India Vs China Nov201

INDIA vs. CHINA International Business

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

Outline • Part 1

- A picture taken from the top.

• Part 2

- How are the two giants emerging?

• Part 3

- Who are the key actors behind their

development?

• Part 4

- 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

CHINA

$1.17 trillion

$ 6.9 trillion

9.1%

11.9%

Population (m)

1,123

1,319

Population growth (annual)

1,2%

0,6%

Inflation

4,3%

5,2%

Export of goods and services (% of GDP)

Over 40%

21%

Imports of goods and services (% of GDP)

24%

Over 30%

Gross Domestic Product GDP growth rate

Source: World Development Indicators database, 2008

Growth trends

|

1978

1982

1986

1990

1994

1998

2002 2006

1980

1984

1988

Source: IMF, 2007

Source: IIF, 2007

Source: IMF, 2007

1992

1996

2000

2006

The added value India: Compositionof GDP

China:Compositionof GDP 2007 12%

2007 18%

1990 22%

1990 32%

2007 29%

1990 27% 1990 42% 2007

48%

2007 53% Industry

2007 40%

1990 46%

Services

Agriculture

Industry

1990 31%

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

High profile human resources

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

DEMAND

Back-office Sophisticated consumers and industrial buyers

Internal entrepreneurship

RELATED AND SUPPORTING INDISTRIES

FIRM STRATEGIES, STRUCTURE AND RIVALRY

High R&D investments and capabilities

Ground up strategy

software R&D Centres/Labs and software training institutes

Homegrown entrepreneurship

Robust infrastructure (telecom, power and roads)

High competition

IT parks (Bangalore, Hyderabad, Chennai, Pune, Gurgaon)

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

MSC direct investment

Low R&D capabilities

Top down

Unskilled and low cost labour

Internal demand (State Owned industries)

Dependent on foreign technology

State involvment

Basic industrial infrastructure

External demand (exportation)

High burocracy

Cheap raw materials

Demand of labor intensive production

External source of technology

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

CHINA

Focus on services

Focus on industry

Lower GDP per capita

GDP per capita two times higher than India’s (in USD PPP terms).

Strong corporate governance standards

Lack of advanced institutional infrastructure and corporate governance

Advanced institutional infrastructure

Indifference towards oil prices fluctuations

Commercially-driven companies

Enjoy wide foreign exchange reserves

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

CHINA

Poverty

Low level of education

Poor knowledge of the industry dynamics

Poor living conditions

Low level of resources

Low level of resources

Bad physical infrastructures

Low level of institutional infrastructures and corporate governance

Inadequate supplies of capital

Skilled labour necessity

Late process of modernisation

Technological capacity

Time issue

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

CHINA before

Semi-socialist autarkic economy

Socialist economic system

High protection Difficulty to set up a new business Foreign investment not welcomed

INDIA now

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

State monopoly of the foreign trade system State-owned domestic enterprises Strict control

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.

•

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

financial

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

Development Strategy

The back office of the world The technology lab of the world Homegrown

China The workshop of the world The factory of the world

entrepreneurship.

Foreign Direct Investment (FDI)

Development approach

From the ground up.

Top-down approach

FDI status

Low

Extensive

Domestic firms environment

Nurturing environment for domestic firms supported by stronger infrastructure that allows enterprises to flourish.

Restricted environment with many obstacles for private domestic firms, preventing them from challenging state-owned enterprises.

Legal System

Advanced and decent legal system, that provides ownership protection for private domestic enterprises.

Unfair & inconsistent legal system with low political status. Domestic private enterprises are discriminated against several policies and

Who is the winner? India

China

Political system

Democracy

No democracy

Capital market

Allows firms to obtain capital they need to grow. Capital market operates with greater efficiency and transparency.

Macro-economic figures

Low performance

Tightly controlled capital allocation restricting the ability of private companies to obtain stock market listings and access the money they to grow. High need performance

Fuller use of resources owned necessary for longterm growth.

Misallocation and Inefficient use of resources depending on FDI.

[Growth rate & GDP]

Micro economic level

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.

•

India has had to deal with a

•

Moreover,

national savings rate half that of China’s and 90 percent less FDI. India

democracy

is

driven

an by

extensive, ethnic

and

messy religious

tensions. •

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 institutional and India have pursued advantages. different development

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

Any Questions?