Economies in Asia: The dragon vs. the elephant

In the race between Asia’s two major developing nations, China’s dragon is, by most indicators, beating India’s elephant, hands down. Its gross domestic product (GDP) is growing at a rate almost double that of India’s, and the aisles of Wal-Mart are cluttered with products made in China. But the United States and the rest of the world had better keep an eye on the elephant and resist temptation to declare the dragon the victor quite yet, says a Harvard Business School (HBS) professor.

“I think there’s a lot of truth to the characterization by most mainstream Americans and American social scientists that China is winning the ‘race,’ whatever that means,” says HBS professor Tarun Khanna.

But Khanna, who’s spent some years comparing the economic development of these two emerging nations and is at work on a book on the subject, cautions that while China has successfully leveraged its governmental structure to attract the foreign companies fueling its manufacturing boom, India’s indigenous entrepreneurship is thriving in a way that cannot be ignored.

Despite – or perhaps because of – the fact that its government lacks the economic savvy of China’s, India has bred homegrown entrepreneurial ventures that are thriving. So-called “knowledge” industries like software, pharmaceuticals and biotechnology, advertising, and even the film industry are giving India an edge over its neighbor.

“I have a certain amount of dissatisfaction with just using per capita GDP as a summary measure for economic performance and human welfare,” says Khanna. “Based on a lot of objective indicators that Yasheng Huang (formerly of HBS and now at the MIT Sloan School of Management) and I identified in an article in Foreign Policy in 2003, you’d have to say that India is far ahead of China.” He points to measures like the Forbes magazine list of medium-sized fast-growing companies, which boasts far more Indian than Chinese companies, and international banks’ ratings of many Indian firms as far better managed than other Asian companies, including several better-known firms from Japan and Korea.

Courting foreign multinationals, or remaining allergic

Khanna, the Jorge Paulo Lemann Professor, turned his abiding interest in emerging competition from the developing world to China and India about two years ago. From an economist’s perspective, he says, the dragon and the elephant make for a fascinating comparison.

“As a social scientist, you want to explore variation. … China, on many dimensions, is just the exact opposite of India,” he says. While authoritarian China has aggressively courted foreign investment, democratic India is “allergic” to it, says Khanna.

“Here you have two large, populous, ancient civilizations that formed modern nation states in geographically proximate locations at roughly the same time, yet have chosen radically different development paths, and have no interconnection with each other whatsoever. Their historic hostility has accentuated the independence of their development paths,” says Khanna. “There isn’t even a direct flight between China and India.”

Khanna posits that the economic differences arise partly out of the different governmental structures in the two countries. In China, where there is little distinction between the bureaucracy and the government, rising through the ranks of the party has been based, since 1978, on how much one contributes to the local GDP. “You have an incentive to promote not just local enterprise but any enterprise. So you open your arms and lay out the red carpet for foreign multinationals,” says Khanna.

India, on the other hand, is the home of what Khanna unapologetically calls “rampant bureaucratic incompetence.” There, bureaucrats’ incentives are unrelated to economic outcomes. “You have to work to attract investments, so why bother?” he says.

Yet while China’s government provides incentives to the state-supported commerce that has fed its economic success, indigenous enterprise has flourished in India as the government has turned its back. Increasingly, these enterprises are gaining ground in the international economy, says Khanna, pointing to Indian software giants Infosys and Wipro, the pharmaceutical company Ranbaxy, the biotechnology firm Biocon, and the manufacturing firm Moser Baer.

“These companies have thrived despite the failure of the government to provide appropriate infrastructure,” says Khanna. He and Krishna Palepu, the Ross Graham Walker Professor of Business Administration at HBS, have demonstrated that these “emerging giants” have had to do things that companies in developed markets like the U.S. would consider anathema – such as invest in substitutes for government-provided infrastructure – to overcome the difficult circumstances in which they operate.

“They’re compensating for the failure of the government. … And the nice thing that’s happening in India is the government is finally letting them do it. The government is recognizing the limits of its competence, which is actually an extraordinary thing,” he says.

It’s not whether you win or lose…

Khanna, who is a native of India, says he’s not concerned about who wins the so-called ‘race’ of these two developing nations.

“Whether India overtakes China or not, frankly, it’s immaterial. I’d be happy if the Chinese continued to grow at 8 or 9 percent, because it reduces poverty,” he says. Much more important is the fact that the United States and the rest of the world learn from China, India, and other developing nations like Brazil or Russia.

“I think you’re going to see more and more important companies coming out of the developing world, and many of them are going to be eating our lunch,” he says. Just as the U.S. software industry has felt the sting of outsourcing jobs to India, Khanna warns that other U.S. industries could be blindsided. “There’s a lot of competition that’s going to come out of left field.”

An Indian entrepreneur, for example, has launched a business growing and shipping high-end produce to Europe. “You could feed a large part of Europe from India,” says Khanna. “That means that if you’re a Florida grower exporting to Europe, you might want to rethink your business model.”

But even more than economic imperatives or intellectual curiosity, Khanna is motivated by what he calls a “do-gooder” urge. “My hope is that we can use the private sector to further economic development based on sound business principles,” he says.