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Chasing the Dragon (and the Tiger): The growth of the two economic giants - India and China

Impressive facts and figures on both India and China are everywhere as both countries constantly feature on TV, in newspapers and the media. Deeper insights into the implications of the rapid economic growth and social and political change taking place are more difficult to find.

shanghaimed.jpgScale, scope and speed of growth

These two giant countries contain more than one in three of the world’s population (2.4 billion combined) but have only recently re-connected with the modern world to boost trade and foreign direct investment (FDI). Liberalisation, the opening up of borders and markets to foreign products, services and investment began in the early 1980s in China under Deng Xiaoping. By the time India began the same process in the early 1990s both countries had similar-sized economies, but China was already growing faster, at 8-9 percent GDP growth per year compared to 5-6 percent in India. As a result China has an economy which is now roughly twice the size of India’s. It has recently passed the UK to become the fourth largest economy, and at current growth rates will be Number 2 by 2016 and overtake the USA by 2040.

China’s ‘planned economy’ is dominated by manufacturing (39 percent of GDP) and has a heavy reliance on foreign firms. It has attracted ten times the inflow of FDI compared to India and around half of its exports are from foreign-owned firms based there. China’s key strengths, in addition to clothing and textiles, are electronics, consumer electronics, white goods, telecoms, autos and computing equipment. As a result both Dell and Wal-Mart buy around $17 billion worth of goods from China each year. But as local incomes rise China has also become the largest market for cell phones, cement, steel, television sets and machine tools, and will soon be the largest market for almost everything.

India by comparison gains just 16 percent of its GDP from manufacturing. Its strengths are in services, including customised software, back-office outsourcing and, increasingly, biotechnology and some media sectors including the Bollywood film industry. Its advantages include more efficient capital markets, a well-structured legal system, a highly entrepreneurial culture and a very useful global diaspora, as well as the English language. Its poor infrastructure, difficult labour laws, restrictive Government bureaucracy and lower literacy rates are seen to be weaknesses relative to China.


Opportunities, threats and a growing pressure to adapt

Many commentators view the two countries as competing in a ‘race to the top’. But it is far more relevant to think in terms of the combined effects of both countries on the rest of us. To do this we need to understand the type of economies they are evolving as the expertise of their people and the capabilities of their firms improve across particular industry sectors. This will provide some degree of foresight into future opportunities and threats.
The success of the Indian software industry is legendary. And as Indian firms like Tata and VSNL expand through crossborder merger-and-acquisition, Western firms see competitors where they once saw benign collaborators. Trends towards higher value-added products and services and international expansion are less well-known when it comes to China. The country is already second only to the US in terms of advanced technology exports, and it will overtake Japan this year to become the second largest investor in R&D. It spent around half of the UK budget on R&D in 1994 and now spends well over three times as much as the UK each year. A recent survey by McKinsey & Co. and Tsinghua University in Beijing shows that China’s technology companies are catching up their foreign rivals, moving from low-price product segments and a reliance on cheap labour to high price product segments and expertise in design, engineering and product development. They are adding more value per employee and getting increasingly better at innovating, both of which are key sources of sustained competitive advantage.

While the scale of these changes may be unprecedented, the processes of change are not. We have seen this pattern before. Some local industries in China are moving along the same path followed by the Indian software industry, and before it the Korean and Taiwanese electronics industries, and before them the Japanese auto and consumer electronics industries. But while it took 30-35 years for firms like Toyota and Sony to move from a cheap labour advantage to become lead innovators, firms like Samsung and Acer took 20-25 years, and Indian firms such as Wipro, TCS and Infosys just 15 years.

Industry domination?

This leaves us with two important questions: which industries will China and India come to dominate, and how long will it take? An obvious third question follows: are British, European and American firms going to be able to adapt in time?

Research at Warwick Business School, funded by the Economic and Social Research Council via the Advanced Institute of Management, is examining these very questions. Many firms have successfully reduced production costs by tapping into cheaper labour and/or better expertise in these emerging markets, or increased revenues by selling products and services in their growing domestic markets. What we are also finding, though, is that many firms are too focused on short-term gains and are failing to fully comprehend the longer term competitive threats from these emerging markets. In fact, in the case of China we find that some firms are unintentionally ‘breeding’ their future competitors. Once valuable brands, key technologies, effective management practices, or customer connections ‘leak’ out, often via local partnerships and joint ventures, what distinctive competitive advantages remain? Where will western firms move to in response to the Indian and Chinese challenge?