Chinese and Indian multinationals enjoy huge home markets and are growing in confidence, says Tarun Khanna, but India’s stronger rule of law means that its companies are bolder and are better investments

Asian multinationals are generating a lot of excitement. But why do they merit special attention? Are they really that different to their historical forerunners and contemporaries elsewhere in the world?

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.

This self-confidence means that China and India do not take kindly to approaches from the developed world that they perceive, rightly or wrongly, as being unfair to them. Microsoft’s decision to to produce Chinese versions of software in the US rather than in China in the early 1990s provoked the government’s ire, and the US firm has arguably not yet recovered from this. And the explosion of at-your-fingertips information about companies worldwide means that China and India have the data they need to decide whether they are being treated fairly.

A new business model
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.

And alliances are being fashioned between China, India and the other large developing countries to facilitate mutual trade. China-India trade is growing fast, even if off a low base, and Brazil and China have kindled a new romance.

Since World War II foreign direct investment (FDI) has mostly emanated from the developed world and has mainly been directed at the developed world. But FDI is increasingly being directed to developing countries. China, for example, was the biggest recipient of FDI last year.

Moreover, FDI between developing economies is beginning to develop. A survey of global business executives in the McKinsey Quarterly, conducted by the management consultancy on the Internet last November, asked how respondents perceived new opportunities. More than 16,000 executives replied. Those from the developing world were more likely to consider emerging markets as attractive destinations for investment than their developed world counterparts. Emerging market respondents have a better understanding of the market for local talent. Instead of being a cog in a large, foreign, slow-moving machine, ambitious locals tend to prefer the opportunities offered by fast-growing home-grown rivals.

Emerging multinationals underestimated
Perhaps most interesting was that developed world respondents did not appear to take competition emerging from the developing world seriously. This dismissal of emerging multinationals is likely to prove a serious error of judgment.

Despite the similarities in size, self-confidence and a shared recognition of the value of trade, there are striking contrasts between the business models emerging from China and India.

First, the extent and nature of government support varies considerably between the two countries. The various branches of government in China – centre, province, township, and so on – are deeply involved, for better or worse, in economic activity. Although private indigenous activity is growing, domestic entrepreneurs have their hands tied behind their backs. China’s leading companies have not risen to their position without explicit and implicit support from the government.

Government in India, in contrast, plays a background role. It is Janus-faced: the residue of the old mindset in India continues to prevail in some industries, where rent-seeking and bureaucratic interference persist, and the government has adopted a more prescient approach of playing a supporting role to industry in other areas. In either case, unlike in China, government is not the proximate cause of the success of India’s best companies. Indeed, the help goes the other way – companies have helped the government, by serving as ambassadors for India and by disseminating best practice to various governmental bodies and commissions.

In some sense, if the objective is to foster home-grown companies, China’s government could not but provide explicit support. This is because the institutional support needed for private enterprise of the sort that becomes competitive on the world stage is lacking in China. It was wiped clean by the Cultural Revolution.

Deng Xiaoping’s decision to embrace foreign capital in 1978 can be seen in two ways: as a recognition that it was the only realistic way to grow quickly, given the absence of domestic market infrastructure, as well as a cause of continued emasculation of the market mechanism in China. Domestic private business has long been treated as a second- (if not third-) class citizen in China. It is only in the past year that local private businesses have been granted rights first given to foreign business a quarter century ago. And the influx of FDI has delayed the much-needed reform of China’s own capital markets.

In contrast, India, of all the major emerging markets, has probably the best underlying soft market infrastructure. Information flows reasonably well between the supply and demand sides of markets, as a result of competing, private-sector specialized intermediaries. This intermediary function is served by such entities as banks, venture capitalists, accountants and auditors in the capital markets, and by executive search firms in the market for management talent. And contracting partners have some guarantee of the sanctity of deals as a result of general respect for property rights and the rule of law.

Indeed, Indian capital markets have been reformed dramatically in the past decade. Banks, although inefficient, are not the albatrosses around the country’s neck that their counterparts in China are. Business schools have existed for several decades and are first-rate teaching institutions, spurred on by cut-throat competition. The net result is that India’s emerging multinationals have leveraged this infrastructure, rather than rely on government largesse.

India has produced far more world-class multinationals – companies such as Infosys, Tata Motor and Bharat Forge – than has China. And, of those that have made it globally, the Indian ones are all private sector driven, while none of the Chinese ones is driven purely by mainland Chinese private sector entrepreneurial activity. And the Indian ones have corporate governance practices far closer to world standards.

Here to stay
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.

Chinese and Indian multinationals are here to stay. They are more than sources of low-cost talent, or low-end outsourcing. Their large economic hinterlands, and the self-confidence expressed in economic and political spheres, ensure that their presence will be felt worldwide. And they should be welcomed, not feared: successful Indian and Chinese multinationals will help ensure that the vast labour forces of both countries will be gainfully employed, enhancing consumer welfare the world over.

Tarun Khanna
Tarun Khanna is the Jorge Paulo Lemann Professor of Business Administration at Harvard Business School. He studies and works with businesses in emerging markets worldwide, and is especially interested in the comparison between China and India. He chairs the Strategy, Leadership & Governance executive education programme.