28 Jan 2008  Research & Ideas

Billions of Entrepreneurs in China and India

Entrepreneurship in both China and India is rising dramatically and thriving under quite different conditions. HBS professor Tarun Khanna explains what it all means in this Q&A about his new book, Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours. Plus: book excerpt. Key concepts include:

  • In China and India, much of entrepreneurship is in response to constraints—societal, political, or other.
  • The business landscapes of China and India differ in 2 main respects: their degree of openness to outside influence, and the extent and type of government involvement.
  • Foreign direct investment pours into China. India has embraced foreign direct investment much less, for good and bad reasons.
  • Traditionally, India has been more open to ideas than has China.
  • In India, caste is both less important and more important than it used to be.

 

Entrepreneurship in the world's 2 most populous nations, China and India, has through modern times been somewhat asleep. But now, says HBS professor Tarun Khanna in a new book, both societies "have woken up," and the results could reshape business, politics, and society worldwide.

"In some sense people in these societies are running faster than their rules and laws can keep up. So they are creating the rules as they go along. And entrepreneurship is, after all, doing things in new ways, ahead of social norms and customs, and establishing the rules and laws. In both countries, these processes are unfolding not just in the mainstream business sector but in society writ large and even in politics and civil society," says Khanna.

Khanna's book Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours will be published by Harvard Business School Press on February 1. Each chapter compares China and India on a broad range of factors in entrepreneurship, including access to capital, freedom and reliability of information, governmental involvement, and infrastructure. Khanna examines the landscape of big, medium, and small entrepreneurship, including rural health-care initiatives and even Bollywood.

As Khanna explained to HBS Working Knowledge, "One can see China clearly when juxtaposed against India, a neighbor that, like China, is a large, populous, and ancient country that chose a different path. The difference is stark. The same is true when we look at India with China as a backdrop. That's why I wrote a comparative book."

In our interview Khanna outlines the business landscape in both countries. He also describes how indigenous and foreign entrepreneurs could get a foothold, how China and India relate to their own diasporas, and how entrepreneurial activity is reshaping both countries for the better.

Martha Lagace: Why did you choose the title Billions of Entrepreneurs?

Tarun Khanna: The title captures the ferment that is taking place in both China and India. Entrepreneurship is not only about hotshots taking companies public. A lot of entrepreneurial activity in these countries is in the exercise of getting things done more efficiently and creatively in response to constraints that people find themselves immersed in. Some of these constraints are societal; some are political. And so this book is full of stories about social entrepreneurs, political entrepreneurs, and others whom we study in business schools—investors, capitalists, and so on.

Q: What's different about entrepreneurship in both countries?

A: The extent and type of government involvement and the nature of openness are 2 dimensions in which the countries are different. These dimensions pervade all aspects of societal existence, whether that means raising capital to start a new business, the nature of markets, copyrights, the media, movies, and religion, as well as the ways in which both countries themselves project their power, the way they deal with each other, and the way the village economy works.

In China, the government is often the entrepreneur. It is in many instances a very efficient entrepreneur. Of course there are bankrupt state-owned enterprises, but there are equally dynamic companies starting out in villages, small towns, and major cities, often with a sizable amount of investment or involvement by local government authorities. It is hard to find any reasonably sized Chinese company in which government authorities do not have input.

In India, some islands of excellence notwithstanding, the government remains inefficient for the most part, and most pockets of entrepreneurship—interesting, vibrant new ways of doing things—are in the private sector or civil society, staying far away from government intervention. So here the private sector leads many significant initiatives; in China, the lead is often provided in a top-down manner.

The second difference is the nature and extent of openness to outside influence and foreigners. Foreign direct investment pours into China. India has embraced foreign direct investment much less, for good and bad reasons. On the good side, India never had to endure a cultural revolution. China "wiped its slate clean" in the Cultural Revolution. Literally and metaphorically, it got rid of intellectuals, human capital, private enterprise, everything. With a clean slate in those circumstances it came to rely on FDI, and help from the overseas Chinese was a big piece of that.

Because India did not follow a similar extreme path it didn't need to embrace FDI quite as much. So that's a reasonable reason to expect low FDI levels. On the negative side, however, India, with its indigenous entrepreneurs, still engages in some protectionist behavior and lobbies to keep foreign investment out.

There are other aspects to openness, of course, than just FDI. Traditionally, India has been more open to ideas than has China, for instance.

