This document provides a case analysis and recommendations for Bombardier regarding its options in dealing with subsidies provided to its competitor Embraer by the Brazilian government. It analyzes three options for Bombardier: 1) urging Canada to impose trade sanctions on Brazil, 2) negotiating directly with Brazil and Embraer, or 3) having Canada match Brazilian subsidies. It ultimately recommends the second option of restarting negotiations as posing the fewest risks in terms of costs and public opposition, while still allowing the other options if negotiations fail. The analysis draws on academic literature regarding international trade, political strategies, and subsidies to support this recommended course of action.

1. Amsterdam Business School
MBA International Business, part-time
Assignment week 3, November 11th, 2013
Case: Bombardier: Canada vs Brazil at the WTO [HBS 9-7003-022]
Michelle Donovan 10429859
Kivanc Ozuolmez 10429832

2. Clearly Bombardier’s strategy and the available options under discussion will shape
Bombardier’s market position and Canada’s role in the aviation industry in the coming years.
As shown in Exhibit 2, the regional jet market is forecasted to grow in the coming 20 years. In
addition to Bombardier’s market positioning and expected benefits at the corporate level, the
Canadian government andCanadian citizens through employment opportunities and the
aviation supply market around Bombardier will enjoy and benefit from Bombardier’s
successes now and long into the future.Our assumption is that both the Canadian and
Brazilian governments are interested in maximizing domestic welfare.Therefore, the three
options under discussion should not only be considered as Bombardier’s issue, but the effects
should be evaluated from a wider perspective, for the common (domestic) good.Therefore,
whatever the decision is, how much benefit will result, and how the decision is communicated
publicly has high importance.
If Bombardier goes for option one, and urges the Canadian government to impose trade
sanctions on Brazilian imports into Canada, export-related economic issues could be triggered
on different export goods on the Brazilian side, and could result inthe Brazilian government
taking serious actions to resolve the Bombardier vs. Embraer dispute, and cooperatingwith
Canada. The larger the sanctions are for the Brazilian goods, the stronger the effects on the
Brazilian economy and the earlier the Brazilian government will be likely to take serious
actions.
Although the above analysis seems persuasive at first glance, how these sanctions will affect
Canada itself, and how the public voice will react, especially from the sectors unrelated to
aviation, is uncertain. Goods imported from Brazil, such as leather shoes, coffee and
electronic components, are easily replaceable from different countries and suppliers, however,
the effects of any sanctions cannot be easily estimated. (The data given in the case is not
sufficient to estimate the effects of the sanctions on the Canadian economy, or on individual
companies importing Brazilian goods.) It is certainly doubtful as to whether these sanctions,
at $344 million CDN annually (p.14), would have enough of an impact on Brazil to force a
change in direction.
As the common benefits of the sanctions are not fully clear, Bombardier might not be able to
convince the Canadian government to apply trade sanctions on Brazilian products.
Negotiating the situation with the Brazilian government and Embraer is another option, where
success fully depends on what both parties can bring to the table. Currently, Embraer is
dominating the market, and driving for a larger market share. In addition to that, Embraer’s
position in Brazil, where corporate culture is dominant and the Brazilian government is atrue
supporter of Embraer, Embraer is shielded from outside enforcements of the WTO, Canada or
Bombardier. Therefore, Bombardier and Canada should offer something very attractive to get
the Brazilians to the table and ultimately conclude the negotiations successfully.
The negotiation terms are not stated in the case, but we have come up with some options.
Bombardier and Canada may suggest ending the competitive fight and instead starting to
cooperate, for example by dividing market share by price fixing,or offering similar funding
packages. To convince the Brazilians, Bombardier can offer collaborations on some activities,
like R&D, or production of common aircraft components, etc. The option to impose sanctions
on Brazilian imports is also still open and legally allowed by the WTO so this possibility
could also be used as a “threat” in the negotiations.
Whether these terms will be enough to convince Embraer and Brazil is not certain, but the
outcome is likely to be beneficial for both parties. However,this initiative, by nature, has some

