Indian Entrepreneurship Trumps Chinese

Private ownership, intense competition and high productivity are a few reasons why.

George Soros came to India in December 2006. He was on a book promotion tour. I interviewed him for CNBC-TV18, the country's leading business news channel that I had founded in 2000. After the recording was done, I asked him, "George, what is the one thing, that single fact, which in your opinion gives India the edge over China?" Soros thought for a while and said, "Entrepreneurship." After a pause, he added, "Your entrepreneurs have built world-class companies. I simply don't see that in China."

When it comes to harvesting entrepreneurial energy, India may have got it set up better than China. Mao's Cultural Revolution cut off the oxygen to China's entrepreneurial lungs. Tarun Khanna, an Indian professor at Harvard Business School who has done outstanding work in studying entrepreneurship in China and India, says: "China wiped its slate clean in the Cultural Revolution. Literally and metaphorically, it got rid of intellectuals, human capital, private enterprise, everything.'

Until 1978, private ownership of any kind was banned in China. Today, Chinese citizens can own property, businesses and shares. Land-lease titles have been made long-term, inheritable and transferable, but have stopped short of full ownership. This looks like a trouble-free crossover from communism to capitalism. Thousands of state-owned companies were sold quite frenetically in the early years. But nine out of ten enterprises were owned by local party officials or indirectly by state-owned enterprises. Such a "privatization" was quite unfair; unlike genuine entrepreneurs, these cadres took no risk, which devolved on taxpaying town residents. Minxin Pei has called this the "decentralized predatory state," one where the exploitative actions of a market economy are layered over by the excesses of state control.

If Chinese entrepreneurship is fake or illusory--then what explains the fact that Chinese goods have taken quality conscious western markets by storm? Is that possible, without genuine entrepreneurs leading the charge? Where is the dichotomy? To understand this phenomenon, you have to take a closer look at "Made in China" goods strewn about in American malls. The products may be made in China, but they are manufactured in factories whose owners are foreign.

That's the striking "dualism" of China's economy. A thriving export sector dominated by multinational corporations which are productive, efficient and quality conscious. This is not native Chinese enterprise--it is expatriate entrepreneurship! To put it a bit more starkly, China offered labor arbitrage to foreign capital--it opened the floodgates, offered foreign companies an unlimited supply of very cheap labor, and "on-shored" what was in reality just a western manufacturing facility.

Entrepreneurship is embedded in Indian genes. The competitive intensity in India is startling; perhaps no other market of the world is as crowded with start-up brands as India is. Today, India has over 400 television channels, created in less than two decades! Where else in the world do you have six direct-to-home broadcast brands and 70,000 mom-and pop last-mile cable operators?

The telecoms industry is equally bewildering; opened to private competition just about fifteen years ago, it is today the fastest growing in the world. Over 15 million new buyers are added every month to the existing base of over half a billion subscribers. Perhaps nowhere in the world is entry into this business as easy as it is in India, with the result that intense competition among nearly half a dozen players has created the lowest tariff regime anywhere in the world.

Some very sensible people are now crying out for a few entry curbs, since Indian telecom could become a victim of hyper-competition. But that's not a debate to be entered into here; the point is that such breathless growth has spawned a cottage industry of telecom entrepreneurs in retail, repairs, re-sales (and perhaps even in the grey market of stolen and smuggled handsets!).

India had also overtaken China as the fastest growing mobile phone market in the world, not just in percentage terms, but also in absolute numbers. Given India's large population, and the fact that China had maxed out, you could say this was entirely expected. But wait--India now exported 60 million mobile handsets to over sixty countries in the world. At 250 million units by 2012, it was "poised to become the telecoms manufacturing hub of the world," gushed Nokia's India chief. Samsung, Motorola, LG, Sony Ericsson--everybody was scrambling to build more manufacturing capacity in India. Again, something counter-intuitive was happening.

Remember, China was the exporter–manufacturer of the world, with its cheap currency, land, labor, credit and low taxes. India had never been that obsessed about pushing car or handset exports. Indian interest rates and production taxes were incredibly high. Then how did this happen? Perhaps it was a triumph of cheap Indian skills, and high productivity caused by intensely competitive conditions in the economy.

A Chinese phrase catching rapid currency is guojin mintui--it means "the state advances and private sector retreats." There has always been plenty of evidence of China discriminating against private entrepreneurial talent in favor of large state- or foreign-owned enterprises. There were several instances of private firms trapped in title disputes whose assets were seized. Today, the Chinese media is full of stories about the "second wave of nationalization," as stimulus-cash-fattened state enterprises gobble up fast-expanding private companies.

Marshall Meyer in Knowledge@Wharton believes that the "government will always remain in control of the 100 largest firms in China," giving it direct ownership of nearly 50 per cent of GDP. Eight out of ten largest listed companies in China are state-owned. In India, nearly half of the ten largest listed companies are in private hands.

Raghav Bahl is the founder-editor of India's largest media house, Network18. Amongst the partnerships he has created are channels, websites and magazines--CNN-IBN, CNBC-TV18, Viacom-Studio18 and Forbes India, for example--growing the company from its inception in 1993 to a market cap of $1 billion.

Excerpted from SUPERPOWER? THE AMAZING RACE BETWEEN CHINA'S HARE AND INDIA'S TORTOISE by Raghav Bahl by arrangement with Portfolio Penguin, a member of Penguin Group (USA), Inc., Copyright (c) Raghav Bahl, 2010.