Q: How should a foreign entrepreneur size up the potential of each country?

A: First, does it make sense to try to enter either of these countries? How does entry fit into a broader business model? In some cases it would be more sensible to enter China, in some cases more sensible to enter India. What China is good at, India may not be, and vice versa. Some companies—GE Healthcare is just one example—are finding that they can leverage both countries symbiotically.

Second, conduct a series of experiments. An entrepreneur has to make many decisions: how much money to sink in, whether to partner, how to work with relevant government or regulatory entities, whether to invest in local or global brands or none at all, et cetera. And several of these contextual factors that matter, which I illustrate through examples in the book, matter differently in China and India, so you might make different decisions in the 2 countries. It often takes a lot of time to experiment, but that doesn't have to mean losing money. They have to be clever experiments, not expensive ones.

Q: How does each country treat its diaspora in terms of stoking entrepreneurship at "home"?

A: To put it bluntly, China has embraced its diaspora, and India has shunned it. While the numbers should always be taken with a grain of salt, it is said that about 50-plus million Chinese and 20-plus million Indians live outside their home countries.

India's tendency to shun its diaspora must rank as among the most disastrous decisions made by a nation in modern times: disastrous in the sense that a successful group of people is willing to give time, money, energy, and good will to their country of origin and is being pushed away. Fortunately, this situation has been changing in India in the last 4 to 5 years.

In China, by and large, the diaspora has played a much bigger role. In 1978, China didn't have the internal markets to rely on, so it turned to the overseas Chinese because they were the only people who could understand China well. To other people China seemed too difficult, too alien, too foreign.

In the case of both countries, there is a broad spectrum of people in the diaspora, so we should be careful about not lumping them all together. That said, the success of the Silicon Valley community and the massive wealth that some people have accumulated have caught the eye of India. And as in most things in life, timing is everything: In some sense the combination of India having its back to the wall in the early 1990s and rejuvenating its reform process, and the wealth accumulating among the diaspora, were the supply and demand side for getting the diaspora together with its home country.

Q: How does entrepreneurship affect the playing field in each country in terms of urban/rural divides, caste (as in India), and so on?

A: We're at the point where half the world's population lives in cities. There is an ongoing debate about whether the overall quality of life is better in cities compared with rural areas. But certainly if you look at the migratory patterns of human beings in recent decades, there's no question that people by and large move from rural to urban areas in search of better economic conditions. In India, most social and economic indicators show that life is better in the cities than in rural areas, on average, even given the fact that there is wide disparity within the cities.

Is it easier to be an entrepreneur in a city? The answer depends on the meaning one assigns to the term "entrepreneur." In the more narrow sense of starting a business, then yes, it's easier to start in the city due to better infrastructure and support. But since entrepreneurship means doing things in new and clever ways, there are lots of stories in my book of rural entrepreneurs—people in India who are in civil society, and people in China who act as entrepreneurs in rural settings. In both China and India I don't think there is any reason to think there is less entrepreneurship in rural settings.

Caste in India is both less important and more important than it used to be. In some sense business is a great leveler. In the cities a low-caste person may earn a lot more than a high-caste person. Business cares about the bottom line. It doesn't care whether you are in caste A or caste B if you can produce a product, manage a sales force, or produce the capital. On the negative side, politicians have whipped up caste frenzy. A lot of voting in India happens along caste lines in so-called vote banks. And so politics has become fragmented with some politicians highlighting caste differences in the electoral process. That has been pretty much a disaster for the system of governing.

Q: China and India have had tense relations in the past. Will these persist?

A: I think there are lots of ongoing sources of concern, as you know. There are unresolved border issues, and people point to both countries flexing their military muscle increasingly: China's blue water navy, India's nuclearization. But I think to focus exclusively on this, even primarily, is a complete mistake. The on-the-ground productive ferment, and the possible complementarity between the China and India story, are far more interesting and promising to me. Building economic relations between the countries, not just through arms-length trade, but investments by individual companies in each other's countries, will cement ties. These will counterbalance the political tensions. So I see the glass as much closer to half full than half empty going forward. This is a happy story, a story of hope.

Q: You have watched India change dramatically in your lifetime. How has China surprised you?

