Attractiveness of India and China for Australian Companies - Case Study Example

Attractiveness of India and China for Australian Companies Interested in Developing their International Markets EXECUTIVE SUMMARY India and China present a multiplicity of investment opportunities as well as challenges to Australian companies seeking expansion. As developing nations, the two countries are characterized by business environments in which most decisions are made without due regard to the regulatory factors. This is one major challenge that new companies, particularly foreign investors, are poised to grapple with. A methodical evaluation of the business environment is therefore supposed to be carried out before any major investments are implemented. It has been noted in this report that China offers more investment opportunities than Indian due to its higher growth rate that offers more business opportunities. On the other hand, in spite of India having a differential market advantage in terms of language and technological progress, it seems to lag behind China due a lackluster market environment. Nevertheless, India offers more opportunities in terms of providing an ample environment for fast business start ups, ease of access to credit by investors, better business establishment and guarantee of business protection. On the basis of these factors, it has been argued that India is a better market than China. This report also points out that consumption in both India and China is based on class practices. In view of this, it has been suggested that Australian companies aspiring to invest in the two countries consider evaluating the nature of the population classes in the two countries. China’s eastern region is more developed that the rest of the other regions. Additionally, China’s rural areas are more marginalized as compared to India’s rural areas. Australian companies should therefore decide on whether to open up the rural areas, which pose lesser competition or venture in the urban areas, which are already overcrowded with other investors. Judgments should be made with regard to the nature of investment. LIST OF TABLES Table1: World Bank rankings of China and India in business climate in the year 2006………….3 Table 2: Factors of Investment Climate in India and China 4 Table 3: Regional per capita income for India and China 6 TABLE OF CONTENTS 1.0 INTRODUCTION As two of the world’s greatest and fastest growing nations of the world, India and China present a multiplicity of opportunities as well as challenges for investment by Australian companies. It is inarguable that China presents more opportunities for foreign direct investment as compared to India, which has largely been regarded an underachiever with respect to providing investment opportunities for foreign based companies (Bajpai & Dasgupta 2004). China has sprung to overtake the United States as the best overseas investment market. Additionally, China is raked ranked by the United Nations Conference on Trade and Development (UNCTAD) as the 47th most preferred nation for investment by developing nations, with India ranking marginally at position 119 (Bajpai & Dasgupta 2004). In spite of the seemingly better position of China to attract foreign investment, it still presents challenges just as it can be noted for India. This report will analyze the market situation in the two countries based on a PESTEL analysis. In particular, four major areas: political, economic, social cultural and legal or institutional factors relating to investment in the two countries will be given priority. The findings will be vital in determining the country that presents fewer challenges in view of Australian companies’ desire to invest in them. 2.0 THE ANALYSIS 2.1 Political Factors The political factors that affect the investment operations include inter alia government stability, taxation policies, government’s regulation of business and so forth (Lukac 2005; Wei & Balasubramanyam 2004). Australian companies interested in venturing overseas certainly face risk. In rapidly growing markets such as India and China, the risk is magnified because of most business decisions are rarely made with due regard for the regulatory environment (Swaminathan et al undated; WTO 2008). Most of the current investment involves standard assessment of market opportunities, partnering opportunities, financial structuring, and estimation of profits. What is fundamentally missing in both the Indian and Chinese markets, as is the case with many other developing nations, is a methodical evaluation of the regulatory atmosphere (Swaminathan et al undated; UNCTAD 2007). The role of governments in attracting investment is depicted in their commitment to providing security, and exercising discretionary power to facilitate a streamlined flow of business operations. Players in the political field are cognizant of the fact that business performance strengthens stability and therefore give security a priority. This also involves giving an assurance that trade agreements and other binding policies will be honored. Along this line, China seems to outsmart India in terms of attracting FDI through higher growth rates, a larger domestic market, lower labor cost, and a more reasonable assurance that commitments between foreign investors and the government will be honored (OECD 2002). In contradistinction, India provides lesser opportunities for Australian companies in spite of the fact that it has a differential advantage in terms of language and technological progress (Polaski et al 2008). Nevertheless, it has been reported that China’s seemingly high propensity to attract FDI could be due to over reporting of statistics due to ‘round tripping’ and India’s low level of attracting FDI could be a as a result of non-conformity in the method used in estimating FDI in line with international standards (Shenkar 2004). Whereas Australian investors would ordinarily find difficulties operating in China due to language barriers, India’s advantage of using English as popular language is overshadowed by the complex level of state government and efficiency, which is characterized by a lot of bureaucracy (Bajpai & Dasgupta 2004; Tian 2007). In China as well, foreign investments have undergo registration with the concerned government and local authorities. The processes involved may be bureaucratic and time consuming. Foreign investors also need to deal with convoluted Chinese tax laws and employment laws as well as regulations regarding infrastructure and commercial activities (Austrade 2007; Brahm 2004). For this reason, investment prospects in India have been shifted to particular regions that exhibit some form of government efficiency and which also have a history of having supported established firms. Thus, while the unexploited areas in India present opportunities for