The Indian Elephant and the Chinese Dragon: Differing Development Strategies of India and China and Effects on Business Environments

Article excerpt

This paper deals with economic and institutional development policies and trajectories followed by India and China, including an emphasis on education, political philosophy, economic philosophies and sustained investments in future growth. These differing strategies have resulted in vastly different business environments, each with their strengths and weaknesses in the new global economy. The authors conclude that despite capital shortages, Indian companies have consistently outperformed Chinese companies, although the Chinese are catching up in certain sectors. The paper also explores the role of Foreign Direct Investment (FDI) in shaping competitive environments and local companies' strengths. Consequently, the paper has policy and developmental implications for India and China.

INTRODUCTION

Comparisons between the iconic Asian giants, India and China are inevitable and appear to have spawned an industry (see the recent special issues comparing India and China in the Economist, BusinessWeek, and McKinsey Quarterly). India's growth rate of 6% seems solid, but melts beside one of close to 10% for China. Indeed, China appears to have done better than India on virtually every measure of economic growth and poverty reduction. Several Indians, including Prime Minister Manmohan Singh, have spoken about adopting "the Chinese model". Yet, India's different political, cultural and social environments, as well as achievements, should call for a closer examination of the Chinese model. The two countries share a 2,170-mile border and the distinction of each being home to more than one billion people, many of them poor. However, myriad differences exist in their policy orientations that have affected the companies they have spawned and their impacts on the global economy. Several factors indicate that the two countries are committed to divergent paths of development and that the race has not yet been completed.

First, we explore the economic, political and institutional development policies and trajectories that the two countries have undertaken. Next, we underscore the different business environments that have resulted. We focus on the characteristics of the local companies that the countries' business environments have spawned, with their unique, though sometimes complementary strengths and weaknesses. Finally, we explore the implications of our analysis for policymakers and global investors.

THE TRODDEN PATHS

India embarked on its economic reforms more than a decade after China. Consequently, it has had less time to see policy effects. However, enormous differences exist between the economic, political and institutional strategies that the Indian and Chinese governments have undertaken. These strategic paths have led to vastly differing business environments.

First, the Chinese government nurtures and directs economic activity more than the Indian government does. It invests heavily in physical infrastructure and often decides (based on government connections) which companies receive government resources and listings on local stock markets. Second, the two countries have adopted divergent policies towards trade and foreign direct investment (FDI): China has embraced it, India remains cautious. Third, the countries have adopted differing forms of government: China remains a communist, single-party country, India the largest democracy in the world. Fourth, both countries' policies have placed differing emphases on hard infrastructure (such as ports, roads and electricity) and soft infrastructure (such as laws, institutions and financial markets). While China has consistently invested in the hard infrastructure, its investments in the soft have been often prompted by external, especially multinational corporations' and foreign governments', requests. India on the other hand has failed to invest sufficiently in hard infrastructure, but its competitive market policies have allowed soft infrastructure to flourish. …