Opportunities and Risks in India and China

by: Marcel Heide

Content

1. Introduction

2. Introduction Part 1: Opportunities in India & China

2.1 Opportunities in India
2.2 MNCs in India
2.3 Opportunities in China
2.4 MNCs in China
2.5 Opportunity Comparison of India & China

3. Introduction Part 2: Risks in India & China

3.1 Risks in India
3.2 Risks in China
3.3 Shortlist of Risks

4. How to Manage these Risks

5. Recommendation

6. Reference List

1. Introduction

The globalisation of markets and the globalisation of production towards a more integrated and interdependent world economy is one of the fundamental changes in modern world history. Former isolated countries are opening up and as a result becoming fast growing economies. The two most impressive of all developing countries (emerging markets) for different reasons are China and India. China and India can also be described as newly industrialised economies (NIEs) which are politically stable, have free market systems and are approaching western standards. This report shows the opportunities and risks for multinational companies (MNCs) businesses in China and India, illustrated by several examples of MNCs experiences in those countries. In the end, the analysis leads to a recommendation by the author which of these economies is more attractive to do business in.

2. Opportunities in India & China

China′s economy has grown at about 9% a year on average since 19781, whereas India′s annual percentage rate expanded at 6.1% a year in the 1990s. In 2002 China became the first country since the 1980s to attract more FDI (Foreign direct investment) in a year than the United States ($53.2 billion)¹. The Indian economic data was and is also impressive. In June 2005, industrial production in India climbed at its fastest rate in nine years: by 11.7% compared with the same month in 2004, including an increase in manufacturing of 12.5%. These figures show how fast both countries improving compared to the rest of the world. With hundreds of millions new consumers the emerging markets are developing rapidly and their market size let MNCs no choice but to enter them. How big the market size is shows figure 1.1 compared to United States.

Figure 1.1 – Market Size [figure only in downloadfile]

2.1 Opportunities in India

After the Second World War India gained independence from Britain. The subcontinent was divided into the secular state of India and the smaller Muslim state of Pakistan. After a third war between Pakistan and India in 1971 East Pakistan was becoming the separate nation of Bangladesh. However, India installed a democratic system of government. The economic system was mixed, characterized by a large number of state owned enterprises, centralized planning and subsidies. The system with government permission and regulations down to production level made it almost impossible to gain economic development. The restrictive system called "licence raj" prevented FDI; controlled the use of land; and prices were managed by the government not the market. In 1991 after 40 years of stagnation the deregulation and privatization in the Republic of India began. Under Dr. Manmohan Singh, now prime minister, as minister of finance political barriers went down. The government started an economic reform program. In 1995 India joined the WTO².This step speeds up the government reform program. The private sector was opened and investments by foreign companies were suddenly welcomed. Tariffs were put down from 400% to 65% on average as well as income and corporate taxes were put down. Also many state owned companies (300 in 1991) were privatized in a rapid pace. Nowadays it is possible to invest 100% in most of India′s industries, for example in the software development industry or the film industry. Some exceptions are industries like private sector banking, the media or insurances were FDI is still limited to minority stake³.

India is having a population of 1 billion people and with an annual population growth of 1.6%, twice China′s rate, India is expected to overtake its neighbour as the world′s most populous nation around 2035. As if this isn′t enough India has an average age of 26 years, which means it is younger than China (33). Within this population there is a relatively wealthy middle class of estimated 205 million people who are looking for consumer goods and better life conditions and they are willing to pay for it. The general national income per head reached $530 in 2003.⁴ The fact that the middle class is highly educated from their world class educational institutions and that English is the working language of this class makes them attractive to multinational corporations (MNCs) as employees for manufacturing or engineering, especially software engineering. According to the fact that 900 software companies are currently operating in India and 200,000 software engineers available, the future looks bright. A well educated Indian software programmer works for 5,800 $ a year compared to 90,000 $ a year for an American software engineer. For this low labour cost reason the worldwide IT-family is heavily investing in the Indian software industry. Satellite Communication makes the transport easy as well as fast and the favourable time zone of India allows MNCs to offer a 24 hour service. While their users/customers in the Western World are sleeping Indian engineers are solving their IT problems. In general India is strong in segments that do not need an intensive infrastructure or are faced by restriction (See Risks in India) as the service sector.

2.2 MNCs in India

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1 "The Great Transition"; Harvard Business Review, October 2003, p 72

2 http://www.wto.org/english/thewto_e/countries_e/india_e.htm

3 "Investing in India", Government of India, New Delhi, November 2005 ; http://dipp.nic.in/manual/manual_11_05.pdf

4 "The Tiger In Front – A Survey Of India And China; The Economist March 5th 2005