Make the nation competitive
First, let’s decide as a nation to ignore Pakistan and heed China. Every Indian leader should scrawl ‘China’ in big letters in his office to remind him every day who is our real competitor. While China is currently ahead, our economy has performed well in the past two decades, and if we accelerate our reforms, especially in agriculture and education, we will gain ground, says Gurcharan Das.
The men who have changed the universe have never accomplished it by changing officials but always by inspiring the people.
— Napoleon 1, Maxims (1804-15)
IT became fashionable in the nineties to talk of national competitive advantage. Not just businessmen, but even politicians and bureaucrats increasingly began to use the phrase. While this is a useful concept, it is easy to fall into the mercantilist trap of believing that nations compete in the global market and policy makers determine market share. The truth is that only companies compete and they win or lose shares based on their capabilities. When a critical mass of firms in the specific industry from a particular nation is repeatedly successful in the world market and helps to generate sizeable export earnings, then that nation is loosely termed to be competitive in that particular industry. There is no one-on-one competition between nation states.
During the nineties, we were influenced in India by the American debate on ‘strategic trade’. Some Indians enthusiastically read tracts like Robert Reich’s Work of Nations and Lester Thurow’s Head to Head and we began to view India as a giant corporation competing with other countries in the global market place. Our media picked up the phrase ‘India Inc’ and began to use it widely, and the Swadeshi Jagran Manch, the rightist protectionist organisation allied to the BJP, tried to persuade the government to target specific industries and lend them support.
The enemy is inside
Once in a while a book comes along that not only influences the minds of policy makers but it creates a new vocabulary for discourse. The Competitive Advantage of Nations by Michael Porter was such a book. ‘A nation’s prosperity does not grow only because of its natural endowments, its labour pool, its interest rates, or its currency’s value, as classical economics insists. It grows out of the capacity of its industry to innovate and upgrade,’ says Porter. A nation can thus ‘create’ competitive advantage when its firms insulate themselves from competition through technology or service based on the proprietary skills of their employees. Simply having an educated workforce, as India does, is not enough. The skills of the workforce must be applied to its exporting industries in order to gain national competitive advantage.
Successful exporting nations have always had intensely competitive home markets, and robust competition is the school in which industry learns to succeed, because it creates demanding customers, who continually push companies to improve quality. India failed to understand this, and its greatest mistake was to virtually eliminate competition in its domestic market.
Porter’s second determinant of national advantage is the ability of successful local companies to create a network of top-class suppliers and ancillaries, somewhat in the way that Maruti has done in India.
The question is: how do Indian companies expect to compete and gain market share in the global market? Initially, it is bound to be on the primitive basis of factor accumulation — the way all developing countries start, with cheap labour and raw materials — and our present exports of undifferentiated products are based on this advantage. But this also makes them vulnerable to the shifting exchange rates of our competitors and to competition from even lower wage countries.
Gradually, Indian industry
will rise to a second stage and become strategic-minded rather than
opportunistic. Our companies will focus on excelling in one area of
business rather than being a jack of all trades; today the average
Indian business house is still engaged in too many business activities.
They will seek out more sophisticated customers and higher value-added
segments of the market. Rather than make generic products, they will
invest in upgrading human, capital and technology resources; establish a
formal in-house R&D programme and restructure work practices in
order to raise productivity. Although industry will have assimilated
modern technology, it will still compete in low price segments with
heavy reliance on foreign components, machinery and customers. This is
the stage at which South Korea and Taiwan are at the moment.
Eventually, at a third stage, Indian industry will have to be driven by innovation if it has to become world class. It will have to assume technology and process leadership. Japan and Germany are at this stage. Indian companies will also have to get bigger to be more competitive. Only large companies will be able to make sustained investments in R&D, match the marketing resources and global distribution capabilities of world-scale competitors, and be able to devote huge resources to training and upgrading of their employee skills. Smaller companies will largely play the role of ancillaries or suppliers to the large companies. In Japan, Sony, Panasonic and Toshiba routinely leverage the innovations of their component suppliers into the global market. Microsoft and Intel achieved global leadership on the broad shoulders of IBM. The success of Silicon Valley companies depended on AT&T and Motorola.
The proper role of the government in creating competitive advantage is as a catalyst. The government cannot create competitive industries; only companies can do that. But governments can encourage or even push companies to raise their sights. They can promote sustained investment in human skills and innovation through fiscal policy. They can ensure competition by reducing state and private monopolies, removing price controls and lowering tariff and trade barriers.
