If you’ve been considering expanding into a rapidly growing Asian market, you might investigate India, a country similar to and different from China in many ways.

Goldman Sachs projects that India will become the world's third largest economy in less than 30 years and that India’s annual gross domestic product (GDP) growth rate will average 5-6 percent through 2050, while China’s will slow and fall behind India’s.

The U.S. Census Bureau estimates that India’s population will pass China's by 2034, reaching almost 1.5 billion.

Contrasting Systems

Unlike China, India has democratic institutions, a more effective legal system, and a more competitive banking structure. Many analysts report that Indian companies deploy their capital more efficiently and are better managed than Chinese firms.

India has world-class intellectual property laws. Like China, however, enforcement is poor.

China is estimated to be 10 –15 years behind India in terms of overall reform. One “advantage” of China’s one-party state is its ability to enforce painful economic measures without having to worry about re-election. The business environment in India tends to nurture entrepreneurship, support competition, and avoid heavy-handed political intervention.

Infrastructure remains a challenge in both countries. One report, for example, indicates that India spent $2 billion on its road network in 2004, compared to China’s $30 billion. In a survey, senior managers of international companies rated India’s infrastructure worse than China's, at 3.3 on a scale of 1 (good) to 5 (poor), versus China’s 2.5.

A United Nations report, Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008, cited China as the most attractive location with India rated second.

The quality of university graduates varies widely in both countries. Significantly, graduates from the Indian Institute of Technology have powered much of the rise of India's knowledge economy and contributed to the success of America's Silicon Valley. Indian graduates also work exceptionally long hours — 2,350 per year on average — according to a McKinsey & Company study, versus employees in the United States at 1,900 and Germany at 1,700 annually.

Investing in India

According to the U.S. Bureau of Economic Analysis, U.S. foreign direct investment (FDI) in India reached $1.2 billion in 2004. This represents 28.6 percent of China's $4.2 billion. On a global level, India attracted less than 10 percent of what China attracted. Nevertheless, the United Nations' World Investment Report 2005 rated India the sixth largest destination for foreign research and development (R&D) investment in 2004 and forecasted it to rank third by 2009.

R&D investment in India is on the rise, with much of it directed into software development. In 2004, India ranked as the world's 16th biggest commercial service exporter and 15th largest commercial service importer, reflecting the strength of this sector, according to the World Trade Organization. Importantly, this ranking is expected to accelerate rapidly as India expands its information technology sector and continues to attract U.S. and European back office operations. In contrast, China ranked as the world's 9th and 8th largest exporter and importer of commercial services in 2004.

India's manufacturing sector currently accounts for about 17 percent of gross national product, which is much less than China's manufacturing sector, reports the Associated Chambers of Commerce and Industry of India. Nevertheless, the development of India's skilled-intensive manufacturing sector should produce higher-technology goods for global consumption at an increased pace.

Bureaucratic logjams are a major problem in India. For example, the World Bank says the process of establishing a company takes 88 days, twice the regional average. And until the 1990s, growth in the private sector was held down because of licensing requirements, price controls, selected credit allocation, and capital controls, according to Goldman Sachs.

To further increase growth, investors say India needs to eliminate current restrictions on FDI, especially in the retail sector, and deregulate its labor market. Thus, Indian restrictive labor regulations are largely responsible for the country's poor job of initially admitting workers into its labor force at productive levels.

Additionally, to improve overall performance in India, analysts suggest putting an end to production reservations for small-scale enterprises, revitalizing the agricultural sector, eliminating fiscal deficits, and accelerating privatization and trade liberalization.

When companies seek to increase trade in a foreign market, they tend to tailor products and services to local consumers' needs and tastes. In India, however, U.S. companies often need to go several steps further, creating a custom strategy that sometimes calls for completely new products, in addition to establishing price points that very carefully target high, middle, and low-end Indian market segments.

Indian per capita GDP was $620 in 2005. Although low compared to China's $1,343, according to the International Monetary Fund, there is a large number of buyers with significant purchasing power. Thus, India is estimated to have a middle class of 200 to 300 million people — a market well worth pursuing.

Complementary Strengths

India and China offer complementary strengths to U.S. firms interested in Asian expansion. As such, China is much stronger than India in mass manufacturing and logistics. In contrast, India is much stronger in software development and information technology services.

As India and China continue to develop, India will continue to catch up to China's stellar performance, offering U.S. companies many opportunities in the world's fastest growing democracy.

This article appeared in July 2007. (CM)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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