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Key Players in the World Economy

What will be the likely impact of the growing
economic power of China and India on individuals,
national and multinational firms in the 21st century?

Overview
1. China and the implications of its:
a. Population
b. Economic growth
c. The influence of:
i. Increased purchasing Power
ii. Increased FDI (Foreign Direct
Investment)
d. Predicted economic power in comparison to
the USA and EU
e. Barriers to entering Chinese markets
f. Trade opportunities
2. India and the implications of its:
a. Population
b. Economic growth
c. The Influence of:
Figure 1 - Deng Xioaping was the Chinese leader
i. Growing purchasing power that introduced capitalistic reforms in China
ii. Foreign investment
d. Predicted economic power in comparison to
the USA and EU
e. Barriers to entering the markets of these
economies
f. Trade opportunities

China
Background Information
• China is the fourth largest country by landmass and has a
population of 1.3 Billion people.
• China was originally a state-run economy, but after the
death of Mao Zedong, his successor, Deng Xioaping
introduced major economic reforms that changed it from a
state-run economy to a more capitalist economy.
• This saw the making of megacities like Shanghai, which were
close to the sea.
• However, the interior provinces of China still remain very Figure 2 - Click Image to know more about China
poor, with little education.
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Economic Growth

Figure 3 - China's GDP growth in comparison to the rest of the world. China became the world's
second largest economy shortly after 2009.

• China has been booming for the three decades. Economic growth has been constant around
10 for a very long time. These double digit growth rates make China a very lucrative business
to settle in.
• However, high growth rates are normal for a developing economy, but to have double digit
growth rates for such a prolonged period of time is truly remarkable.
• From this economic growth, the population of China has
benefitted greatly, their incomes have risen and the past
famines that had plagued china are now a thing of the past.

The Influence of Purchasing Power

• Purchasing power is measured by the purchasing power
parity: an exchange rate that allows the accurate
comparisons of purchasing power. It is used because prices
for specific products such as food vary considerably between
countries and consequently the purchasing power of a sum of
given money.
• Much of rural China still remains poor, even though there has
been dramatic change over the past few decades when China first
adopted Capitalism.
• Overall, the massive increase in total GDP has helped China.
• Cities such as Shanghai and Guangzhou have very wealthy citizens, facilitating the growth in
demand for luxury goods.
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The Influence in Increased Foreign Direct Investment

Figure 4 - As can clearly be seen in the Graph, FDI in China has sky-rocketed after 2004. Foreign Direct Investment has helped China reach those double digit
figures as well as make its labour market more skilled due to technology transfer. More Information of Chinese FDI→

Foreign Direct Investment (FDI) is the inflow of foreign wealth into a nation. This can be in the form
of capital such as manufacturing plants or other production facilities. It may be associated with
outsourcing of production in countries with lower input costs or it may be directed towards
production of foreign markets.

• FDI has poured into China as soon as it had adopted Capitalistic reforms; business became
more lucrative in China and the cheap unskilled labour that China provided was ideal for
manufacturing plants.
• FDI led to Technology Transfer, when countries with limited access to technology acquire
expertise when Multi-National Companies locate there. Gaining access to new technology
was one of the key aims of the Chinese government when economic reforms were
introduced; the reason why MNCs had to set up a joint venture with a Chinese company.
• This resulted in the availability of more skilled labour in the Chinese market due to
Technology Transfer. The increase in skilled labour lead to great production efficiency in
China.
• As a result of more technology and information coming into China, China began to develop
more sophisticated products like electronics and photovoltaic cells (solar cells). Companies
such as HUAWEI (Networking Electronics producer) and Suntech (Solar Cell producer) not
have become MNCs as they operate in different countries.
 4|Quazi Nafiul Islam – www.studenttech.co.cc

Predicted Economic Power in comparison to the USA and EU

Figure 6 - The ten largest economies in the world in 2050, measured in GDP nominal (millions of USD), according
to Goldman Sachs. Bigger Picture →

