China or India? Many companies ask themselves this question. Due to saturated markets, increasing costs and low growth rates in the developed western countries, going to Asia might be the only possibility to sustain healthy growth rates

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ST32002 International Business           China vs. India         Marion Goettert 05010225                        

Table of content:

  • Introduction

  • Business development and opportunities

  • Risks

  • Political and General Instability Risks

  • Ownership and Control Risks

  • Operations Risks

  • Legal risks

  • Economical risks

  • Cultural and social risks

  • Ethical risks

  • Conclusion

  • Bibliography

         

Introduction:

China or India? Many companies ask themselves this question. Due to saturated markets, increasing costs and low growth rates in the developed western countries, going to Asia might be the only possibility to sustain healthy growth rates. With more than one billion people living in India and China respectively, including a huge middle class and growth rates are more than double as in western countries there are huge opportunities for companies. The benefits of globalization made it possible to enter these markets. But these opportunities come also along with risks, therefore it is vital to have a closer look at these two countries to identify these risks and decide then which country fits to the company and where you think you can handle the intercultural differences best.

Business development and opportunities:

The key drivers that made the globalization possible were also in favor of the business development in China and India. The evolution to more democratic systems and open market systems enabled the opening up of the market and the falling barriers made it possible to enter these markets. Technological advances especially in the communication and transport sector made it profitable to ship products back and forward and outsource services.

Western companies are actually forced to go abroad to make profits because of saturated markets in their home markets or in the western hemisphere. Often they invested a lot on R&D and only if they are global player the gain sufficient returns on investments. They also want to take advantage of the low cost resources and the expanding market demand in China and India. The worldwide demand is more  than ever before. It is also important to obtain first mover advantages to be ahead of competitors.

Half of the world’s population is living in the newly developed countries. Cavusgil (2002) states that in these countries one target group is bigger than the population of an individual country in the western world. The growth rates are impressing in comparison to what we are used in Europe or North America. The emerging middle class that desires western products creates a huge consumer market. Cavusgil (2002) states that the perception of these countries has also changed because of the economic reforms. The risks seem manageable and they are technological competitive. The increasing purchase power creates a sufficient market. But these countries are not only interesting because of their large markets, but also as location for high quality and low cost resources.

These countries offer often subsidization and tax relief for enterprises. People in these countries are very motivated and ready to work harder and longer to achieve goals.  

The CIA states that before the reforms stated in 1978, China was a soviet-style centrally planed economy. The state determined the products, the amount, the price and the distribution. Collectivism was emphasized and State owned companies were the rule. But because this system failed to bring the desired economic development, the Chinese government decided to modernize the economy towards a more market orientated system, which would be more open to the world. It changed the collectivism in agriculture to ‘a system of household and village responsibility’. It permitted ‘small privatized enterprises in services and light manufacturing’. Alltogether there is less government control. Furthermore it opened to FDI and trade from abroad. These measures made it possible to attain a huge GDP growth and finally made it to the ‘second largest economy after the USA’.

Due to these reforms 30 years ago it has great advantages. It is the country that receives the most FDI in the world. It offers low labor costs, as well as low cost for land and other expenses. Furthermore it offers tax exemptions and low tax rates as incentives to allure foreign companies to invest. As the most populated county at the moment and with growth rate of 13% the last 10 years it is very attractive. China mostly concentrates at labor intensive work in the industrial sector, for example assembling and processing. It serves as a worldwide supply base where goods are produced and exported. It has a good educated workforce that is able to conduct these tasks. In these areas it is the world leader and has a lead over competitors. An opportunity is also the low cost of advertising and the low level of competition in this area. It offers a good industrial base and short term and long term profit potential.

Hill (2005) states that when India became independent, it chose to adopt a democratic system, but a mixed economy that was largely based on state owned companies and a central planning. It had quotas, high import tariffs and restricted FDI. This system did not generate growth and economic process. Poverty and low standards of living were prevailing. Due to this situation the government decided to execute reforms. In 1991 it has begun to open up its economy for the private sector, reduced tariffs and taxes and FDI is welcome. Furthermore it decided to privatize its state owned enterprises. The results were obvious. GDP experienced a stable growth, FDI came into the country and the service sector, with the software development is booming. There is a growing middle class that can afford buying shopping and specialty goods. But a lot is still to be done, India needs to continue its reforms and reduce the tariffs further. Poverty is still a huge problem that needs to be solved.

Because India has begun its reforms later, it is not as far in its development as China. But for example it will overtake China as the most populated country in the future and it will be a young and agile society. An advantage is its increasing middle class, which is already enormous with 100-250 million people. This market segment is relatively wealthy and can afford to buy also western products and services. It provides a huge opportunity for western companies to target this segment. The youth market is this middle class is especially interesting, because they grew up with being exposed to western ideas and products. The demand is expected to double in the next 10 years and high income households are increasing as well. The population and industry is more evenly spread in the cities all over the country.

India has a sophisticated, efficient and fond financial system with a healthy banking system and the Indian Stock Exchange. The Rupee is free convertible and India has a good private sector. It reduced income taxes and gives tax incentives to attract new businesses. Trade organizations offer help for foreign companies.

Because of its colonial past it is familiarized with the western nature and English is one of the most important languages in business and politics. Many people in India are therefore English speaking, can be easily trained to work for western companies and are computer-literate. India’s workforce is well educated, qualified and motivated. They have world class universities that emphasize math and engineering. India educates more engineers than anywhere else in the world. There is no shortage of managers either. These highly trained employees work for a fraction of the cost of western countries. This low-cost-high-quality workforce and a knowledge based industry are the main factor in the competitive advantage of India. Nobody can offer this combination elsewhere in the world and that is the reason why the service sector is booming in India. Software development, call centers, customer care, movies, tourism, biotechnology and pharmaceutics are the main industries. Western companies see opportunities in outsourcing services to India, for example banks and insurances (Allianz and Deutsche Bank) as well as car makers like BMW and VW. Pharmaceutical companies outsource their research for example Roche, Glaxo SmithKline and Pfizer. India is also ‘a very entrepreneurial society’ (Hill, 2005, 104)

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Risks:

Political and General Instability Risks

China is a communist state, with a one party system. There is no political opposition that has any real power. It is a totalitarian regime and a collectivist society. Even tough it has transformed its economy to a free market, there is little political change. The regime still maintains tight political control and restricts the personal freedom, e.g. ‘it limits the internet access for government and university employees’ (Hill, 2005, 69) and there ‘is no access to foreign newspapers’ (Country Profile, ...

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