The Rise of India: India and the West - Institutional Contrasts

CHAPTER TWO THE RISE OF INDIA: INDIA AND THE WEST-INSTITUTIONAL CONTRASTS

India is now emerging as a major player in the world economy that is increasingly dominated by the ascendance of knowledge-based activities. It is the second fastest growing economy in the world, with an expected GDP growth of eight percent during two thousand five to two thousand six. The rapid growth of the information technology sector along with globalization, and deregulation, created new opportunities as well as new challenges for firms in an environment that is ever changing at an accelerating rate.

In the changed scenario, India is becoming an active participant in the global economy, while at the same time drawing increasing interest among foreign investors as well as national governments in Europe, North America, and Asia. A number of factors indicate the growing integration of India in the world economy and is reflected by a number of different indicators. To begin with, there has been a significant increase in the flow of foreign direct investment to India. It is estimated that foreign direct investment increased by sixty-six percent in two thousand one. More broadly during the decade nineteen ninety to nineteen ninety-one to two thousand one to two thousand two foreign direct investment inflows increased from United States dollars one hundred three million in nineteen ninety to nineteen ninety-one to United States dollars five point nine billion in two thousand one to two thousand two. During the period nineteen ninety-one to two thousand two India is estimated to have received a total amount of United States dollars twenty-four billion in foreign direct investment. This figure, of course, does not include that of Foreign institutional investment that is considerably larger.

There are other indications that an economic transformation may well be underway in India. A study by Goldman Sachs suggests that India is expected to be the world's third largest economy in two thousand thirty-five, after United States and Japan. A ranking by Forbes of the world's best corporations included nine Indian companies such as Indian Oil, HLL, Infosys, Reliance, and WIPRO. By nineteen ninety-nine, India had become the third largest car market in Asia.

The intense competition in the Indian market due to the entrance of foreign competitors, has led domestic firms to upgrade the quality of their products, and these firms often give the multinationals a run for their money. India has become a haven for foreign companies seeking to outsource their business operations. General Electric is reported to have garnered cost savings of United States dollars three hundred fifty million a year by outsourcing to India. The decision by IBM to buy Daksh, see chapter three, India's third largest back office services firm, in an acquisition that is valued between

United States dollars one hundred fifty to two hundred million is a good example of India's increasing attractiveness as an investment destination. Overall, it is estimated that there are several hundred call centers in India with a turnover of United States dollars two billion and employing about one hundred fifty thousand people in India for companies such as Citibank, Deutsche Bank, HSBC, Dell Computer, SAS, and Compaq.

India's resurgence as a major economic player is not without historical precedence. It is estimated that in the early nineteenth century, India accounted for about sixteen percent of the world's GDP. As noted in chapter one of this book, as early as the second century BC, India was a major trading nation and it was perhaps the reputation earned as a commercially oriented country that led Alexander the Great to invade India in three hundred twenty-seven BC, Indians exported products to the Roman Empire, and after its fall had developed ties with their successors both in that part of the world as well as South Asia. The active involvement of the Indians in trading suggests a strong entrepreneurial spirit among Indians, a spirit that was curtailed although not eliminated initially by overseas invasions, as well as the advent of colonial rule, and post independence, by a regulatory regime that created impediments to innovative ideas.

That this entrepreneurial spirit still exists can be seen not simply by the rapid growth of the information technology industry in India, see chapter three, but also by the fact that the Indians who have migrated overseas, have utilized their entrepreneurial spirit for considerable gain for themselves as well as the larger community. It has been suggested, for example, that a third of the engineers in the Silicon Valley are of Indian origin while seven percent of the high tech firms are led by Indian CEOs. Similarly about one third of Microsoft employees, a quarter of IBM, and a sixth of the scientists of Intel are said to be of Indian origin. There are other examples as well. Consider the case of the Jain community, who have carved out a dominant position in the lucrative international diamond trade. It is estimated that they control about fifty percent of the market for gem quality diamonds. The Tatas and the Birlas, two of the leading business groups in India developed under British occupation and fortified their position in the post-1947 regulatory regime. The global Indian diaspora is estimated to be about twenty-five million people and their importance seems to be on the rise.

What are the implications of the potential emergence of India as an economic superpower for foreign investors seeking to do business in this country? This is the central theme that we attempt to address here. Although the resurgence of India as an economic power is a view that is now widely held by scholars and business people, India is still a country in the process of economic transition. It is our belief that while the Indian market does offer huge opportunities, the opportunities have to be utilized in the right way.

A prerequisite for such an endeavor and a deep understanding of the Indian business environment. This calls for a keen knowledge of the Indian political, cultural, and economic realities that govern economic transactions in this country. Although each business opportunity is unique, tailoring that opportunity for creating a win-win solution for all, requires a sophisticated understanding of environmental realities.

We begin this chapter by providing a broad overview of the differences that exist in the institutional environment between India and the North American and European environments and the implications that they may have for the practice of business in these countries. A more detailed analysis of the political and the cultural environments follows in the subsequent chapters of this book. The institutional environment comprises the economic dimension, the political dimension, and the sociocultural dimension. These dimensions are not entirely independent of each other but for expositional purposes we will be dealing with them as separate entities. We also recognize that not all European countries are the same, and are equally cognizant of the fact that the European business environment is different from the North American one. Therefore, the institutional gap is likely to be far greater between India and the Western world than is the case between Western European countries and North America.

The Institutional Contrast between India and the Western World

"The nineteenth century belonged to Europe, the twentieth went to America, and many believe that the twenty-first century is likely to be Asia's." This comment highlights the great optimism that is felt by some experts about developments taking place in this region. Some experts are even suggesting that within Asia, it is India that may have the edge over China, given the strong tradition of entrepreneurship in the country. Indeed, the Global Entrepreneurship Monitor of the London Business School has rated India second in entrepreneurship globally. It is evident that there is considerable potential in this country, and indeed, one of the implications suggests that the institutional gap between India and the West may diminish over time, and that there is a possibility of a two-way knowledge flow, as opposed to a one-way flow, that traditionally existed between the West and India.