INDIA vs.

CHINA
International Business
Group members:
Iman Alalawi, Viola D’Andrea, Davide Di Labio, Marco Fossati, JiHong He, Harpreet Singh

Outline
• Part 1 • Part 2 • Part 3 • Part 4
- A picture taken from the top.

- How are the two giants emerging?

- Who are the key actors behind their

development?

- From backward to latecomers: different

perspectives.

Part 1
A picture taken from the top

Intro
India and China, the two former giants

Economic indicators
INDIA
Gross Domestic Product GDP growth rate Population (m) Population growth (annual) Inflation Export of goods and services (% of GDP) Imports of goods and services (% of GDP) $1.17 trillion 9.1% 1,123 1,2% 4,3% Over 40% 24%

CHINA
$ 6.9 trillion 11.9% 1,319 0,6% 5,2% 21% Over 30%

Source: World Development Indicators database, 2008

Growth trends

|

1978

1982

1986

1990

1994

1998

2002 2006

1980

1984

1988

1992

1996

2000

2006

Source: IIF, 2007

Source: IMF, 2007

Source: IMF, 2007

The added value
India: Com positionof GD P
2007 18% 1990 32%

China:Com positionof GDP
2007 12%

1990 22%

2007 29%

1990 27% 1990 42% 2007

48%

2007 53%
Industry

1990 46%

2007 40%

1990 31%

Services

Agriculture

Industry

Services

Agriculture

Source: Internal elaboration on World Development Indicators database, September 2008

Operating in emerging markets

Part 2
How are the two giants emerging?

India as back office of the world
FACTORS DEMAND RELATED AND SUPPORTING INDISTRIES FIRM STRATEGIES, STRUCTURE AND RIVALRY

High profile human resources

Back-office Sophisticated consumers and industrial buyers

High R&D investments and capabilities software R&D Centres/Labs and software training institutes

Ground up strategy Homegrown entrepreneurship

Skilled labour High level infrastructure, (Reliable/satellite telecommunicatio n) availability of fast Digital telecommunicatio n links High technological internal resources

Internal entrepreneurship

Robust infrastructure (telecom, power and roads) IT parks (Bangalore, Hyderabad, Chennai, Pune, Gurgaon)

High competition

favourable foreign policy

China as the work shop of the world
FACTORS DEMAND RELATED AND SUPPORTING INDUSTRIES FIRM STRATEGIES, STRUCTURE AND RIVALRY

Low average of instruction Unskilled and low cost labour Basic industrial infrastructure Cheap raw materials External source of technology

MSC direct investment Internal demand (State Owned industries) External demand (exportation) Demand of labor intensive production

Low R&D capabilities Dependent on foreign technology High burocracy

Top down

State involvment Growing competition between JVs, indigenous firms, and global Frees capital Multinationals market to promote expenditures Large number of state owned industries Mass production based on economy of scale

India vs China remarks
INDIA
Focus on services Lower GDP per capita Strong corporate governance standards Advanced institutional infrastructure Commercially-driven companies Enjoy wide foreign exchange reserves

CHINA
Focus on industry GDP per capita two times higher than India’s (in USD PPP terms). Lack of advanced institutional infrastructure and corporate governance Indifference towards oil prices fluctuations Enjoy wide foreign exchange reserves Global economic integration through international trade and investments

Part 3
From backward to latecomers: different perspectives.

Development in strategic terms
• SOME DISADVANTAGES OF BEING BACKWARD COUNTRIES:

INDIA
Poverty Poor knowledge of the industry dynamics Low level of resources Bad physical infrastructures Inadequate supplies of capital Late process of modernisation Time issue

CHINA
Low level of education Poor living conditions Low level of resources Low level of institutional infrastructures and corporate governance Skilled labour necessity Technological capacity Time issue

Development in strategic terms
How to overcome disadvantages of being “backward” countries? STRATEGY
Understanding the character and driving forces behind the industrial dynamics Assessing existing resources

INSTITUTIONS
State Compensatory role New institutions for the harnessing of capital and technology

Exploiting latecomer advantages!

Development in strategic terms
How to overcome disadvantages of being “backward” countries? STAGES OF GROWTH
Traditional society Transitional stage

STRATEGY

Take off Drive to maturity High mass consumption

Quasi-automatic process

Development in strategic terms
How to overcome disadvantages of being “backward” countries? FLYING GEESE PATTERN
Shifting competitive advantage from one industrial sector to another and from one country to another Industrial upgrading

CHINA
MNCs, FDI and technological learning as key factors for developing of flying geese latecomer industries

How India and China are exploiting the latecomers advantages

• Institutional innovations: tools that allow latecomer countries to take short cuts that might include a financial innovation, according to the country’s degree of backwardness. • These institutions feed highly essential data to the firms to establish, compete and grow in the competitive market INDIA CHINA
Confederation of Indian Industry (CII) EXIM Bank Industrial Development Bank of India (IDBI) Federation of Indian Chambers of Commerce and Industry (FICCI) National Development and Reforms Commission (NDRC) State Development Planning Commission (SDPC) Closer Economic Partnership Arrangement (CEPA) Ministry of Agriculture (MOA)

Part 4
Who are the key actors behind?

