A Study of the Financial Characteristics of Firms in Two Rapidly Growing Economies

By Penkar, Samuel; Deo, Prakash | Journal of International Business Research, July 2010 | Go to article overview

A Study of the Financial Characteristics of Firms in Two Rapidly Growing Economies


Penkar, Samuel, Deo, Prakash, Journal of International Business Research


INTRODUCTION

The expectation is that in the next two decades, China and India will turn into super-powers and industrialized nations. The analysis in this paper will help in understanding how each country's corporate setup works and will help in evaluating the investment potential in the buying of stocks of firms of each country in their various industry sectors.

This study contains a literature review followed by the results of the study. The study utilizes a three step top to bottom analysis; macroeconomic analysis followed by industry analysis and lastly with company analysis. The various tables and figures are attached to the end of the article.

LITERATURE REVIEW

Hu and Honghua (2002) compare key measures of strengths between China and India. These measures include GDP, ratio of long-term economic growth expectation in the world's total, average years of education, and the ratio of exported goods and services in the world's total. The authors conclude that China is far ahead of India. Husain and Harris (2009) compare and contrast broader aspects of the political, economic, and sociocultural climates within the two countries. Kalish (2007) and Zhao (2007) draw similar conclusions based on detailed comparisons and the risks and opportunities of doing business in each country. Wu (2007) compares the service sector growth in China and India and analyzes the determinants of growth in services with an econometric model. He finds that role of services in both China and India has been rising, with China starting from a lower base. Srinivasan's (2004) exhaustive study on comparison of economic performance between China and India identifies key differences and similarities, the underlying causes of success and failures and concludes that China and India have a lot to gain, both from trading with each other and cooperating in the WTO.

Maddison (2002) reveals that although India forged ahead of China until the outbreak of the First World War, since 1980, China has forged much farther ahead. Rwaski (2001), Srinivasan and Bardhan (1974), Deato and Kozel (2003), Park and Wang (2001) discuss the sources of estimates of economic performance in China and India, and their frailties. Bahl and Martinez-Vazquez (2003) argue that China's governance is much decentralized than indicated by the government and therefore, it is hard to predict the effect of greater decentralization on China's future fiscal health. Battacharya and Patel (2002) note that the Indian economy suffers from a large and increasing role of the government. Bosworth and Collins (2007) point out the weak and strong performances of India and China in various sectors and conclude that both economies should be able to sustain their growth.

While a wealth of literature exists on evaluation of these two countries from a macroeconomic perspective, there exists a gap in the finance literature, specifically, a perspective for potential investors in trying to determine where to place their investment funds. In this article, we examine the valuation issues that an investor needs to consider when investing in china and India.

By and large the finance literature advocates a three-step (also known as top-down) valuation process. The first step includes evaluation of general macro-economic factors which influence a country's economy. These factors include fiscal and monetary policy of countries, political conditions. The second step involves identification and assessments of an industry environment in a country's economy. It includes labor skills and relations, capital-labor and business cycle-industry inter-relationships, demographics, scope of the industry and its competitive environment to gauge business risk. The final steps comprise of individual firm analysis in an industry.

We use this three-step framework to evaluate and compare the valuation environment in China and India.

THE ECONOMIES

We deploy Goldman Sachs version of the three-step process, which includes examination of GDP as the key component of a country's economy. …

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