A: I've been interested in China since I was a child. It was the big neighbor to the north that was Communist, had defeated the Indian Army in 1962 in a border conflict, and was not generally portrayed positively. China was quite mysterious. After I cotaught an experimental MBA seminar on China and India at HBS, and then cowrote an article on India and China with Yasheng Huang ["Can India Overtake China?" in Foreign Policy, July-August 2003], I became so fascinated with China that I began to travel extensively there. In the course of writing this book I spent time with all sorts of people in better and the less well-traversed parts of China—entrepreneurs, of course, but also policymakers, politicians, and South Asia specialists in Beijing.

I discovered that the versions of events that I had been told were different from the versions of events that they, the Chinese, had been told. I found that very revealing. I also have a lot of Chinese students who were extremely gracious with their time as I traveled across China. I began to learn Mandarin, and the process of learning the language itself has been extremely revealing. For this book I went pretty deep into China as into India. It's been a terrific journey of discovery.

Book excerpt from Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours by Tarun Khanna

Finding reliable, useful financial information is a real problem that anyone wanting to go to work at, sell to, buy from, or invest in a Chinese or Indian company must face. I am often asked for guidance in solving this problem and have found that answers are different for the two countries.

In China, can I believe the financial information in a company's annual report?

Not really, I say. The annual report does not serve the purpose it does in market economies, that is, to communicate reliable information. Several of the companies with which one might interact may not even be legal entities in their own rights: almost surely they will have a blurred responsibility to traditional business constituents and to government.

What about analysts' reports on Chinese companies?

Two issues are at stake. First, most of the domestic assets of Chinese companies are not publicly listed. Those that are listed locally are not necessarily the companies' best assets but are the results of the government's attempt to leverage domestic savings toward salvaging bankrupt state-owned enterprises. Assets listed overseas—and on which reliable foreign analyses presumably exist—are not all the assets of the corporations in question. For example, the Bank of China's overseas operations are listed in Hong Kong but represent only a small part of the bank's operations on the mainland. Second, Chinese financial analysts are not independent but state owned or state controlled, as are the companies on which they issue reports.12

How about relying on credible business media?

Caijing and a few other media outlets like it have made some progress, but for the most part credible business media are still scarce. One reason is that Xinhua, China's official news agency, is directly controlled by the Central Committee of the CCP. Newspapers that carry a Xinhua story are allowed to rewrite or shorten but not add to or otherwise revise the text. Since Xinhua is the only agency with correspondents based overseas, every other media outlet depends on it for international news. The government control of Xinhua is far from subtle. Typically a working group from the party's propaganda department meets every week to draw up detailed guidelines for what issues Xinhua should cover and how those issues should be presented. Xinhua officials then pass the guidelines along to lower levels.

Market information—information gathered by impartial, objective observers in return for monetary compensation—is also scarce in China. One recourse is to turn to what economists awkwardly call non-market information.13 Inconveniently, there is no compendium of what passes as reliable non-market information. In China the primary source of this type of information is guanxi, a term referring loosely to relationships. Legions of academics have published studies documenting the value of guanxi in China. These are valuable precisely because they are the primary conduits of reliable information in a society where impartial sources of information are non-existent. As an example, observers of Zhongnanhai, the government compound in Beijing around Tiananmen, are busy figuring out who's in and who's out of the Party hierarchy, presumably with a view to discussing the future embodiments of state power. The very reliance on guanxi makes it unlikely, in the short run, that credible, impartial, objective purveyors of market information will emerge. Why invest in building such an organization if everyone relies on relationships?

Is it easier to find reliable information about a company in India?

Yes. First, as a result of a legal system derived from the common-law tradition, annual reports provide the rudiments of information that Western observers expect, and familiar rules govern corporate disclosure. Real-time stock market data are readily available on all publicly traded companies, a result of vigorous competition between the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Private-sector intermediaries in India use business models that include information synthesized from company disclosures and intelligence that they gather from the ground. The Centre for Monitoring Indian Economy (CMIE), for example, is a privately owned clearinghouse for reliable information on publicly traded firms and some privately held firms in India. Founded in 1976, CMIE is the brainchild of the entrepreneur Narottam Shah. Numerous credit-rating agencies work off the primary information available from companies and from CMIE to provide risk analyses for debt claimants.

Indian business magazines compete ferociously. Business Today and Businessworld have effectively challenged Business India, once the dominant publication. These three publications claim top rankings among readers and advertisers, and their fortunes ebb and flow as one would expect in a competitive environment, keeping the companies and information providers relatively honest. The libraries and archives of these business magazines and of the daily business newspaper the Economic Times are accessible to any person on the street, either free or for a nominal charge.

