INB 311India-ChinaDr. Lairson9/16

The Chinese Business Environment

Four factors in particular dramatically differentiate the business environment in China from that of the West. A firm that masters them may meet with success; ignoring them can lead to disaster:

1) Sensitivity and adaptation to the requirements of the Party-State at the national level.

2) Sensitivity and adaptation to the requirements of provincial and municipal Party administrators and government.

3) Identifying the opportunities posed by emergent technical infrastructure and navigating the shoals of weak or nonexistent soft infrastructure.

4) Visualizing and acting on the opportunities of a rapidly emerging consumer economy at both the high-end and mid-market level.

Most important feature of Chinese business environment:

The Party -State is critical to the success of all firms, especially if they seek to expand or diversify their activities. Sustained Party-State linkages over long periods of time and across all geographic areas where a firm is active are essential components of

any business plan in China; creating and maintaining these relationships demands a highly qualified team of public affairs specialists working on your firm’s behalf.

Why India Trails China By AMARTYA SEN

The hope that India might overtake China one day in economic growth now seems a distant one. But that comparison is not what should worry Indians most. The far greater gap between India and China is in the provision of essential public services — a failing that depresses living standards and is a persistent drag on growth.

Inequality is high in both countries, but China has done far more than India to raise life expectancy, expand general education and secure health care for its people.

India has elite schools of varying degrees of excellence for the privileged, but among all Indians 7 or older, nearly one in every five males and one in every three females are illiterate.

The poor have to rely on low-quality — and sometimes exploitative — private medical care, because there isn’t enough decent public care. While China devotes 2.7 percent of its gross domestic product to government spending on health care, India allots 1.2 percent.

India’s underperformance can be traced to a failure to learn from the examples of so-called Asian economic development, in which rapid expansion of human capability is both a goal in itself and an integral element in achieving rapid growth. Japan pioneered that approach, starting after the Meiji Restoration in 1868, when it resolved to achieve a fully literate society within a few decades.

In China, decision making takes place at the top. The country’s leaders are skeptical, if not hostile, with regard to the value of multiparty democracy, but they have been strongly committed to eliminating hunger, illiteracy and medical neglect, and that is enormously to their credit.

The case for combating debilitating inequality in India is not only a matter of social justice. Unlike India, China did not miss the huge lesson of Asian economic development, about the economic returns that come from bettering human lives, especially at the bottom of the socioeconomic pyramid. India’s growth and its earnings from exports have tended to depend narrowly on a few sectors, like information technology, pharmaceuticals and specialized auto parts, many of which rely on the role of highly trained personnel from the well-educated classes. For India to match China in its range of manufacturing capacity — its ability to produce gadgets of almost every kind, with increasing use of technology and better quality control — it needs a better-educated and healthier labor force at all levels of society. What it needs most is more knowledge and public discussion about the nature and the huge extent of inequality and its damaging consequences, including for economic growth.

Hypothesis: Democratic governments create elites who do not care about the welfare of average people as long as they can fool these people into voting for them. In autocratic societies where elites are strongly committed to economic growth and development, these elites see the welfare of average people as essential to national development.

Comparing Doing Business in China and India

China

India

1) Trading Across Borders – page 12

WHAT THE TRADING ACROSS BORDERS INDICATORS MEASURE

Documents required to export and import (number)

Bank documents

Customs clearance documentsPort and terminal handling documents Transport documents

Time required to export and import (days)

Obtaining, filling out and submitting all the documents

Inland transport and handling

Customs clearance and inspections

Port and terminal handling

Does not include sea transport time

Cost required to export and import (US$ per container)

All documentation

Inland transport and handling

Customs clearance and inspections

Port and terminal handling

Official costs only, no bribes

2) Enforcing Contracts – page 12-13

Procedures to enforce a contract through the courts (number)

Steps to file and serve the case

Steps for trial and judgment

Steps to enforce the judgment

Time required to complete procedures (calendar days)

Time to file and serve the case

Time for trial and obtaining judgment

Time to enforce the judgment

Cost required to complete procedures (% of claim)

Average attorney fees Court costs Enforcement costs

3) Wage costs

China

India

Margaret Pearson, "The Institutional, Political and Global Foundations of China's Trade Liberalization," in Saadia Pekkanen and Kellee Tsai, Japan and China in the World Political Economy , 2005.

From 1978 China has moved from almost complete autarky to deep integration into the global economy

The pace and degree of this transformation is unprecedented, especially for a large nation

Strategy of integration was incremental and experimental: limited experiments, examine results, adjust and enlarge the experiment

Three stages of this change:o 1978-1992: SEZs expand, liberalization and rising trade, and

increasing FDIo 1992-2001: accelerating FDI (17% of gross capital formation);

expanding liberalization of domestic markets; substantial decline in tariffs (1982- 2001 tariffs drop from 56% - 15% - about ½ the level of India’s tariffs) and regulations/licenses; rising domestic competition; substantial legal revisions, across all the levels of Chinese government, to become WTO compliant

o 2001-2014: join WTO and dramatic liberalization with tougher requirements than for other developing nations; deep liberalization of agriculture and elimination of subsidies to sustain domestic competitiveness; eliminate most controls on exports and imports for firms; substantial reduction in non-tariff barriers, though not all; explosion of inward FDI and of exports to 2008; rising outward FDI; world’s largest trading nation

Chinese actions provide a powerful and credible commitment to liberalization directed at global firms and investors, who embrace China with enthusiasm

Trade as a % of GDP; FDI as a % of GDP for China as high as any nation Global economy brings money, knowledge, technology, global prices and

competition and economic dynamism to China Giant rise in employment in manufacturing and economic productivity as

rural farmers and workers have moved to cities and joined global labor force Global integration focused on eastern cities until about 2005; rapid

integration of 2nd tier cities and even 3rd tier cities 2005-2014. Chinese government, at all levels from center to local, has acted as the

primary agent for the integration of China into the global economy and the primary agent of liberalization

Global integration has linked a vast number of components of the political system from central ministries to local governments, firms and organizations with a deep an strong connection to the global economy

Thomas Farole, The International Geography of Trade , World Bank, 2013, 159-202

page 105

Page 162

page 163

While there is much heterogeneity in the story, there are few “winners” among the traditional lagging states (see table 6.3). The main exceptions here are Orissa, which rose from 64 percent of the national average to 71 percent, and Uttarakhand, which rose from 90 to 98 percent of the national average. On the other hand, there are many examples of lagging states that have fallen much further behind over the past 15 years. Most notable are Nagaland, whose relative position fell by more than half, from almost 120 percent of

the national average GDP per capita to just 56 percent, and Arunachal Pradesh, which declined from 114 to 73 percent. Madhya Pradesh also experienced major decline from 86 percent of the national average to just 48 percent, making it the second poorest state (after Bihar) as measured by state GDP per capita. Interestingly, the high-income states include both states that were major winners over the past decade (Haryana, Goa, and Pondicherry) as well as states that have declined substantially in relative terms (Maharashtra, Punjab, and Delhi).