India vs. China: Market Attractiveness for Australian Companies

Introduction

This report has been prepared from the perspective of consultants hired by the Australian Trade Commission (Austrade), whose mission is to help Australian companies succeed in international business by providing advice, market intelligence, and support to reduce the costs and risks involved in selecting and developing international markets (Austrade, 2008). The report advises on the attractiveness of India and China for Australian companies interested in developing their international presence. India and China are two of the largest and fastest-growing economies in the world; however, both markets still present considerable challenges for Australian companies looking to expand in the region. The analysis that follows covers four key dimensions and concludes with a recommendation on which country presents fewer risks and challenges for Australian firms considering international expansion.

Lung-Fai Wong's work entitled "Agricultural Productivity in China and India: A Comparative Analysis" notes that these two countries are among the most populous in the world, together comprising more than one-third of the total global population (Wong, 1987). Wong further observes that despite differing greatly in economic, social, and political circumstances, both China and India "emerged as net exporters of agricultural products after more than three decades of development. Each country, however, employed different strategies and reforms and, therefore, they have been of great interest to economists for many years" (Wong, 1987).

A study by Balasubramanyam and Wei (2005) entitled "Textiles and Clothing Exports from India and China: A Comparative Analysis" compares the export performance of the textiles and clothing industries in both countries using the revealed comparative advantage and the Kreinin-Finger similarity indices. The results indicate that China holds much higher shares in world exports of both textiles and clothing, while India holds a comparative advantage in women's clothing and men's shirts. With the abolition of the Multi-Fibre Arrangement (MFA), China was expected to gain at India's expense in most categories of clothing exports, even in those where India previously held a higher market share. The authors concluded that India would need to strengthen its competitive position relative to China, particularly in high-value, design-oriented products in the EU and U.S. markets (Balasubramanyam and Wei, 2005).

Dilip K. Das (2006), in "The Chinese and Indian Economies: Comparing the Comparables," presents several key findings relevant to this analysis:

Both China and India were historically known for their prosperity, but in the modern era they experienced sharp economic decline and became marginal economies characterized by large impoverished populations and stagnation. Early in the twenty-first century, however, both nations re-emerged as significant powers in the global economy. China, in particular, delivered a remarkable economic performance in the closing decades of the twentieth century and was widely regarded as a future economic superpower — a low-cost manufacturing giant with rapidly rising merchandise exports and imports. India's post-1991 growth performance also improved, with notable success in services sector exports, though it did not match China's overall economic performance. Das concludes that the economic weight of China and its integration into the global economy will continue to grow, and that India could follow a similar trajectory (Das, 2006).

The Market Oracle, in its report "Emerging Markets Outlook for 2007 — India, China, Russia, Eastern Europe and Brazil," offers the following assessment of each country:

Overview of Markets: India and China

India: India experienced a volatile boom during 2007, with the Sensex index rising over 50% by year-end following a significant sell-off in May. Despite a solid long-term growth story, India was expected to undergo some consolidation in the near term. Crucially, economic growth had not been accompanied by sufficient investment in infrastructure — particularly in transport and power — which lagged well behind developments in China. The implications of weak infrastructure were expected to become increasingly apparent to investors. Governance of the economy was seen as less effective under India's democratic system, and rampant corruption remained a concern. Overall, India was expected to continue growing but to experience greater stock market volatility than China (The Market Oracle, 2007).

China: China continued to enjoy strong GDP growth of approximately 10% per annum, supported by an ongoing construction boom as tens of millions of people migrated to new cities each year. This economic prosperity was generating an ever-growing middle class increasingly adopting Western-style consumer preferences. Even if export demand were to weaken due to a slowing U.S. economy, rising domestic demand was expected to compensate. The gains of 2006 were projected to continue well into future years (The Market Oracle, 2007).

Export performance data comparing China and India from 1950 to 2004 illustrates a widening gap in favor of China, particularly from the 1980s onward, as China's export growth dramatically outpaced that of India across the period.

According to Sinha (2007), foreign direct investment (FDI) patterns contributing to the growth of emerging markets have undergone significant changes over time, with a notable shift of flows from developed to developing economies. China has grown at approximately 9% annually for more than a decade and doubled its GDP within six years. The definition of an emerging market economy (EME) used by Sinha includes countries taking steps toward a market-oriented economy with a per capita income below $10,000 and a population of one million or more — a definition that encompasses both China and India (Sinha, 2007).

China has attracted ten times more FDI than India and has grown into an economy three times the size of India's. The AT Kearney Confidence Index ranks India second after China in FDI attractiveness, but the gap between the two is significant: China attracted approximately $60 billion in FDI compared to India's $5 billion. Investor confidence in India had yet to translate into actual investment flows comparable to those seen in China (Sinha, 2007). China is described as "the leader in absorbing FDI" (Sinha, 2007).

Labor market reforms undertaken in China have not been replicated in India, largely due to political opposition from organized labor unions. China's labor market is considerably more flexible, making inter-industry reallocation of workers a smoother process. In India, the reallocation of resources from inefficient to efficient firms is also slow, given stringent exit barriers — particularly legislation preventing retrenchment (Sinha, 2007).