The cases of China and India Emerging economies The cases of China and India

Emerging Economies (1) The terms ‘emerging’ or ‘transition’ economies imply that some form of change is underway. Emerging economies are usually low or middle economies and may be big or small in size, such as BRIC economies. Common characteristics: They are all experiencing the transition from developing to developed country status and/or from state dominated to a freer, more liberal market economy.

Emerging Economies (2) Other characteristics: Emerging economies are engaged in opening up their economies. Emerging economies tend to exhibit common economic and structural performance characteristics. Compared to developed countries, emerging economies retain relatively large agricultural sectors. As the constraints on business ease up, emerging economies all face FDI inflow increase. Growth in emerging economies has been stronger and more buoyant than in most OECD countries since the 1990s.

Changing role of China and India in the world economy

The top 10 economies in 2013 (Source: Peng & Meyer, 19) Changes in the Fortune 500 (Source: Peng & Meyer, 22)

Real GDP growth (%) in the BRIC and US economies Source: IMF, World Economic Outlook

Economic structure – 2015 (%GDP) US India China Agriculture 1.0 17.0 9.0 Industry 19.0 30.0 41.0 Services 80.0 53.0 50.0 Source: World Bank

Emergence of China 1978 onwards – reforms to modernise China Guiding principles Increase role of the market Reduce direct role of government and central planning Gradually phased in – pragmatism wins over ideology

Key reforms – 1980s Agriculture – household responsibility: farmers able to sell surplus crops on open market – market incentives Promotion of FDI to obtain technology and foreign exchange Opening of trade – by 1986 – trade reached 35% GDP. Pre- reform – 1% Greater power for managers Growth of consumer and services

1990s → Greater use of price mechanism Creation of market institutions Reduced role of the state Legalisation and encouragement of private entrepreneurship Beginning of banking sector reform Address deficiencies of state-owned enterprises (SOEs) External liberalisation – e.g. 2001 WTO membership

Emergence of India Pre-reform: ideology of self-sufficiency → closed economy with high tariffs dirigiste ‘licence raj’ Limited reform in 1980s 1991 financial and balance of payments crisis made reform inevitable

Post-1991 India Trade liberalised – further opening possible Opening of investment but restrictions remain in some sectors, e.g. retail Tax reform Financial sector reform – cautious efforts to privatise and open banks to competition Privatisation and industrial reform Resurgence of large family conglomerates (e.g. Tata, Birla, Ambani and Moda families) Dismantling of licence raj – red tape still high

China v. India Chinese reforms began earlier and more consistent Faster growth in GDP, trade, investment in China Regional disparities in both

China India Authoritarian, one party rule Democratic, weak coalitions Strong industry – range and sophistication Strong services – ICT, pharma and auto parts Many out of poverty Some poverty reduction Big infrastructure investment Poor infrastructure Ageing population Young population Heavy investment in basic education – higher later Heavy investment in higher education – basic later

Challenges China India Environment – could hinder growth Increase in inequality – destabilising? Tension between market and political system? Weak coalitions – difficulties in reform Dependent on trade – problems if turn to protectionism Growth undermined by weak infrastructure and weak basic education Economic imbalances

Factors in China’s success Strong government – able to implement Pragmatic approach High savings and investment Access to foreign knowledge via trade, FDI, licensing, foreign education Large market – attracts FDI and good export platform Investment in education and infrastructure

Factors in India’s success Early investment in technical education English language New ICT sector not over-regulated Relative FDI opening Far behind – initial easy catch-up

The Future? Mexico Indonesia Nigeria Turkey The rise of BRICS? ●Emergence of the MINT? Mexico Indonesia Nigeria Turkey The rise of BRICS?

Impact of BRICS Economies on International Business Together, BRICS represents 26% of the planet's land mass, and is home to 46% of the world's population. Regarding economic growth, BRICs are 8% of the world's GDP. According to statistics of the World Trade Organization (WTO), the participation of BRICS in global exports more than doubled between 2001 and 2011, from 8% to 16%. In those eleven years, their total exports have grown more than 500%, while total global exports grew 195% in the same period. Between 2002 and 2012, intra-BRICS trade increased 922%, from US$ 27 to 276 billion, while between 2010-2012, BRICS´ international trade rose 29%, from US$ 4.7 to 6.1 trillion dollars.

Impact of BRICS Economies on International Business BRICS have emerged as major recipients of FDI and important outward investors. Over the past decade, FDI inflows to BRICS more than tripled to an estimated US$263 billion in 2012. As a result, their share in world FDI flows kept rising even during the crisis, reaching 20% in 2012, up from 6% in 2000. BRICS countries have also become important investors, their outward FDI has risen from US$7 billion in 2000 to US$126 billion in 2012, or 9% of world flows - ten years before that share was only 1%.

Summary The meaning of ‘emerging’ economy or ‘transition’ economy. Business environment of China and India The impact of emerging economies on international business Inside Story - Building BRICS (https://www.youtube.com/watch?v=UZj2YpKTiD8) What Are The BRICS Countries (https://www.youtube.com/watch?v=F03yzqR4gYI)