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Introduction
S.R. Hashim and N.S. Siddharthan
The backdrop
In the last few decades the world has experienced a significant shift in the centres of growth. China and India were late entrants into the high growth club of developing countries, but the size of their economies has already made the impact of their momentum quite significant. This is truer of China which has had a longer period of high growth. China started implementing economic reforms in 1978, and the economy responded quickly to these reforms. China’s gross domestic product (GDP) grew at an average rate of 10 per cent per annum during the period 1979–95 and at an average rate of 8 per cent per annum thereafter. From being among the world’s poorest countries in 1978, China in 2004–5 moved to the lower–middle income range in terms of per capita income and is, after Japan, the largest economy in Asia. Measured in terms of purchasing power parity, China at present is the second largest economy in the world, larger than Japan, and second only to the USA.
India started implementing serious economic reforms from 1991 and the Indian economy also responded well to these reforms. As is now well-documented, the economic performance of India during the first three decades after independence was quite modest, recording an average growth rate of 3.5 per cent per annum. The growth rate improved to an average of 5.6 per cent per annum during 1981–91, but was accompanied by severe macro-economic imbalances like high fiscal deficit, large foreign debt and adverse debt–service ratio, high inflation and an acute shortage of foreign exchange. During the decade after the reforms, that is, during 1992–93 to 2002–3, GDP growth improved to 5.9 per cent, on an average, with much healthier macro-economic indicators. In the recent four years the average rate of growth has gone up to 8.5 per cent per annum, the investment rate has crossed 32 per cent of GDP, there is a foreign exchange reserve of 180 billion dollars (and growing) and manageable rates of fiscal deficits and inflation. The Indian economic fundamentals at present are sound and these indicate a potential growth rate of 9 per cent per annum in the next phase of development.
It has been observed that the transition of low growth economies to high growth economies is almost necessarily accompanied by rapid technological change and a structural shift in the sectoral profile of the economy. The contribution of primary sectors to the GDP decreases while that of the secondary and tertiary sectors increases. It appears that a commensurate shift of workers takes a much longer time. Within the secondary and tertiary sectors, there is a movement from low-tech industries to high-tech industries. High-tech knowledge-based industries have played an important role in the transition of Chinese and Indian economies. In fact, the transition of the Indian economy, in particular, has been led by high-tech knowledge-based industries such as the information technology (IT) sector, IT-enabled sectors (particularly communications), biotechnology and pharmaceuticals. To understand the recent processes of growth, scholars and students of business, economics and technology have studied the behaviour of firms in these high-tech industries, the self-created, government-supported and/or globally primed business environment under which they operate, and their role in ushering in the growth revolution.
The theme
Several firms from developing countries, and in particular from India and China, have emerged as important global players in knowledge-based (high-tech) industries like information technology, biotechnology and pharmaceuticals. For example, Indian software has been growing at a compound annual growth rate of 40 per cent from 1990 to 2004–5, and 80 per cent of the output is exported. The Chinese software industry, probably even bigger in size, has also been growing rapidly but is not export intensive. However, the Chinese hardware industry is very large and globally competitive. With regard to pharmaceuticals, India has been recognised by the United Nations Industrial Development Organisation (UNIDO) as one of the top-ranking countries among the developing nations in terms of production and distribution of pharmaceuticals. The Indian pharmaceutical industry is very competitive and some Indian firms have become global players in terms of exports and acquisition of European and U.S. pharmaceutical companies. Likewise, several Chinese pharmaceutical firms are export and R&D intensive.
