China Vs India

Development of the countries

India

The globalisation of a company goes always along with a great amount of opportunities but also with many risks. India and China are both very interesting countries to move into.

India became democratic after gaining independence from Britain in 1947. From then, up to the early 1990s India has had a mixed economy, which was identified by a lot of state-owned businesses, centralized planning, and subsidies. This lead to a dramatic constriction of the private sector. During this time it was really hard for the private sector to expand because they needed a permission of the government to do so. Sometimes the companies had to wait for month to get the allowance for normal business activities such as expanding production or hiring a new director. Additional there where high import tariffs, production quotas, very strict labour laws, highly restricted foreign investment and price setting by the government, instead of by the market, which made impossible for the private sector to get stronger and almost very hard and unattractive for foreign investors to go into the Indian market.

In 1991, the government recognized that it could not go on like this and created a high-flying economic reform programme. The industrial licensing system got removed and areas which where reserved for the stated-owned companies got opened up to the private sector. Also foreign investors where welcome now. Foreign ownership of 100 per cent was still only allowed under certain circumstances but foreign equity stakes, up to 51 per cent, got permission without any problems. In addition, raw material and a lot of industrial goods could be imported for free and the maximum tariff for imported goods was cut down from 400 per cent to 65 per cent. The plans of the government to privatize the state-owned turned out to be not as successful as it should have been because of a strong communistic opposition. In 1999 only 60 of the 300 state-owned businesses went over into private hands.

All these reforms have been very successful, India managed to grow 6.1 per cent in the 1990s and in spite of the global economic slowdown they still managed a growth of 5.5 per cent in 2002. The foreign investments rose from $150 million in 1991 to $ 5 billion in 2002.

But still the political opposition has slowed down further import tariff reductions because they fear India to get flooded from cheap Chinese products as soon as the barriers get lowered again. The strict labour laws have not been loosened yet and some products are, according to the actual law, only allowed to be produced by a small company.

China

China is one of the countries which turned despite a communist government, from a command to a mixed economy. In 1949 the people's Republic of China was founded by the Chinese Communist Party under Mao Zedong. Under his leadership of almost 30 years to 1976 the GDP already had an average annual growth 6.7 per cent with was mostly due to mobilizing additional resources. But the investments became inefficient with the time and the relatively high growth could only be implemented in very small parts to a higher consume of the population. After the death of Mao Zedong in 1976 his successor Deng Xiaoping introduced economic reforms in 1978. Since the middle of the 1980s private companies in the industrial sector were allowed. Later the external trade has been liberalized by admitting foreign companies. A more collective leadership has been performed by Jiang Zemin from 1989 to 2002. At the moment China is led by Hu Jintao but Mr. Jiang still has a big influence.

At the moment China has a stable growth rate but it is not sure that it will be continuous because the country has almost no market segments left which are easy to liberalize. Additionally there are still a lot of state-owned institutions which are performing very badly, but the state bank is granting them more and more credits which are unlikely to be paid back and in the case of a bank rush they could not meet the demands because they have a lot of bad credits. The Chinese government does not want to close the unprofitable companies to avoid a mass unemployment. That shows that China is still on its way from a commanded to a mixed economy.

Opportunities

India

Despite of the very low level of education India offers, to foreign investors, a highly educated middle class. India's educational institutions are world-class, especially on the IT sector since the government is always emphasizing engineering. Another advantage is that English is the working language among the middle classes because India used to be a colony of Britain.

China

China offers a lower cooperate income tax of 33 per cent compared to India with 35 per cent.

China has a very low inflation which makes it easier for foreign companies to calculate their investments. In the 2002 China has a inflation rate of -0.8 per cent.

Both countries

Both countries are offering a cost advantage to their foreign investors. For example In 2003 the labour cost per hour of an textile manufacturing worker has been in India $ 0.74 and in China $ 0.92. Compared to Great Britain standards in 2003 of $ 19.24 this is a real cost advantage for manufacturing companies.

A good example of exploiting this advantages is Swan Optical. It is a relatively small US based eye wear manufacture. They produce on a low cost basis in China and have their design facilities run over joint ventures in Italy, France and Japan. This makes it possible for the company to manufacture on the lowest prices and sell their products for high prices because their designers are located in famous fashion cities.

It should also be noted that both countries offer a huge domestic market. The potential Chinese market with 1.2 billion people, is bigger than the United States, the European Union and Japan combined. India is almost offering the same potential with a population of 1 billion. It is not to be expected that this markets gain the same living standard as the western countries in the near future. Still they are huge potential markets, and because of that companies should strongly consider a market entry.

Risks

India

One of India's biggest problems is a shortage in qualified new graduates. Despite their huge population they can't meet