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India presents FDI threat to China
By agencies
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Wednesday, 05 July 2006, 19:30 IST
MUMBAI: While the economists are more than ready to dismiss a country based on the current flooding condition, delayed flights, chaotic airports and choked roads leading into Mumbai, Yasheng Huang associate professor at the Sloan School of Management presents a very unusually take on this
situation.
Usually ruffled by delays, he is unruffled and surprisingly impressed. Shooting into prominence on the back of a paper he authored with Tarun Khanna of Harvard Business School, first published in Foreign Policy, a magazine political wonks swear by, the crux of their argument was that in spite of dismal success when it comes to attracting foreign direct investment (FDI), India is poised to overtake China.
Stating that India's reluctance to aggressively woo FDI has helped spawn a breed of domestic entrepreneurs that China lacks, they argued, in the long run, India would overtake China.
Bringing forth the difficulties the tropical weather could pose to the development of the country, he said that incidence of infectious diseases is higher. And because health is an important input for economic growth, India has to expend a lot of resources to deal with this, whereas China doesn't. In response to the India's infrastructure by Huang, currently in India on invitation from CII, he added the fact that India has a low savings rate, low investments and an infrastructure that needs to be improved. "In spite of these, if a country clocks 8%, I'm impressed."
On technological matters, he points out that the entire hypothesis that India's software capabilities are superior to that of China's is bunkum.
China produces as many engineers as India and files more patents. If Infosys and Wipro are to be reckoned with, it is because India allowed firms to raise funds from the markets.
While wondering what exactly is it about Shanghai that impresses Indians, he attributes the growth to massive government investments and not economic liberalization. In the eighties when SEZ were first set up in four regions of China, the concept was extremely successful. In the 90s, government started throwing its own resources into building new zones. From an economist's perspective, that was undesirable for many reasons.
Importantly, this capital was diverted from resources that would otherwise have gone into developing other parts of the nation. One of the outcomes was urbanization, with land being confiscated from
farmers at cheap prices. Making matters worse was the fact that FDI was favored over domestic investments. "You cannot discriminate against local enterprise," says Huang. ''If urbanization happened as a natural consequence of economic growth, it's good. Not otherwise."