China and India: Emerging Technological Powers
By Carl J. Dahlman
Ø Asia’s economic groundswell is no longer breaking news, but the critical details of this transformation and its staying power are just coming into focus
o Advantage of a low-wage workforce is obvious
§ Is this the foundation of an economic superpower?
o Economic leadership = ability to produce high-quality high-technology goods and services and to create innovative new products and technologies
Ø Must look at innovative capacity of China India
o 2 most populous countries
§ Account for 20.7% (china) and 17%(India) of the world’s population
o Low per capita incomes
§ But already 4th and 11th largest economies in the world at nominal exchange rate
§ And 2nd and 4th largest economies in terms of purchasing power parity (PPP)
o Growing more than 3 times faster the world average
§ Low percentage of persons with higher education, but because of the large size of each country they have a critical mass of highly educated people
o Large innovation capacity due to critical mass of expenditures on R&D
Ø Important note: Innovation in China and India should be understood to include not just knowledge that is new to the world, but also knowledge that is new to these countries. It is important to consider this second dimension of innovation because it helps to understand why these economies are growing so fast.
Ø HISTORY: China and India are among world’s oldest civilizations
o Most of 1st millennium they accounted for ¼ and ½ of totally world economic activity.
§ Lost prominence to Japan and W. Europe in last 200 years.
· Reason: missed industrial revolution so did not benefit from the rapid growth of industrial production technology.
o Past 25 years have been rapidly increasing their GDP
§ Tapping into global knowledge and economy
o Mid- 20th century both underwent radical regime change
§ India won independence from England in 1947
§ Mao’s communist revolution triumphed in China in 1949
· Initially, both were influence by Russian development strategy – marked by state control of economy and strong autarkic trade policies.
§ 1970’s China moved to market economy and opened up to world
· Joined WTO in 2001
· Growing recognition of private property rights and rapid integrating into world’s trading system since then.
· Has become third largest exporter of merchandise goods
o Named “manufacturing center for the world”
§ 1980’s India relaxed grip on private sector and growth began to increase
· Major financial crisis in 1991 due to over-borrowing
o Undertook trade liberalization to overcome this
§ Boosted its rate of growth from 2%-3% per year
· Past three years its rate has increased to 8% per year
o Reason: rapid expansion of information technology (IT), business services, commerce, and banking.
o Named “IT-enabled service center of the world.”
Ø Current Conditions
o In 1980 per capita income of both countries was equal at $250
o In 2005 China’s faster rate of GDP had allowed for GDP per capita to reach $1,740
§ Compared to $720 in India
o Life expectancy is 8 years longer in China than India
o In 2005 China’s population was 30% larger than India’s and the size of the Chinese economy was three times India’s.
o China’s higher investment rate has been reason for its faster growth
§ Past 10 years – investment has averaged 36% of China’s GDP and 25% of India’s
o China’s high per capita income growth is also a result of its one-child policy
§ Average annual population growth from 1990-2004 was only 0.9% compared with India’s 1.7%
§ By 2040 India is predicted to surpass China to become most populous country
o Age pyramid
§ 1/3 of India’s population is less than 15 years old
§ China will be facing a challenge with a more rapidly aging population and a rapidly increasing dependency ratio
o Literacy and Education
§ China has advanced much more rapidly than India in improving literacy and overall educational attainment
· Has invested heavily in expanding its higher education system in the past 10 years
o Economy
§ Chinese economy: agriculture’s share of GDP has fallen to 13% while industry’s share has risen to 46% (one of the highest percentages in the world.)
§ Indian economy: agriculture’s share of GDP is still 21% and industry’s share is just 27%
· There has been significant growth of the service sector: rapid increase in high-value business services such as offshore services, and the establishment of banking and consulting operations.
Ø Tapping into Global Knowledge
o Main difference between China and India in their development strategies is the extent, timing, and means of obtaining global knowledge.
§ Partially explains their difference performance and growth paths
o China has embraced globalization and benefited.
o India has been more autarkic and circumspect
§ Opened up much later and much more slowly.
o Main means of tapping into global knowledge: trade, foreign direct investment, technology licensing, copying and reverse engineering, foreign education and training, and accessing foreign technical print information.
