Asia's new business giants

Tarun Khanna from the Harvard Business School writes about the emerging Asian giants, India and China, and why the developed countries need to understand them.

I had written in the past couple of days about the need in the MBA Curriculum to add India and China as part of the course. This article by Tarun Khanna only reinforces that.

Two differences distinguish multinationals from China and India, at least compared with their closest neighbours from Korea and Taiwan, and, to a lesser extent, other southern and east Asian economies. First, the companies from China and India are based in very large countries (both in geographical and population terms). This means that some companies have had a chance to bide their time behind protectionist walls, sometimes wasting resources but, on other occasions, building capabilities to compete globally. It also means that the better managed of these companies have domestic cashflows that enable them to do battle with developed-world multinationals arriving in their own (emerging market) backyards.

Second, these large countries bristle with self-confidence. China and India, like Brazil, see themselves as leaders of the developing world. China’s explosion on the world stage is well known, and India’s star is rising. Yashwant Sinha, a former finance and foreign minister of India, told me about a comment by Venezuela’s president, Hugo Chávez, earlier this year. “India’s position in the developing world is rather like the leading football player in the leading football team in Latin America,” he said.

The greater awareness of the outside world also means that a model “from the developing world, for the developing world” is becoming more feasible. A generation ago, Indians, for example, were isolated from many areas of commercial activity elsewhere. Now Indian companies such as Apollo Hospitals and Bajaj Motor have begun to cater to the needs of the Middle East, east Africa and parts of south-east Asia, evolving from a model in which much of the entrepreneurial activity in these countries was fuelled by Indian migrant labour and managers.

China, too, has evolved from trading with overseas Chinese communities in its sphere of influence to developing companies to catering to the needs of the region and farther afield. It is not uncommon to find China’s politicians paving the way for economic activity by Chinese firms in central Asia, Africa and Latin America.

The differences between Chinese and Indian multinationals have several implications for managers in the west. Consider just two. First, if they nurture a business model that capitalizes on low-cost talent, they must realize that there is an indigenous capitalist class – especially in India – that does this well already; that is, they must identify some value added over and above just tapping into talent. Where they prevail, and where the local entrepreneurs do, is likely to be a sector-specific story. This is much less of an issue in China, though even here Motorola and Nokia’s besting by scrappy local Ningbo Bird has surely put the western world on notice.

Second, shareholders of western firms will realize that they can invest directly in Indian companies rather than entrust their funds to US and European companies to then finance operations in India. That is, given the soft market infrastructure in India – especially property rights and access to capital – foreign portfolio investment is more of a viable substitute to foreign direct investment than it might be in China.