Ultimately, it is company leadership that achieves global advantage. A good company chief recognises the central role of change and innovation — and the uncomfortable truth that innovation grows out of pressure and challenge. This has rich implications for our education policy. How do we get our best talents into export industries like tea, gem-cutting, leather, readymade garments, software? If we value exports then we must attach prestige and rewards to working in them so that young talent will be attracted to them. As Porter says, ‘nations tend to be successful in activities and industries that people admire or depend on the activities from which the nation’s heroes emerge’. Japan’s heroes work for Toyota, Sony and Honda; German heroes work for BMW, Audi and Mercedes. While we did not have national heroes in our traditional exporting business, we did begin in the nineties to make our software warriors into national icons. People like Narayana Murthy and Premji increasingly became role models for the young. This is a welcome development.
‘Indians are among the brightest people on this earth,’ said a German statesman in a candid discussion at Davos in the early nineties, ‘and yet India can’t seem to take advantage of the global economy. Why can’t Indians understand that there is only one game in town? Those who learn to play it well will make it in the twentyfirst century; others will be left behind.’ That game is, of course, exports, and no nation in modern times has grown rich or economically strong without becoming a successful world trader. India’s finest economic years since Independence were between 1993 and 1997. It is not surprising that exports also boomed, increasing twenty per cent a year during the period.
India and China had the same level of exports in 1971 — around $ 13 billion. By 2000, China’s exports had crossed $ 200 billion and India’s were languishing below $ 50 billion. The trade numbers, more than anything else, explain why the world respects China and ignores India. By now most people have realised that East Asia’s miraculous success was built on exports. But few realise that to be a top exporter you have to be a top importer. The world’s top fifteen exporting nations are also the world’s top fifteen importing nations — and virtually in the same order — according to WTO data. This makes sense: the more output you want, the more input you need. Since no country makes everything (or should make everything), they import them.
Ignore Pakistan, heed China
A few years ago, the respected head of a multinational company observed the unreal quality of our public discourse. He said that he had read our newspapers voraciously for two weeks and for every report on China he had counted eight on Pakistan. ‘To the world at large only China and India matter in Asia,’ he said. when people say that the twentyfirst century will belong to Asia, they have China in mind, and then India. Japan doesn’t count, because its demographics are wrong. Pakistan doesn’t even exist in the big picture. Although China is currently ahead, India is the only country that could counter-balance it. I realise Pakistan is your neighbour, but so is China.’
Listening to him I was reminded of one of sage Patanjali’s aphorisms: ‘What a man thinks, so he becomes.’ Patanjali was referring to controlling our thoughts during meditation, but what is true for an individual is also true for a nation. We are obsessed with Pakistan and so we will become like Pakistan — a failed economic and political state. Instead, we should engage with China, the most dynamic economy in the world for two decades. Pakistan is a distraction and pulls us down. China will push us up. What can China teach us? The first lesson is to have clear national objectives. For twenty years, China has had only one objective — to become an economic superpower and lift its people out of poverty — and it is pursuing it single-mindedly. Nations, like individuals, perform best when they are one-pointed. The Chinese have learned that law and order, speedy justice, political stability — all good in themselves — also promote growth by creating a sound climate for investment. Chinese leaders wake up in the morning and they think only one thought — the prosperity of their people. What do our leaders think about?
The New York Times reported in January, 2002, that there were five Chinese delegations in Bangalore in the previous month alone, trying to understand India’s success in software. ‘They have beaten us in everything, now they also want to defeat us in software,’ the CEO of an Indian company, who had refused the Chinese entry into his premises, was quoted as saying. Premier Zhu Rongji visited Bangalore the same month to woo Indian companies to come to China. He went to Delhi not to talk about Aksai Chin or Pakistan but to establish a Beijing-India airlink.
‘Foreign investment has been the fuel behind the Chinese miracle,’ reported the Wall Street Journal. ‘Every dollar of foreign investment yields five dollars of additional output to the Chinese economy. That compares with less than two dollars in the state-owned sector.’ More than fifty per cent of China’s phenomenal exports come from foreign enterprises. Even assuming that seventy per cent of Chinese FDI is from non-resident Chinese, the thirty per cent that is not is four times larger than ours. Yet Indians are the ones who fear foreign investment. Our concerns over swadeshi reflect our inferiority complex and our lack of confidence in our ability to compete in the global marketplace. How did the notoriously insular Chinese manage to change their attitude to foreign capital? China realises far more than we do the enormous potential of global capital for creating wealth and eliminating poverty. That is why it is wooing it with much greater vigour and effectiveness. Once investors come to China, they are more hospitably treated by the government. The Chinese government also targets specific multinational companies and goes after them single-mindedly. This is a second lesson China can teach us: how to get more foreign investment.