In the light of this background, it is important to analyse the competitive advantages of these firms located in developing countries. The sources of their competitiveness, inter-country differences in their conduct and performance and the likely future trends need to be identified and analysed. These issues assume importance because the impact of information technology is not confined to a particular sector or product. It is more like a technological fusion which cuts across disciplines, nations, industries and sectors. Scholars from different disciplines in technology, pure sciences, economics and other social sciences have been working in these areas. Though the issues involved cut across disciplines and so require a multidisciplinary approach involving interaction between scholars from different disciplines, there is no forum or platform to facilitate scholars belonging to science, technology, business schools, economics and other social sciences to meet, present their research findings and interact. The seminar ‘Knowledge-based industries, employment and global competitiveness’ was organised by the Forum for Global Knowledge Sharing at the India International Centre, New Delhi, on October 6–7, 2006 in response to this vital need. The papers presented at the seminar that are included as chapters in this volume have been arranged under three sections:
- Global Competitiveness
- Employment
- Science and Technology—A Perspective
Six chapters comprise the global competitiveness section. They cover both the information technology and the pharmaceutical sectors. The first chapter presents a comparative study of Indian and Chinese firms. Two chapters deal exclusively with Chinese firms and two with Indian firms. The last chapter analyses the adoption of IT by firms in Mauritius. It is relevant to note that Mauritius enjoys a special trade and investment relationship with India and is consequently in the lead with regard to foreign direct investment (FDI) inflows into India. In the employment section, all the three chapters are devoted to India. By and large, volumes on global business ignore employment aspects and concentrate exclusively on competitiveness. It was felt that this omission needs to be corrected as employment (or the lack of it) in general, and the issues relating to what is popularly called ‘jobless growth’ in particular, have been taking centre stage in the current debate on liberalisation. Therefore, an entire section on employment has been included. Towards the end of the book we have included a section on science and technology comprising two chapters, one each from the perspectives of science and technology. Most chapters in the volume are based on primary data collected through scientifically organised field surveys and/or interviews. However, the two chapters on the perspectives of science and technology differ from the rest. These two are not research articles in the traditional sense but are futuristic. Consequently, the format of the two chapters is also different. They attempt to anticipate and foretell technological developments and discuss their implications for developing countries.
A guided tour of the book
The first chapter by Nollen and Siddharthan compares the IT sectors of India and China. The motivation of the chapter comes from the fact that China and India are two of the fastest growing and biggest economies in the world, but their IT sectors could scarcely be more different. Indian IT has a large software services export industry with an exceedingly fast growth rate, whereas the Chinese software industry, though also large and fast-growing, is almost entirely domestic. Indian IT hardware is a small industry with slow growth, but the Chinese hardware industry is very large, fast-growing and export competitive. The chapter seeks to answer the following questions: In what ways are Indian software firms different from Chinese software firms? What distinguishes Chinese hardware firms from Indian hardware firms? Among the many potential variables which factors differentiate these sets of firms?
The next chapter by Aya Okada concentrates on the competitive advantages of the Indian software sector. Agglomeration or the formation of industrial clusters is considered to be an important contributor to the competitive advantage. This chapter concentrates on the Bangalore IT cluster (the number one cluster in India), which is dominated by small and medium enterprises (SMEs). The chapter examines the role played by SMEs in developing the cluster. In particular, it analyses the challenges faced by SMEs in competing in the global market, the development of their innovative abilities, their linkages with domestic and foreign firms outside the cluster and their capacity to network and forge strategic alliances to succeed globally. This is followed by another chapter on agglomeration advantages that relates to the pharmaceutical sector of China. Zhang and Bulcke analyse cluster formation in the Chinese pharmaceutical industry, its specific features and the role of FDI in agglomeration. They find that agglomeration has enhanced the global competitiveness of the Chinese pharmaceutical industry and contributed to its export performance. Consequently, China has emerged as a manufacturing base for bulk and intermediate pharmaceutical products in the world. In addition to entrepreneurial clusters, some of these formations have also emerged as knowledge-intensive clusters in high-tech industrial zones. The study of such clusters also emphasises the linkages between knowledge institutions and enterprises.
The chapters on agglomeration benefits and global competitiveness are followed by a chapter on export competitiveness. In this chapter on the Indian IT industry, Narayanan relates export competitiveness to technology acquisition. He tests the relative importance of variables representing technology acquisition, firm size, vertical integration and capital intensity on the export competitiveness of Indian IT firms. His results suggest the important role played by foreign equity participation (intra-firm transfer of intangible assets) in export competitiveness. The study also highlights the role played by the state in making the IT industry competitive.