investment by Australian companies; the bureaucracies posed by the government pose a major challenge. Yet the popular regions are either already overcrowded or are characterized by significant competition among firms. China is definitely a larger economy than India and given that giant investors tend to prefer large economies. China is thus in a better position to attract firms like those from Australia. But while China leads in attracting FDI due what can be perceived to be better government policies and faster growth, India still outshines it in some sectors as shown in the table 1, which makes India an equally good market for investment by Australian companies. In areas such as acquiring credit, business establishment, paying taxes and protecting investors, India performs better than China (Zhao 2007). Table1: World Bank rankings of China and India in business climate in the year 2006 China India Overall 93 134 Starting a business 128 88 Dealing with licenses 153 155 Employing workers 78 112 Registering property 21 110 Getting credit 101 65 Protecting investors 83 33 Paying taxes 168 158 Trading across borders 38 139 Enforcing contracts 63 173 Closing a business 75 133 Source: Adapted from Zhao (2007) The figures in table 1 are based on a survey carried out by the World Bank in 175 developing and developed countries. If Australian companies consider issues such as starting business, getting credit and protection of business, then India would be a more appealing market. But this should be done with due regard of the other political factors. 2.2 Economic Factors Factors such as inflation, levels of wealth among consumers and unemployment rates comprise economic issues affecting investment by companies in particular countries (Lukac 2005). It is inarguable that Australian companies would want to invest in markets characterized by high levels of consumption. Along this line, the level of consumption is affected by factors such as employment, which directly or indirectly determines the magnitude of wealth possessed by consumers. As rapidly developing countries, both China and India are characterized by different levels of consumption. While the two countries have been instrumental in producing goods and services for the international markets, not much can be said in terms of their consumption because the consumption has not been significant enough to be taken into consideration (Darley & Johnson 1993). The changing economies have greatly affected the level of mass consumption with regard to use of luxury goods, advertising, production of cheap copies of goods and so forth. Consumption patterns in India and China are profoundly embedded in class practices and features of political distinction (Borooah, Gustafsson & Shi 2005). This has affected a number of factors as shown in table 2. Factors of Investment Climate Unit India China Market size comparison Population in 2000 Billion 1.8 1.28 FDI-GDP ratio in 1999 Percent 0.5 3.9 GDP in 2000 Billion $ 1121 440 Per capita GDP between 1990 and 1999 Percent 3.3 8 Per capita purchasing power parity $ 2800 4200 Source: Adapted from OECD (2002) and Poston (2006) Table 2 shows a higher purchasing power and a higher level of FDI in China vis-à-vis India in spite of the fact that India had a bigger GDP and a larger market size in the 2000. Investment efforts in the countries should therefore aim at the areas that are in most need of services or products as described for each country in the following section. India is characterized by massive poverty and only about 2 percent of the country’s population earns $2000 or more (Theil & Ferguson 2003). In such a setting, it is certainly difficult to define a middle class of consumption, which is the category of the population that accounts for the greatest level of consumption in any country. Additionally, India’s population is currently in a status of metamorphosis from a primeval caste-based system of life to a gradually more class-based system (Gaiha & Kulkarni 1998). Australian companies venturing in India will therefore have to address this issue by understanding the class system in the country and the goods and services that are considered essential by the different classes- which is important for creating a differential market advantage. This should involve creating brands and advertisement features that have particular focus on the existing class system in India. Additionally, the products and services created should try to equalize the Indian society by having the lower classes of people move up. On the other hand, China’s middle class is highly optimistic, open-minded, fun seeking, and considerably wealth (Ambler, Xi & Witzel 2008). The existing professionals and businessmen aspire to have incentives that match their way of life such as great works of art and architectural designs. Australian companies aspiring to invest India should therefore consider venturing in production of goods and services that are luxurious to suit the needs of the largely affluent Chinese society. Although China is can be considered to be more open in terms of trade liberalization, this is more of a relative concept. The country may be attracting more investors and more competition but this does not necessarily mean that companies find it an easy market. There still are difficulties in transfer of technology from one country to China, and intellectual property rights are still an impediment (Ambler, Xi & Witzel 2008). Thus, even as Australian companies strive to meet the needs of the largely affluent Chinese population, they will have to grapple with a significant number of hurdles. 2.3 Socio-cultural Factors Socio-cultural factors refer to attributes of the consumers such as levels of education, consumerism, and income distribution, which is related to employment and unemployment (Lukac 2005). Socio-cultural factors are closely related to the political and legal factors because laws that are passed by the relevant authorities affect the socio-cultural attributes of any society. Historical backgrounds have affected the levels of education in both India and China. For instance, China’s development towards a liberal market economy in the 1990s was more pronounced in the Eastern part than in other areas. This is largely due to the fact that mobility of people was greatly restricted, thus causing significant disparities in level of education and access to employment (Borooah Gustafsson & Shi 2005). In view of this, Australian companies moving to China can opt to either venture in the more developed Eastern region, which definitely has more competition, or venture in the other regions, which certainly pose more challenges such as language but present more unexploited business opportunities. On the other hand, India has historically been characterized by fewer restrictions in mobility, implying