§ China has been more aggressive and systemic in all of this areas than India.
Ø Foreign Direct Investment
o Inflows of foreign direct investment into China have been higher than those into India
§ Several factors influence this:
· 1. China opened up towards FDI earlier and wider than did India
· 2. China’s larger and richer market has been pull factor
· 3. China has many cost advantage over India even though its labor costs are now generally higher than India’s
o Transportation is more efficient, service infrastructure is more development, and the red tape for trade in physical products is less burdensome
§ Result: China is attractive as production platform for global operations
Ø Technology Licensing
o China has been much more aggressive in licensing foreign knowledge thrugh formal technology-licensing agreements
§ Chinese royalty and fee payments are more than ten times those of India
Ø Foreign Education
o China has been sending more tertiary level students abroad for education
§ In 2004, more than 15% of all the 2.7 million students studying outside their home country were from China (not counting Hong Kong)
· 5% were from India
o Foreign education and training are important means to tap into global knowledge.
o Many of these students stayed un their host countries until a few years ago when they began to return to China and India
§ Due to increasing opportunities in their home countries and attractive incentive programs designed by their home countries to stem this brain drain.
Ø Copying and Reverse Engineering
o China has advantage in copying and reverse engineering foreign technology because of tis great access to foreign knowledge.
Ø R&D investment and activities
o Tapping into global knowledge had been much more important in improving the productivity and growth of these economies than innovation from their R&D
Ø Inputs
o Most common input measures are scientists and engineers doing R&D and expenditures on R&D
§ Number of scientists and engineers doing R&D in China is second only to the US
§ Number in Indian is about 1/8 of China’s
Ø Outputs
o Two commonly used broad output measures are scientific and technical publications and US patents.
§ China has been increasing its number of scientific and technical publications very rapidly over the past few years
· 2003 had more than twice as many ass India but only 14% of the US total
§ India has been increasing its scientific and technical publications as well, but not as fast
§ Citations analysis reveals that China’s output is of higher quality than India’s
Ø Efficiency
o Crude measure of relative efficiency can be constructed by looking at technical publications and patents and per dollar spent on R& D (does not control for the quality of the outputs or for the different cost structures in the countries)
§ Results suggest India is the most efficient, followed by China then the US
· Reflects lower cost structures (particularly the salaries of researches)
§ US is more efficient in terms of R& D cost per patent.
Ø R&D by Multinational Companies
o Relatively recent development in both China and India has been increasing R & D by multinational companies (MNCs) which now operate more than 750 R&D labs in China and more than 250 in India
§ Need for MNCs to do R&D locally to adapt their goods and services to the domestic markets
§ MNCs have begun to set up R&D centers aimed at developing products and services for the global market
· Initial motivation was cost effectiveness of hiring low-wage Chinese or Indian scientists and engineers.
o Rapidly growing demand has revealed that the supply of high-quality researchers was smaller than expected, and salaries are rising
o Limited supply of qualified researchers is becoming a constraint on MNC-funded R&D, particularly in India
Ø GDP
o India will surpass Japan in PPP terms by 2008 to become 3rd largest economy
o China will catch up to US by 2013
§ Projections are inflated because are in terms of PPP rather than nominal dollars
Ø Trade
o In terms of real dollars instead of PPP, China is projected to surpass the US as world’s leader in merchandise exports in 2007
o India’s exports have also been growing faster more recently, but still a relatively small playeràlikely due to poor infrastructure
o Effects of china and India entering the market on I-Trade?
§ BENEFITS
· Increasing specialization and exchangeàreduction of production cost
· Large and rapidly growing markets of the these economies—BIGGER demand
§ NEGATIVES
· Increasing adjustment and restructuring pressures
· Some industries will face significant pressures to change ex: shoe, textile, and garment industries in US
Ø Intellectual Property Rights
o Market for knowledge = increasingly global
o Complaints about IP violations (reverse engineering and outright copying) tend to be stronger in China than India…still industries cannot afford to NOT be part of their marketsàhope is that they can make innovations faster than they can be copied but Chinese/Indian firms are catching up
o US/other developed countries will have to pay closer attention to IP issuesàthis could damange desire for investment in China/India if they don’t step up measures
Ø What’s Next?