3. elements of a cartel-like (monopolistic) structure and may result in resistance from theWTO,
or further issues being raised with the WTO by other countries and companies which are also
aircraft manufacturers and/or purchasers.
An aggressive approach, to match Brazilian government subsidies and PROEX financing with
the help of the Canadian government, is the third option. Bombardier considers this option the
most effective,the quickest to implement and the most advantageous. Through PROEX-like
export financing from the Canadian government, Bombardier can offer comparablefinancing
and pricing options to potential airlines and purchasers, and thus position itself in a stronger
position in the market against Embraer.
Price and financing matching is allowed by the rules of the OECD, of which Brazil is not a
member, but it is not clear if this price and finance fight is in violation of the WTO’s rules.
Even if this practice violates WTO rules, it will give time to Bombardier and Canada to
strengthen their market position, and probably the dispute will get higher exposure in the
WTO and result in an escalation for permanent resolution.
On the other hand, if Canada were to introduce such measures, perhaps Brazil would simply
increase its investment in PROEX in order to overtake Canada again, and the results would be
an escalation or “subsidy war”.
Bombardier thinksthe government’s interest is to focus on the long term effects of support –
otherwise thegovernment should be worried about the results of not supporting Bombardier;
lost export sales, employment issues, fragility of the supply market around Bombardier, and
other different domestic constituencies. But from a timing perspective, as the elections are on
the way, politicians will probably hold short term agendas, and focus on the short term
effects, especially public opinion about potential support. From experience, the Canadian
government knows that any type of support for Bombardier would resonate with both
supporting and opposing public voices across the country. The public reaction, especially
opposing voices, would be the main concern of the government while heading to the election.
As all three options above have their cons and pros, and may result in different outcomes for
Bombardier, the Canadian government and the overall regional jet market, we cannot decide
which way to go only by looking at cons and pros, and expected outcomes. Therefore, we
referred back to scientific research in our reader in hope of finding a direction.
The Harvard Business School review (HBS 9-390-001, 1990) refers to the positive
externalities argument, “concerned with situations where society could benefit from an action
that might be too costly for an individual, rational firm to undertake. …. In such a case, it
would make sense for the government to encourage the firm to undertake those activities,
even if a subsidy (or protection) was required. The social benefits of the government’s action
would outweigh the social costs” (p.4). Therefore we can expect that the Canadian
government’s potential support for Bombardier will be beneficial for overall society, and the
third option is more likely to offer stronger and wider outcomes. Furthermore there is the
profit-sharing argument, that support for Bombardier could improve national welfare. This
support could take the form of subsidizing R&D activities or providing “tax relief or
subsidies…to increase the profitability of private investments…[such as] expand[ing]
production facilities, foreign firms might be discouraged from expanding their own
operations. The result would be increased market shares and profits for the domestic firms” (p
4-5).

4. But then the question arises about managing public opposition to such support. In order to do
this, Bombardier should organize campaigns with politicians and government officials,
separate from election campaigns,which focus on support and its benefits for the common
good. Bombardier should also support election campaigns, maybe even fund (donate to) some
political camps to get the government onto its side after elections. As a pluralist economy, the
Canadian government is lobbied and pressurized by many different interest groups which
have different and conflicting demands, all of which it is expected to consider. In order to
“stand out” among all the different groups, Bombardier should invest in corporate political
activity (CPA).
According to Sean Lux et al, 2011, CPA activity is positively related to firms’ performance
and therefore, the political support mentioned above, or a different kind, is likely to help
Bombardier to get government support for export financing and subsidies, or for restarting
negotiations, or for imposing sanctions.
The HBR article goes on to mention that “conditional strategies which offered the carrot of
liberalized trade backed up by the stick of retaliation” are the most effective in terms of
getting the foreign side to respond with cooperation. Trade liberalization shows much higher
gains than trade protectionism (p.9).
Murtha &Lenway assert that “Countries are better off…if they cooperate…, refrain from
subsidies, and their companies likewise cooperate in a stable oligopoly” (p.122)
Therefore our conclusion is that Bombardier should approach the Canadian government after
the election to ask them to approach the Brazilian government with the aim of restarting
negotiations. We think the Canadian government is more likely to look favorably on this
option than the other two, as this will cost them the least amount of money (it does not
involve substantial injections of cash) and is the least likely to negatively affect public
opinion (again due to money; large sections of the voting public do not want to see more
subsidies given to Bombardier, and their reaction to increased prices due to sanctions on
Brazilian imports is not likely to be positive either). Also this approach is in line with
Canada’s actions in this conflict up until this stage, which have been to “play fair” and
involve the WTO at every stage. Furthermore this option does not preclude the use of either of
the other two options at a later stage. Should negotiations not be successful, the other options
(“stick of retaliation”) are still available, but would involve much more persuasion on the part
of Bombardier.

5. References
Case: Bombardier: Canada vs Brazil at the WTO [HBS 9-7003-022]
New Theories of International Trade (HBS note 390001)
Murtha, T. &Lenway, S. (1994) Country Capabilities and the strategic state: how national
political institutions affect multinational corporations’ strategies, Strategic Management
Journal, 15: 113-129
Lux, S., Crook, T.R., &Woehr, D. (2011) Mixing business with politics: A meta-analysis of
the antecedents and outcomes of corporate political activity. Journal of Management, 37: 223247