While attracting FDI, host countries are interested in the quality of FDI in terms of its benefits to the host country’s industry and economy. Valuable benefits are the backward and forward linkages created by FDI and the spill-over effects that contribute to the competitiveness of the local firms. The chapter by Beule et al. examines the backward linkages of FDI (foreign-invested enterprises) in the province of Guangdong, China. They argue in favour of a market-seeking strategy influencing the local sourcing policy of the foreign firm. The study finds that firms funded by overseas Chinese capital use more local material compared to firms funded by FDI from developed countries. Furthermore, local sourcing does not automatically increase over time indicating stability in the share of imports to output.
The last chapter in this section is on the role of IT in enhancing the competitiveness of small and medium firms in Mauritius. This chapter by Lal argues that the adoption of information and communication technologies (ICTs) could change the economic structure of nations and make their enterprises globally competitive. Given this background, it is essential to identify the factors that influence the adoption of ICTs by firms. The chapter analyses the relative importance of the qualifications, knowledge base and perceptions of the chief executives, the extent of networking needed by the firm, the importance of product quality and the cost of communications on the adoption of IT. Of these four factors, the first represents entrepreneurial characteristics, the second and third, the product market characteristics, and the fourth, the government policy initiatives in providing infrastructure. The study reveals the crucial role of the government in providing a reliable and inexpensive communications infrastructure to promote the adoption of ICTs.
Three chapters have been included in the section on employment. Two of these deal with the impact of liberalisation and globalisation on employment and the third concentrates on the IT sector. The results of the studies on liberalisation and employment have been ambiguous. In this context, Pandit and Siddharthan argue that in respect of generation of employment, liberalisation measures will result in both gainers and losers. Therefore, they suggest that it is important to identify the industries/sectors that gained in employment and those that lost. Their study aims at identifying the characteristics of industries where employment increased/decreased after liberalisation. Their chapter concentrates on the following questions: Does the presence of multinational enterprises (MNEs) hinder or promote employment? Is employment growth higher in sectors that produce differentiated products or in sectors producing standardised goods? Does skill content of the workforce influence employment? The answers to these questions, they contend, are important for evaluating the current economic strategy of the Government of India.
To Kato and Mitra, technology imports can contribute to employment only if some vital preconditions are met. In the absence of these conditions, mere imports in technology would mean raising unuti-lised capacity. Therefore, in their view, it is not appropriate to pose the question whether globalisation per se that promotes import of technology has positive or negative effects on employment. Their findings suggest that consequent to Indian liberalisation policies, technology imports through the import of capital goods have not contributed to positive growth of employment. What is required for enhancing employment is not mere unidirectional import of technology but sharing of knowledge among firms.
The chapter by Sarkar and Mehta focuses on the employment profile of the ICT sector, its contribution to national income, employment, exports and wages. They argue that the growth of the ICT sector has led to the emergence of a ‘new economy’ in the country and has created new jobs for technical persons, earned considerable amount of foreign exchange and attracted FDI. They conclude that the ICT sector has many indirect effects on economic growth, such as, the growth of productivity and efficiency in ICT-using industries and services.
The last section concentrates on aspects relating to developments in science and technology and policy imperatives for India’s successful participation. As already noted, the chapters under this section differ from the rest of the chapters included in the volume. The two chapters depict the vision of the authors with regard to new technological developments and their implications for enterprises. Baskaran’s chapter reviews the nature and developments in modern science, and discusses some of the important developments in nano science, quantum computers and molecular biology. Thanks to the internet revolution and the consequent knowledge sharing, Baskaran suggests that knowledge-based industries can grow even in countries that are not major actors in science. Furthermore, there is simultaneity or a two-way relationship between knowledge-based industries and science; they mutually reinforce each other. Indiresan, in his chapter, suggests the emergence of a new revolution in the transmission of information. He also discusses the main issues involved in the dual use of technology. He argues that in the current technology era the importance of financial capital will diminish and intellectual capital will assume a principal role. Therefore, to compete in the information age, heavy investment in activities that foster knowledge will become vital.