• The USA has a far higher GDP than China for the time being but China
has a far higher growth rate. Predictions state that China will overturn
the USA by 2040, and is currently the second largest economy. However
right now as China becomes more developed, will growth rates reduce?
Read more →
• China right now has the largest car market in the world. Read more →
o Such fast-rising car sales will put a great pressure on its roads
and other infrastructure in the future.
• China is already ‘economically colonising’ Africa to make sure it has the
resources to sustain strong economic growth in the future. But opinions
differ on this matter. None the less, China is making strong advances in
order to secure African natural resources.
• This is a developing topic, but facts are that America has the largest
economy by far, but China is still growing at a rapid pace.
• The shift in power due to the growing influence of China has made
China a key market for most Multinational businesses.
• China is also investing heavily into education and research facilities due
to the massive inflow of foreign currency. China is trying to make
something similar to the Ivy league in America; C9 League→
• Due to these high growth rates, Chinese are becoming richer and are
demanding better foods such as meat and fish.
• China is making its business more competitive and transparent through
the introduction of regulatory commissions as well as privatisation of
SEOs (State Owned Enterprises); reducing corruption at the same time.

Figure 5 - China vs. USA. Bigger Picture→

5|Quazi Nafiul Islam – www.studenttech.co.cc

Barriers to trading in China

• China unlike India was not a colony of the British; it lacks able English speakers, making
language a barrier to trade in China. China is ripe for investment so these English speaking
Chinese managers are in short supply and are likely to be expensive.
• Intellectual copyright laws are not properly enforced in China, so software makers and music
companies will have a very difficult market to sell to.
• Markets can suddenly fluctuate due to changes in government’s economic policies; the
government of China has a massive influence on the market because a large portion of the
businesses in China are SEOs. Investors have to understand a whole new set of the
monetary, regulatory, and legal issues that are involved as the Chinese government has a lot
of say in the economy.
• China has no nationwide credit database, so it is difficult to assess consumers’ credit-
worthiness.
• China is undergoing rapid social and
economic change; a widening disparity
between haves and have-nots could
cause significant upheaval.
• Multinationals often must compete
against local players with lower cost
operations and lower prices.
• The diversity of the Chinese market
is significant, requiring a variety of
products to meet segmented needs.
• Infrastructure is less developed
than in US, making transportation
a challenge: especially legal and
banking infrastructure.
• Conducting market research and identifying
market sectors is extremely difficult due a language and cultural
barriers; an advert may be culturally offensive to the Chinese. More→

Trading Opportunities
• China is a fast growing market with both enormous landmass and population;
there are plenty of customers in China.
• Growing car market means that it gives a larger market for car manufacturers
to sell to.
• There is a lot of interest in foreign education, as many Chinese students are
now opting for foreign degrees from countries such as Australia and the UK.
• As China is becoming richer there is growing demand for processed foods
such as meat and fish.
• Wine is also becoming something that rich Chinese are wanting.
• Large increase in income has led to the demand of luxury goods.

Please note, that more comparisons will be made in the India section of these notes, to give you
guys a comparative understanding of these two competing nations.
 6|Quazi Nafiul Islam – www.studenttech.co.cc

India
Background Information
• India is also a very large nation; 7th largest by landmass and with a
population of 1.2 Billion.
• The Indian subcontinent was colonised by the British and
India remained a colony for 200 years. As a result the
economy was crippled although the British did establish
an administration system and rail transport lines (which
was to transport Indian natural resources).
o However, this is now giving India an edge over
China because it has more English speakers; its
markets are more accessible.
• India was later broken up into the Muslim half (Pakistan) and
then the Hindu half (Present India). Pakistan then broke Figure 7 - Click to get more details in India
up into Bangladesh and Pakistan.
• Right now India has a much lower HDI than that of China. The higher the HDI the better. HDI
is a composite index of life expectancy, education and standard of living.

Figure 8 - Human Development Index: Trends 1980 - present Figure 10- Human Development Index: Trends 1980 - present
7|Quazi Nafiul Islam – www.studenttech.co.cc

Economic Growth
• After India received independence it adopted socialist principles aiming to reduce the rift
between rich and poor. It also believed greatly in the idea of self-sufficiency.
o This caused few private industries to grow as there were many restrictions and
formalities.
• Domestic markets in the 1980s were guarded by trade barriers; the government hoped that
this would give domestic businesses protection: markets were not open. This in turn
attracted little FDI and thus no technology transfer. Growth was slow in the 1980s and the
majority of Indians were very poor.
• In the 1990s government control over businesses were removed. As a result export as a
percentage of GDP increased, making India an open economy: an economy in which exports
and imports form a significant part of the GDP.
• India now has about 50% of the global market for outsourced IT and business services, made
possible by its English speaking population and good education system.
• India also has great human capital as there are many unemployed graduates in India with
growing industries in pharmaceuticals, electronics, cars, aerospace and biotechnology.