Why China is growing so
fast is the result of a phenomenal rise in labour productivity,
according to a study by Zulin Hu and Mohsin Khan of the International
Monetary Fund (IMF). They trace this not only to foreign enterprises,
but also to Chinese town and village enterprises, ‘which have drawn
more than 100 million people from low productivity agriculture into
higher value-added manufacturing.’ Started initially as simple
agricultural processing factories, many are now world-class exporters,
China’s reforms started from below — unlike ours — and the third
lesson we can learn is to shift the focus of our reforms on to
agriculture and the village.
We can also learn from the Chinese to shed our xenophobic attitude to foreign investors. Our swadeshi activists demand that we be selective about foreign investment and this, on the face of it, appears to be reasonable. But the Chinese have realised that the investment world doesn’t work that way. Foreign investors suffer from a herd mentality and act on ‘market sentiment’. Before deciding to invest in a distant land they want to know whether their investment will be safe. So when they view attacks on Pepsi and Kentucky Fried Chicken on their television screens, as it happened in the mid-nineties, everyone becomes concerned.
The Chinese have realised that foreign investors are not lined up outside their doors waiting to come in. The brutal reality of the global market is that the demand for capital is greater than its supply. Global capital goes where opportunities are commensurate with risks and are competitive with alternative options. Indian capital behaves no differently. Why does it flock to Mumbai and Bangalore and ignore Patna? The harsh truth is that India is to global capital what Bihar is to Indian capital. We need foreign capital more than it needs us. We need massive amount of funds to upgrade our creaky infrastructure and neither our government nor our private industry has these sort of resources. Hence, we have to woo the foreign investor. With our poor image we have to work harder. With the reforms we have signalled to the world that India has opened up, but we are not in a position to say, ‘Yes, but.’ Thus, we cannot be selective. We cannot be half pregnant.
Even if we could be selective, there are good reasons why we should not be. The point is, who would do the selecting and on what basis? As soon as we give the power of selecting to a politician or a bureaucrat we risk returning to the bad old days of the licence-permit raj. To minimise corruption, it is best to be transparent and not give discretionary powers to anyone. Besides, by being selective we give our industrialists another excuse to demand protection for various products and risk becoming a closed economy again.
I am an admirer of Mahatma Gandhi, but his swadeshi ideology was badly flawed. As a political tactic to galvanise Indians against British rule, swadeshi served its purpose at the time, but as an economic philosophy in today’s competitive, borderless economy it is self-destructive. The record of the past fifty years amply shows that countries that were open and encouraged foreign investment have consistently outperformed those which were closed. And none lost its sovereignty. Tiny Singapore built a strong economy based on foreign investment. Today, it regularly lectures the United States on moral values and the superiority of the Confucian ethic. So, why is a big country like India afraid?
Although we don’t wish to import the command mentality of the Chinese leadership, we ought to learn from the Chinese to be more enthusiastic about the market. I sometimes ask myself why is it that so many Indians, especially intellectuals, hate the market. There may be two reasons, I think. One, there is no one in charge in the market economy and this causes people enormous anxiety. The second reason is that we tend to equate the market with businessmen. Since we think that businessmen are crooked, we tend to transfer this negative image to the market, and feel the need for the heavy hand of government to keep the market in line. Because the market is invisible, nothing anyone can say will convince people that the market is morally blind; that it is merely an arena in which people buy and sell. We forget that the market is, in fact, the best ally of the ordinary citizen, because it forces businessmen to compete. It is like democracy, in this respect, which forces politicians to compete.
Critics write much nonsense about the obsolete technology of multinational companies, which they say keeps Indian firms permanently dependent. It is the usual gibberish from the overactive minds of the ‘dependency school’, which has no basis in the real world and shows a total lack of understanding of how companies operate. A multinational, like any company, invests in order to succeed in the market place, and it will employ whatever technology it takes to win. If it employs old technology against a competitor with the latest technology then it clearly shoots itself in the foot. Multinationals have no interest in neo-colonial constructs.
‘Globalisation’ to us should mean the global expansion of Indian enterprise in areas where India has a comparative advantage. This is what it means to companies like Ranbaxy and Dr Reddy’s, who are making it in the global economy. It is the same with our software warriors in Infosys, Wipro and Satyam. Along with generic pharmaceutical and software, another area of potential competitive advantage is agriculture and horticulture. To realise our potential, however, we ought to be more relaxed, like the Chinese, with capitalism and globalisation.
Excerpted from The Elephant Paradigm: India Wrestles With Change by Gurcharan Das