Government-affiliated organizations keep pace with these competing private entities. The Indian Statistical Institute, an eminent think tank and bastion of statistics and economics, maintains data banks and discloses companies' decisions regarding debt holding and equity. The Planning Commission, the Reserve Bank of India, and other government-linked bodies regularly massage and report data. These reports are heavily analyzed, debated, and criticized in the independent business media and serve as additional checks on the micro information they publish.

And what about interpreting accurate country-level information in China and India?

Again, this is possible only with equally reliable data on specific industries and the economy in general. For China watchers, the limited availability of reliable statistics continues to be the biggest stumbling block. Numerous caveats accompany discussions of the levels and growth of China's GDP, in itself a veritable cottage industry. China does have governmental data banks—for example, the China Securities Regulatory Commission (CSRC) in capital markets.14 But they do not appear to function as intended. The CSRC is responsible not only for providing information but also for the very performance of the stock market—heavily in hock to the government as it is. Such a structure inevitably engenders conflicts of interest.

Thomas Rawski, a professor of economics at the University of Pittsburgh, is a close observer of the Chinese economy and a longtime student of Chinese economic statistics. In his view, China's growth rates from 1997 to 2001 were probably less than half the official annual figure of 7.6 percent. And China's official statistics were unlike any seen previously in Asia. In Japan in the late 1950s, Taiwan in the late 1960s, Korea in the late 1970s, and China itself in the late 1980s, cumulative growth in real output exceeded 30 percent. Each expansion sparked higher energy consumption, increased employment, and raised prices. During the 1997-2001 period, however, China's energy use, employment, and prices fell. Unless the Chinese have identified a radical new way to use energy, the growth rates appear exaggerated.

Digging into these figures, Rawski cited numerous Chinese-language materials complaining of jiabao fukuafeng, or "the wind of falsification and embellishment."15 Was political manipulation part of this tornado of false reporting?

Yes and no. Deception is not new in China, but it has become rampant since 1998, when targeting 8 percent GDP growth became a "great political responsibility." The Chinese leadership certainly did not want to be fooled. They wanted to learn what was happening on the ground, but they had no direct control over the details of reporting. As a result, the cadres who exaggerated their performances got promoted, and those who gave honest, less-than-rosy reports were blamed for incomplete tasks. This is why the former director of China's National Bureau of Statistics (NBS), Zhang Sai, slammed "administrative interference in statistical work" in 1999, and Premier Zhu Rongji complained about rampant "falsification and exaggeration" in 2000. After 1999 NBS publicly dismissed provincial growth estimates as "cooked local figures." It substituted its own more conservative measures but did not explain how it arrived at them. China Daily warned of "statistical fraud," and domestic critics blamed "agencies of the national government" for "statistical illegalities."16

Indian companies and financial institutions are not free from fraud and error. On the contrary, India's financial scan of 1992, which I discuss at some length in a subsequent chapter, was at least as egregious as the stock market fever that gripped China in the same year. Both countries have seen their share of financial shenanigans, but their responses to the systemic problems in their financial sectors could not be more different. India celebrated information and embraced competition and market forces, whereas China left intact and arguably strengthened government control of the stock exchanges.

Book excerpt used with the permission of Harvard Business School Press from Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours by Tarun Khanna. Copyright 2007 Tarun Khanna. All rights reserved. Purchase this book.

12. Stephen Green, China's Stock Market: A Guide to Progress, Players and Prospects (London: Profile Books, 2003).

13. This term was first coined by David Baron at Stanford and refers most commonly to actions taken to react to or affect government regulations and work with civil society and excludes the prices and amounts of products and services that a company provides.

14. See its mission statement on China Securities Regulatory Commission's Official Website.

15. Thomas G. Rawski, "What Is Happening to China's GDP Statistics?" China Economic Review 12 (2001): 347-54. A later paper considers several criticisms of his arguments and explains why he stands by his reasoning: "Measuring China's Recent GDP Growth: Where Do We Stand?," University of Pittsburgh, August 29, 2002, http://www.pitt.edu/~tgrawski/papers2002/measuring.pdf

16. Thomas G. Rawski, "Beijing's Fuzzy Math," Wall Street Journal (Eastern Edition), April 22, 2002.

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.