The Influence of increasing purchasing power

Average annual growth of real

Per Capita GDP,PPP,2007
per capita income, 1990-2007

China US$2,753 4.5%

India US$5,383 8.9%
Source: UN Human Development report,2009
• India has a strong and growing middle class meaning that the overall purchasing power of
India is increasing. This means that it will be more lucrative for car manufacturers, luxury
goods producers as well as electronics manufacturers to start selling here. Increased
purchasing power has also resulted in more FDI into India.
• However most 40% of the Indian population live in the poorest states and 25% of the Indian
population live under the US$1.25 poverty line.
8|Quazi Nafiul Islam – www.studenttech.co.cc

The Influence of Foreign Direct Investment

$160,000,000,000

$140,000,000,000

$120,000,000,000

$100,000,000,000
US$

$80,000,000,000
China
$60,000,000,000
India
$40,000,000,000

$20,000,000,000

$0

Year

Figure 9 - Foreign Direct Investment into India and China over the past few decades. Source: World Bank

• Flow of FDI is still slow due to the government still partially believing in self-sufficiency;
efforts are being made to increase this.
• FDI has increased purchasing power of Indians overall allowing them to purchase more
sophisticated goods and services.
• Also, technology transfer has helped India’s IT sector grow making it a powerhouse for IT.
Bangalore, the IT capital is making able IT engineers.
• As you can see, India and China took a big hit when it came to FDI (China’s hit was far more
significant).
9|Quazi Nafiul Islam – www.studenttech.co.cc

Predicted economic power in comparison to the US and EU

Figure 6 on page 4 gives you a
prediction on how the
economies of India and China
might become if they
continue to grow at
staggering rates.
10 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c c

Barriers to Trade
• India still holding onto the ideals of self-
sufficiency does have many trade barriers
installed that make imported goods more
expensive.
o Foreign companies have to pay
higher corporate tax. For normal
companies, it is 35% while for
foreign companies, it is 40%.
• Culture and Language is a big problem in
India: India has 23 languages with a myriad
of different cultures.
• There is still a lot of corruption that persists in India, and this means that setting up
businesses and legal formalities take a long time.
• Inconsistent Industrial Policy and Rules; Laws, regulations and rules are often and suddenly
changed.
• Labour Regulations and Protections: Under the Industrial Labour Law, in the case that any
company employing more than 100 employees lays off staff, it must first acquire permission
from the state government. As it is extremely difficult to obtain such permission from the
state government, not only does this regulation directly affect flexible business plan
changes, but it also makes business closure difficult.
• Foreign companies are limited to the amount of loans they take.
• China does not respect international intellectual property laws.
• Goods in India are often smuggled from other countries making them cheaper. For a legal
business to import and sell foreign goods there are a lot of fees to be paid, which makes
them very expensive and does not give them a fair chance at competition.
• Foreign investors are barred from investing into key sectors such as agriculture and
infrastructure such as transport.
• Lack of Infrastructure
o Infrastructure in such areas as electric power, roads and telecommunications
networks has not been developed and this is the principal barrier to the
enlargement of overseas investment in India.
11 | Q u a z i N a f i u l I s l a m – w w w . s t u d e n t t e c h . c o . c c

Trade Opportunities
Trade still as of now is difficult to carry out in India, mainly because of the protectionist policies that
India persists in maintaining, although new opportunities have been created with the incoming of
economic reforms in the 1990s.

• There is considerable human capital in India and with an English

speaking population, it means that skilled labour can be
recruited at very cheap wages are the cost of living in
India is much lower than that of western nations.
• India is a very education-promoting nation, meaning
that there are many opportunities for western
Universities especially in UK, USA and Australia to
make money from Indian students.
• International businesses are allowed to own
pharmaceutical companies in India meaning that they
can take advantage of the location to export to other
nations as well as taking advantage of the human capital
present in the country.