o US must try to understand better what is taking place w/ C&I
o Cooperation is a big possibility and likely the best option
o Desperate need for new clean energy technologies as C&I develop and their energy needs grow
o Buying power of poorer people in C&I has huge potential in the market (ex: $10 cell phone, $100 computer, $2000 car)
o Re-emergence of these economic powers is both a challenge and an opportunity
India’s Growth Path: Steady but not Straight
By Salil Tripathi
Ø INTRO
o India’s economy IS booming: growth rate of 2006 = 8-9.3%, which has been sustained over the last few years
o Since 1991, India has removed a lot of crippling governmental controls on business activities à attracting lots of foreign investment, keeping skilled Indians at home
§ Stopped micro managing economy
§ Comply with WTO
§ Reducing tariffs esp. on capital goods
§ Allow foreigners to won majority stake in subsidiaries
§ Lift limits on Indian companies
o Resisting Intellectual property right standards is still an issue in India à though I is getting better since deciding to comply with WTO IP rights regime
§ This commitment tested with Swiss pharmaceutical company Novartis and their drug Gleevac (anti-leukemia drug) Indian generic drug makers want to make a generic of Gleevac but it is technically still protected by IP rights….who will Indian gov protect?
o ISSUE: providing millions of poor people with affordable medicine..this goes back to IP issues. How do we protect medical R&D people AND Indian generic drug manufacturers
o Today, most sectors of Indian economy open to foreign investmentà certainly less foreign investment than China, but still a lot
o Internal instability (Pakistan v. India, nuclear proliferation and noncompliance with NNPT, caste-based violence, terrorism) makes India less attractive
o India’s econ growth has raised millions out of poverty, though some have gotten much richer than others
Ø The un-China
o China is building from scratch, India is trying to rebuild aging infrastructure
o China has luxury of not dealing with public option where as India (as a democracy) has to keep politicians accountable to and can’t make decisions that will upset anyoneàadversity in countryside can attract media and attention and broad public outrage, even if majority of citizens are benefiting
o China is overwhelmingly dependent of foreign capital; India has huge domestic private sector which reinvests much of its retained earnings ALSO domestic stock markets = relatively efficient
o Sectors that dominate foreign investment in India: software, chemicals, pharmaceuticals, infrastructure
Ø Planning or Dreaming?
o India has great goals right now BUT do they have skilled people? Sufficient R&D incentives? Promising sectors?
o Indian Institutes of Technology = IIT; rights inaugurated by Nehru
§ Concerns about managing quality, shortage of faculty members
§ Harsh selection ensures that only the brightest are selected (each year 4000 apply, 100 make it)
§ Have undoubtedly changed India for the good
§ Have produced very talented, successful individuals BUT not known for original research à strong push for innovation is needed
o Environment for R&D has been growing slowly but steadily in India à improvements in IP rights is/will be a huge part of this growth
o More and more multinational orgs are establishing operations in India (GE, Microsoft, Texas Instruments, Oracle, Adobe)
o While push for R&D by foreign companies within India is growing, they are still lacking domestically sponsored R&D à probably due to Indian goat’s distrust of capitalist model thus creating a market plagued by nonappropriability (thus gov’t must step in to sponsor R&D because not enough incentive for private firms)
o The critical link between lab, venture capitalist, and market place has not yet been forged in India à rather India’s govt sponsored research system focuses on basic science with little near-term commercial value/bad match up with market needs
o Emerging Indian pharaceutical industry shows who India’s market is changingàhuge export of generic drugs
o Some Indians worry about multinational org. investment within their nationàthey fear the benefits won’t come back to them BUT good b/c keep Indian talent at home and build some infrastructure that domestic companies can later use
o IPrights still a big issue!! ¾ of all software used in India is pirated!!
Ø The Long and Winding Road
o lots of hopeful signs, but many major problems persists (abundance of avoidable diseases, overcrowded and inefficient transportation, poor infrastructure in roads and bridges, poor drinkable water, bad electrical system, huge illiteracy!)
o in 1980 2/3 of Indians were illiterate—now 300+million out of Indians 1 billion cannot read (still a problem but getting better
o India has potential to be source of technological innovation
o Due to Indian political culture, major transformations can happen only incrementally à but growth will come
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