a 51% interest in the new joint venture, while Eaton Corporation will own 49% (Schroede & Li, 2014).
Both companies engaged in a joint venture are among the industrial giants. Eaton Corporation is an American power management company with the annual sales of 22 billion dollars. It provides energy-efficient solutions that help to manage hydraulic, electric, and mechanical power more efficiently. The company has about 103,000 employees and operates in more than 170 countries. On the other hand, Shaanxi Fast Gear is the largest China-based specialized production enterprise that specializes in commercial vehicle transmissions, castings and auto gears. The company has over ten stock companies, a factory in Thailand, and a dealer office in the United States. The operation indices of Shaanxi Fast Gear have been the highest in the Chinese gear industry for eleven years. Moreover, its annual production and sales volumes of heavy-duty transmissions have been the highest in the world for eight successive years (Schroede & Li, 2014).
Therefore, by summarizing the provided information, it is possible to conclude that the economic principle of governmental intrusion into the economy can be applied to the abovementioned event. According to it, the government can sometimes improve the performance of the market. The competitive market can be described as a self-regulating structure, but in the case it is unable to allocate resources effectively, the government may change the situation by using monetary and fiscal policy. Such actions are usually aimed at ensuring the stable growth of the country’s gross domestic product (GDP) and maintaining a competitive environment in the market (Baumol & Blinder, 2012). Since both of the companies occupy the leading positions in their industries, a joint venture agreement will ensure a significant advantage on the Chinese commercial vehicle clutch market for them. However, as it is not yet fully developed, Eaton Corporation, together with Shaanxi Fast Gear, may not only acquire a large market share but also force smaller and weaker Chinese competitors out of the business, forming a monopolistic market. In the case of such event, the Chinese government may intervene by applying the measures of antitrust policy to both of the companies in order to protect smaller companies and maintain a competitive environment.
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In general, a joint venture between Eaton Corporation and Shaanxi Fast Gear will prove to be profitable for both of the companies. The agreement of the foreign company to sell the goods produced in partnership with the national company will lead to the reduced costs and shared financial risks. Shaanxi Fast Gear is a local company, which means that the yield of Eaton Corporation on the Chinese market will be greatly facilitated. Moreover, since Shaanxi Fast Gear is an experienced mediator, which has an established system of connections with consumers and positive business reputation in the Chinese market, a joint venture will be particularly effective. As a result, Eaton Corporation will strengthen its positions in China and increase its revenues (Campbell & Netzer, 2012).
It is clear that the competition is the most effective way of achieving the goals of the market economy and the interests of all members of the society. However, if Eaton Corporation and Shaanxi Fast Gear decide to enter into the vowel (or tacit) agreements on the division of the market or the price level (i.e. to create a monopoly), the buyers will be forced to pay a higher price for the products and reduce their consumption. In this case, the prices will be artificially high, and not all clients will afford to buy the same product in the desired quantities. As a result, the Chinese consumers may incur economic losses from the suppression of competition. Moreover, the elimination of competition would disturb the balance of supply and demand, which may lead to a waste of already scarce productive resources of the society (Steiner, 2007).
The result of such actions may be a governmental control of the monopolized market, which combines various methods of influencing the monopolized production. In particular, the Chinese government may impose financial sanctions, such as fines and taxes, on a joint venture in the case of violation of the antimonopoly legislation. Moreover, if Eaton Corporation and Shaanxi Fast Gear are implicated in the systematic use of methods of unfair competition, their joint venture may become a subject to direct disband. As a result, both companies will sustain financial losses and lose their positive image. Therefore, it is possible to conclude that the mentioned joint venture of Eaton Corporation and Shaanxi Fast Gear will be efficient and profitable if its participants abide by the Chinese law.
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