that its population had almost equal access to education and employment opportunities. Additionally, India has provided more education premiums to its population as compared to China (Borooah, Gustafsson & Shi 2005). Thus, while most educated people in China are found in urban areas in India they are fairly distributed even in remote areas. This presents an opportunity for investment by Australian companies in that in India, skilled an unskilled labor can accessed from any region while in China it is found mostly in urban areas. A point to note therefore is that there are more investment opportunities in rural India than rural China with respect to consideration for educated employees. Along this line, the ethnic dimension can play a more influential role in investment in India than in China because most minority communities in Western China are disadvantaged economically as the area has benefited less form China’s economic growth (Borooah, Gustafsson & Shi 2005; Communicaid 2007). But the nearly economically balanced population in India presents a greater opportunity for consumption, thus attracting more investment. Australian companies can use regional imbalance and the respective per capita income as a deciding factor for the regions in which to invest. As shown in table 3, disparities are evident in terms of mean income and population sizes in different regions of India and China. Table 3: Regional per capita income for India and China Central South West East North National India Mean Income (PPP $) 606 769 850 536 774 680 Population Share 40 20 13 14 12 100 Income Share 36 23 16 11 13 100 China Mean Income (PPP $) 706 555 1352 904 Population Share 38 26 36 100 Income Share 30 17 53 100 Source: Adapted from Borooah, Gustafsson and Shi (2005) Form table 3, is noteworthy that the population in all of India’s regions on overage has access to significant income. In contradiction, most of China’s wealth is concentrated in the eastern region followed by the central region. In view of this, Australian companies should invest in luxurious commodities and services in the East and Central China. The other regions are appropriate for service industries and production of essential commodities. The companies should also think of services that are shunned by big investors in marginal areas such as banking services, which can be handy for most areas in India and the seemingly insignificant areas of China. 2.4 Legal, Ethical and Institutional Factors These factors include issues like operations in business ventures such as monopolies and other form of business, employment relations and so on. India’s legal framework basically similar to that used in Britain. Most of the existing commercial laws were put in place before independence and reflect the English practice of contracts. Three of the most important laws are The Sale of Goods Act (1930), The Property Transfer Act established in 1882, and The Negotiable Instruments Act of 1881 (Manian 2007; Sharma 2000; Panagariya 2008). The Sale of Goods Act of 1930 deals with the movement of property in order to be put into monetary consideration. The Property Transfer Act (1882) deals with the relocation of assets that are immovable, leases and mortgages. The Negotiable Instruments Act of 1881 deals with bills of exchange, checks, and promissory notes (Manian 2007). To the Australian companies, these are not new laws since they also understand the English laws, being members of the Commonwealth. An equally important law is The Indian Contract Act of 1872, which prescribes the regulations regarding all forms of contracts in India. This law is much alike to that used in the United States and the United Kingdom, so Australian companies may not find difficulties operating under its stipulations. The stipulations in the law include all the requirements that must be fulfilled in order for any investment or commitment to be called a contract. Chinese laws are a mixture of Soviet and Communist principles with some influence of western cultures (Chow 1997). This presents challenges for Australian companies which are mostly familiar with the western laws. Three key principles are noted in China’s institutional frameworks as highlighted below. Qingmian is used to refer to human feelings. The Chinese have respect for fellow human beings and this is considered to be the basis of any contract between foreigners and the Chinese and for all relationship management (Ambler, Xi & Witzel 2008) He is a Chinese word used to portray harmony and is a phenomenal concept that emphasises the smooth operation of activities among a group or society. He considers harmony to be good and conflict bad. It is used to imply friendliness particularly between local Chinese and foreigners (Ambler, Xi & Witzel 2008). Guanxi is used to imply relationships. This has been the basis of China’s popularity as an FDI destination (Ambler, Xi & Witzel 2008; Christmann & Taylor 2001). The above descriptions present both opportunities and challenges for Australian firms interested in venturing in India and China. India seems to present a market that is well understood by Australian firms, but poses challenges that it is less popular than China. On the other hand, while China is a popular destination it presents challenges due to laws that seem convoluted to the western world such as Australia. There is therefore need for more research depending on the particular activity targeted by given firms so that they know exactly where their strengths and weaknesses are with regard to expansion to India and China. 3.0 CONCLUSION The report has evaluated the nature of business environment in both India and china, with a major finding that China is a more popular country for foreign investment. This is largely because of the country’s market size and its high rate of technological progress. Nevertheless, India has a differential advantage over China in that it offers a better environment for business start ups, access to credit, establishment of business and an assurance of business protection. India also offers more opportunities in that its laws are similar to those used in Britain, to which Australian firms are familiar. China’s major challenges are reflected by regional imbalance, in which the east is more developed than the other areas. Nonetheless, this is also an opening for Australian companies to venture in the marginalised regions. India seems to have a balanced workforce in terms of educated people countrywide, but poses a major challenge to business expansion due to high rates of poverty. REFERENCES Ambler, T; Xi, C & Witzel, M 2008, Doing Business in China, Taylor & Francis, New York. Austrade, Available from www.austrade.gov.au (July 16 2009). Bajpai, N and Dasgupta, N 2004, What Constitutes Foreign Direct Investment? 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