An overview
The processes of growth in recent times have been characteristically marked by the expanding reach of multinational enterprises, flows of foreign direct investment, unprecedented growth of ICT and knowledge-based industries and infusion of ICT across the entire spectrum of industries and activities. The two largest and fastest growing economies, China and India, have been riding high on this tide of growth. However, their growth experiences have been somewhat different and hence they have adapted to these global trends in somewhat different ways. India’s move to a higher growth path is more recent. China has had a much longer experience of high growth. Chinese growth has been led mainly by manufacturing industries and export of manufactures. The services sector has led India’s growth in which the ICT industries have played a key role. China has been able to build strong physical infrastructure, while physical infrastructure in India is weak and it is weakest in respect of electricity. This background, to a large extent, characterises the pattern of growth in the two countries. All the chapters in this volume, taken together, reveal some very interesting features of the paths followed by these two countries in adapting to the new trends, and their implications for employment, global competitiveness, exports and future growth.
India and China both have been able to develop a large IT industry. The Indian IT industry is dominated by software production and export, while the Chinese IT industry is dominated by hardware production and export. However, the software segment of the IT industry in both countries is almost equal in size. It follows that the Chinese IT industry, software and hardware taken together, is much larger in size than the Indian IT industry. The Indian software industry produces mostly customised software services, 90 per cent of which are exported. The Chinese software industry is oriented both to packaged products and customised services, but mostly for domestic use. Since the Indian software industry is more export-oriented, it has been building up a more skilled and professional workforce and has been encouraging more independent, professional and entrepreneurial behaviour. For exports the Indian software industry depends on strategic alliances abroad and subcontracting. The Chinese software industry has achieved higher labour productivity (Nollen and Siddharthan). Software industry segments in both countries have benefited from cluster development, which helps in knowledge sharing, development of a pool of skilled manpower and creation of dedicated infrastructure, which is particularly helpful for the Indian software industry because infrastructure otherwise is very weak. A variety of incentives in the form of tax and trade concessions have also been provided to the software sector in India to make it export competitive (Narayanan). Thus, an export orientation has been built into the Indian software industry, and the industry has delivered results. Indian exports in general being sluggish, high exportability of the software industry is of great value to the economy.
It has been noted that the software segment of the IT industry in China and in India is almost of the same size and its growth in the two countries is also similar. In 2004–5, it was a $23.4 billion industry in India and a $26.4 billion industry in 2004 in China. The industry was growing at the rate of about 40 per cent per annum in both the countries. The Indian software industry produced mostly customised software services and exported about 80 per cent of its product. The Chinese software industry produced mostly packaged products about 90 per cent of which were meant for domestic consumption. The competitive advantage of the Indian software industry in exports has been emphasised. But there could be another aspect to this advantage, and that is, that the Chinese software industry is equally productive and efficient but has been purposely oriented towards the domestic market to spread the infusion of IT across a wide spectrum of domestic industries. This has also made the Chinese firms more competitive. This may be one of the important factors in the export competitiveness of the Chinese manufacturing sector as a whole. This, presently, is a hypothesis thrown up by this set of chapters.
In many other economies, many a times, the adoption of ICT in all industries and economic activities, important as it is for competitiveness and growth, does not take place. The question is: Why? There is one chapter in this volume on the adoption of ICT in SMEs in Mauritius (Kaushalesh Lal). It was found that ICT use in SMEs in Mauritius was very limited. Only about a third of the firms in the sample made regular use of even e-mail and internet. The use of more sophisticated ICT tools such as Management Information Systems, CAD/CAM, CAE and flexible manufacturing systems was hardly known. A significant proportion of SMEs, as high as 33 per cent, were not even aware of what was useful to them. The knowledge base of entrepreneurs and managers, their educational qualifications, was an important explanatory variable in ad...