Role of the government
INDIA before
Semi-socialist autarkic economy High protection Difficulty to set up a new business Foreign investment not welcomed

CHINA before
Socialist economic system State monopoly of the foreign trade system State-owned domestic enterprises Strict control

State planning through 5Year Plan Mixed economy Reduced control on foreign trade and investment Privatization trend

INDIA now

CHINA now
3Step Development Strategy Reduced control on economy Government supervision through indirect guidance of a more dynamic economy Many institutions to control and supervise
(People's Bank of China, National Development and Reform Commission, Ministry of Finance…)

NDRC (CHINA)
• The National Development and Reform Commission (NDRC)

NDRC is a macroeconomic management agency under the Chinese State Council, which has broad administrative and planning control over the Chinese economy. • The NDRC's functions are;  To study and formulate policies for economic and social development,  To maintain the balance of economic development, and  To guide restructuring of China's economic system.

EXIM BANK (INDIA)
Exim Bank (The Export-Import Bank of India) • Exim is an Indian government-owned institution for the public sector. financial

Managed by a Board of Directors, which has representatives from the Government, Reserve Bank of India, Export Credit Guarantee Corporation of India (ECGC), a financial institution, public sector banks, and the business community. The Bank’s main objective is “…providing financial assistance to exporters and importers, and for functioning as the principal financial institution for coordinating the working of institutions engaged in financing export and import of goods and services with a view to promoting the country’s international

EXIM BANK (INDIA)
The Bank's functions are segmented into several operating groups including:
•Corporate Banking Group - handles financing programs for Export Oriented Units, Importers, and overseas investment by Indian companies. •Project Finance / Trade Finance Group - handles the entire range of export credit services such as supplier's credit, pre-shipment credit, buyer's credit, finance for export of projects & consultancy services, guarantees, etc. •Lines of Credit Group - handles the financing and export transactions in the agricultural sector. •Small and Medium Enterprises Group handles specific financing requirements of export such as credit proposals from SMEs under various lending programs. •Export Services Group offers a variety of advisory and value-added information services aimed at investment promotion, it offers assistance to Indian companies, to enable them to establish their products in overseas markets.

Part 5
Who is the winner?

Who is the winner?
India
Referred as The back office of the world The technology lab of the world Homegrown entrepreneurship. From the ground up. Low Nurturing environment for domestic firms supported by stronger infrastructure that allows enterprises to flourish. Advanced and decent legal system, that provides ownership protection for private domestic enterprises.

China
The workshop of the world The factory of the world Foreign Direct Investment (FDI) Top-down approach Extensive Restricted environment with many obstacles for private domestic firms, preventing them from challenging state-owned enterprises. Unfair & inconsistent legal system with low political status. Domestic private enterprises are discriminated against several policies and

Development Strategy Development approach FDI status Domestic firms environment

Legal System

Who is the winner?
India Political system Capital market Democracy Allows firms to obtain capital they need to grow. Capital market operates with greater efficiency and transparency. Low performance China No democracy Tightly controlled capital allocation restricting the ability of private companies to obtain stock market listings and access the money they need to grow. High performance

Macro-economic figures
[Growth rate & GDP]

Micro economic level

Fuller use of resources owned necessary for longterm growth.

Misallocation and Inefficient use of resources depending on FDI.

Published studies
• Last year, the Forbes 200, an annual ranking of the world’s best small companies, included 13 Indian firms but just 4 from mainland China. A report issued in 2000 by the Chinese Academy of Social Sciences concluded that, “private and individual enterprises have a lower political status and are discriminated against several policies and regulations. In a recent survey of leading Asian companies by the Far Eastern Economic Review (FEER), India registered a higher average score than any other country in the region, including China. In a World Bank study published last year, only 52 percent of the Indian firms surveyed reported problems obtaining capital, versus 80 percent of the Chinese companies polled.

Who is the winner?
If India has so clearly surpassed China at the grassroots level, why isn’t India’s superiority reflected in the numbers? Why is the gap in GDP and other benchmarks still so wide?

W hy?

Why?
• It’s the history; India’s economic reforms only began in 1991, more than a decade after China.

national savings rate half that of China’s and 90 percent less FDI.
India has had to deal with a Moreover, tensions. India is an by extensive, ethnic and

messy
religious

democracy

driven

India has also had a longstanding, volatile dispute with Pakistan over Kashmir. China, on the other hand, has enjoyed two decades of relative tranquility, it has been able to focus almost exclusively on economic

Future winner is…

INDIA

Conclusions
Comparing India and China, India is doing a superior job in utilizing their resources and exploiting the China and India have pursued different development institutional advantages.

strategies. • China used the fastest route to reach economic development which is foreign direct investment (FDI). • Indeed, India’s homegrown entrepreneurs may give it a long-term advantage over the Chinese inefficient financial system and capital market. • India’s strategy may enable it to catch up with and perhaps even overtake China.

Bibliography
• • Huang, Y. and Khanna, T. 2003. “Can India overtake China?” Foreign Policy, (July-Aug): 74-81. Khanna, Tarun and Krishna Palepu 2006. “Emerging giants: Building world-class companies in developing countries”, Harvard Business Review, Oct 2006, 1-10. Lehman Bros 2007. “India: Everything to Play for” (Chaps 2, 3 and 4). Angus Madison , 2005, “The West and the rest in the world economy, 1500-2030” Australian National University, Canberra Angus Madison, 2001, “The World Economy. A millennial perspective” Development Research Center, OECD, Paris Mathews, J.A. 2005. “The intellectual roots of latecomer industrial development”, International Journal of Technology and Globalisation, 1 (3/4): 433-450. Zhongying Pang 2007. “The dragon and the elephant”, The National Interest, 1 May 2007, 1-2. http://www.worldbank.org www.imf.org www.eximbankindia.com www.en.ndrc.gov.cn

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