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A CASE STUDY OF CHINA AND INDIA;

AN ECONOMIC POWER SHIFT FROM THE WEST TO THE EAST

BY

ADEIFE SASHA-BLAIR OKIN

JANUARY, 2010

Email address: okinsasha@yahoo.co.uk

Case Study:
Pete, E. (2005). "Crouching Tigers, Hidden Dragons", China and India: Opportunities
and Challenges. Business Week , pp 52-61.
1. Discuss the innovation implication for the leading developed nations
concerning China and India’s rapidly escalating capabilities.

Overtime, China and India have developed some capabilities, which has affected
developed nations like U.S, Germany, Japan and so on. According to Porter’s
diamond theory, a nation could have competitive advantage over other nations
on the bases of four broad activities, they are; Factor conditions, demand
conditions, relating or supporting industries and a firm’s strategy, structure and
rivalry (Porter, 1990).

Porter also implied that a nation’s competitiveness depends on its determinants


of productivity and the rate of productivity growth. The factor and demand
conditions as stated in theory can be used to illustrate both nations’ determinants
of productivity, while the related or supporting industries in the theory can be
used to explain the rate of productivity in these countries.

The rising capability that the two countries possess is as a result of their ability to
assign their available resources (factor conditions) to specific productive areas to
yield viable outcome. China and India’s factor conditions are resources such as;
human, knowledge, physical, financial, and infrastructure. They have physical
resources such as hydroelectric, petrochemicals, large geographical size. Their
large population has also increased the available human resources, as there is
booming growth in young professionals particularly in the science, technology,
finance and accounting sectors. This has aided both nations achieve knowledge
resources (such as scientific, technical, market, and research institutions). China
has more modern infrastructure resources such as transport, communication,
and housing. An example is China’s initiative to create nine futuristic planned
communities for 800,000 residents each with large parks, man-made lakes, retail
districts and college campuses (Pete, 2005)

With the factor conditions that India holds, they have been able to innovate ways
to channel their resources into related or supporting industries, like technology,
engineering, manufacturing and pharmaceuticals. This has enabled them play a
high role in global innovation chain, an evidence of this is the rising research and
development centres available in the country, while technology giants rely on
India to create software platforms and multimedia features for the next
generation devices. India’s engineering capabilities include 3-D computers to aid
tweak designs of car engines and aircraft wings. Also, their financial and market
research expertise has aided them achieve more outsourcing work which has
been estimated to $56 million every year from 2010 (ibid). Having all this
capabilities and resources, Indian companies are beginning to produce goods
and services with high quality at low prices compared to other developed nations.

Also, the factor conditions that China holds has facilitated them become
innovative in labour intensive mass manufacturing of various items, from
electronics, equipments, heavy industrial plants, to clothe and textiles.

Having stated the various capabilities that China and India have, it is safe to say
that this new rising capabilities have present and future implications on the
leading developed nations. The major implication is that China and India are now
more advanced in different areas such as technology, manufacturing, medicine,
marketing and finance. Hence, they will make use of the large more educated
population to produce innovation at lower costs, thereby increasing their profit
margin. This in turn translates that the leading developed nations will experience
increase in job lay offs and lower income for employees. Another implication is
that due to China and India’s enormous population, low labour cost and
economic growth, more companies from Western countries will shift their
resources and investments into both nations so as to reduce their operational
cost structure.

2. Evaluate the evolving balance of economic power shift from the West
to the East.

Various factors have propelled the shift of economic power from the West to the
East. An apparent cause is the booming growth in China and India’s young mass
of talents and professionals. Every year both nations have a minimum graduate
of 500,000 Scientists and Engineers against 60,000 graduates in the U.S (there
was limited information on the most current statistics). For Life science, it is
estimated that by 2008, both nations will witness an increase in the total number
of young researchers by 35% to 1.6 million while U.S will witness a decrease by
11% to 760,000 (Pete, 2005). With an approximate increase of 13% per year, a
great number of scientists and students in Asia are returning home from the
West. Both nations are investing heavily in research and development. Next to
the U.S. and ahead of Japan, China spent $136billion on R&D in 2007
(Bhattacharya, 2008). These young professionals have become experts in
various fields and have provided innovation with a combined knowledge of latest
software tools and multimedia technologies that often exceed those of American
professional’s. Therefore, with the expertise, skills and low cost of labour in both
nations, there has been an increase in the workforce and employment rate due to
high influx of various multinational companies from the West.

Another reason for this shift in economic power is due to the proximity of China
and India. For instance, multinational companies are operating in both nations
simultaneously by building their goods in China and designing their software in
India.

This economic shift has enabled both nations play major roles in setting global
standards. Due to the rising rate of population and class of consumers, the rates
of demand and consumption has increased, therefore companies are constantly
developing innovative products and services to satisfy consumers. According to a
research by Ovum Company (2007), both nations have the world’s largest
customer base of cellular phones and Internet broadband. It is estimated that by
2010, China will have 800 million cellular phone subscribers. Users of broadband
in both nations will increase from 181 million in 2008 to over 2 billion people by
2014. With this, it is evident that they will become the leaders in dictating
electronic trends.

However, in evaluating the evolving balance of economic shift, it is logical to say


that China and India’s position as new global leaders could experience some
setbacks due to corruption, political instability, health and environmental issues.
The rapid industrial growth in both countries has deteriorated their air and water
quality. In both nations, 1 million people die of premature death due to air
pollution. Both nations are fast becoming ecological wasteland as there is
insubstantial environmental law enforcement to control pollution and
deforestation This pollution curses China to loose $200billion every year
(Bremer, 2006). More so, both nations lack adequate medical care for its rapidly
aging population. They have no pension schemes or medical benefits and are
faced with a high growth rate in disease, AIDS, Tuberculosis and other diseases.
It is estimated that in 2010, 20 million Indians and 10 million Chinese would be
infected with AIDS (Pete, 2005).

Both nations’ political instability, especially India’s political violence could hamper
economic growth. China is a capitalist economy that lacks democracy and
human right, while India practices a democratic system with pervasive corruption.
These shortcomings could disrupt foreign direct investment, private investment
and Capitalization.

3. What are the potential market opportunities for China and India?
Also, discuss the future competitive threats of China and India for
industries in developed countries?

The potential market opportunities for China and India are abundant ranging
from consumer goods, telecommunications, automobiles, electronics,
pharmaceuticals, infrastructure to financial services and education. As stated
earlier, due to the high rate of population, inexpensive labour cost, educated
workforce and the soaring capabilities of both nations, Western companies
are rushing in to invest, with the establishment of Joint Ventures. Western
companies will put in all their resources to maximize profit, by transferring
intellectual, financial and technological resources. This is beneficial to China
and India as they get to increase their market opportunities by providing
diversified products and services to satisfy customers within and outside both
nations.

Although Western countries benefit from the economic development and


ongoing international trade in India and China, industries in both nations are
fast becoming global competitors. The Western nations face competitive
threats from China and India in industries like; industrial, manufacturing,
technological and even educational. An example of China’s competitive
advantage in high value industrial and equipment manufacturing is Huawei; a
telecommunication equipment manufacturer based in Shenzhen, whose
equipment and services were capable enough to beat that of Siemens in a
German tender (Javier, 2008). India is also a threat to Western companies in
the Pharmaceutical industry, they are increasing Research and Development
and their biotechnology focus, while getting more outsourcing and off shoring
activities. Next to U.S, India has the highest number of Pharmaceutical
manufacturing plants approved by the U.S FDA. Over 60% of India’s bulk
drug production is exported, they hold the biggest share of the world’s
contract research business. Compared to the Western countries, they offer a
huge cost advantage in Clinical trial. These examples are just to illustrate how
intensive India and China pose competitive threats on the developed nations.
In the nearest future, the most competitive threat both nations impose on the
developed nations is in the area of Workforce. With China and India’s
increasing GDP, economic growth, escalating capabilities and their intention
to join forces, it is very evident that they will attract more foreign direct
investment from the West which will increase the strength of their workforce
and decrease that of the West.

REFERENCE
Bhattacharya, A. (2008, November 18). China and India: New Innovation and Talent
Forces. Retrieved January 21, 2010, from Business Week:
http://www.businessweek.com/globalbiz/content/nov2008/gb20081117_964178.htm

Bremer, B. (2006, June 16). The Dirty Secret of China's Economy. Retrieved January 21,
2010, from Business Week:
http://www.businessweek.com/globalbiz/content/jun2006/gb20060616_397339.htm

Javier. (2008, October 27). Retrieved January 21, 2010, from The China Sourcing Blog:
http://www.chinasourcingblog.org/2008/10/china-and-hightechnology-threa.html

Ovum. (2007). (China to pass 500 million cellular connections in Q3 2007) Retrieved
January 21, 2010, from http://www.ovum.com/go/content/c,377,71829

Pete, E. (2005, Aug 22). "Crouching Tigers, Hidden Dragons", China and India:
Opportunites and Challenges. Business Week , pp 52-61.

Porter, M. (March-April, 1990). The Competitve Advantage of Nations. Harvard


Business Review , pp 74-91.