An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures

and Yours

India

hina and India, the worlds two largest countries by population, share a border and the distinction of being the biggest forces in Asias economic resurgence. Both have long been viewed as playing a supporting role for the U.S. economy -- China in manufacturing and India in back-office technology support. But while Indian and Chinese companies today are increasingly challenging U.S. corporations more directly, the two Asian giants remain woefully ignorant of each other and share few business ties, according to Tarun Khanna, a Harvard Business School professor and author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures -- and Yours. That is beginning to change, if slowly. In an interview with Ravi Aron, senior fellow at Whartons Mack Center for Technological Innovation, Khanna discusses where India and China have been, and where they are headed in their economic relations with the United States--and with each other. India Knowledge@Wharton: A good point to start is the starting point in your book, when you point out that one of your Chinese acquaintances tells the president of Yale University that Our students know so much about American history, while Americans have been woefully uninformed about Chinese history or its geography or its culture in a business context. Your own experience is when somebody told you in Princeton that India is somewhere next to Saudi Arabia. Is that right? Tarun Khanna: Thats right. India Knowledge@Wharton: Tell us a little bit about what, in your view, led to Americans and Europeans big blind spot about India and China. Why didnt they think it was worth getting to know more about these countries? Khanna: The short answer is that China and India, until very recent times, have been almost utterly irrelevant to America to American society, to American commerce. And I dont think this is a commentary on America or Americans. Its a commentary on social and economic dominance and the world order. Its sort of an analogue to All roads lead to Rome. You sort of had, under Pax Americana, all roads leading to New York. There really was very little economic imperative to

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

think about things outside. In other words, a high degree of introspection set in to American society over the last several decades. And China, and India in particular, prior to the 1980s, there really wasnt anything economically meaningful going on. So its not surprising. I suppose one could address that question with a slightly different and longerterm historical lens, which is to say that there have been periods of intense contact between America and China in particular, but also America and India. In particular, New England, which is where I am based, was a point of connection between the United States and India. Somehow thats fallen by the wayside. But primarily with economic imperatives that blocked China and India out of the modern U.S. imagination, and more so India than China. India Knowledge@Wharton: The naturally paired question to that would be, even greater than the ignorance or the lack of interest of American business and, to a lesser extent, policymakers, is the lack of interest in India and China about each other. If there is a major country that knows less about China than the United States, that would be India. I did my schooling there and my undergrad there. You learned very little about China, except for the disastrous war of 1962. And I dont think, even today, in the India Institutes of Technology or the Indian Institutes of Management, there is a lot of interest in China, other than the commodity trades of China rising. Would you agree? Khanna: I think thats right. Both China and India have been woefully ignorant about each other. I think its fair to say that, for your contemporaries and mine growing up in China, India would be utterly irrelevant. And I think that would still have been the case as recently as three or four years ago. Its only in the last I want to say, two, three years that India begins to show up in the editorial pages, or the equivalent of the editorial pages, in Chinas newspaper the Peoples Daily, even occasionally creeping onto the front page. But thats a very recent phenomenon, and it has to do more with the rise of certain kinds of Indian companies that are supplying the Chinese and buying their
2

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

products. I would say that my own mental image, correct or not, of China, as a child growing up in India, was that of the big guy to the north, and perhaps the big, bad guy to the north, because, after all, there had been a border conflict in 1962, after which relations went into a deep freeze. Its interesting that in my meandering through China I discovered that the same events were interpreted quite differently by the Chinese. And indeed, worldviews are shaped by history, and history is written by different people in different places to suit their own particular national interests and national myths in many instances. So, to be entirely truthful, as an educated person from India, or an educated person from China, one often ends up with very different versions of the same events. And its these sorts of misconceptions, or either inadvertent or intentional miscommunication, that I wanted to begin to set right by writing something about each of these countries. India Knowledge@Wharton: Toward the end of your book, you write about, as you wandered through China, talking to people about Raj Kapoors films, and how some of them could actually hum the lead song from Awaara. Let me ask you. Is it implicit in your observations, has Indias soft power, while not giving it any economic or political leverage in the region, allowed India to gain a greater visibility in China than Chinas hard power has given it visibility in India? Khanna: That statement is correct, I think. That whatever visibility China has in India has very little to do with hard power, and whatever visibility India has in China has entirely to do with soft power and has very little to do with government action. There are lots of commissions on Sino Indian cooperation that have been set up, but I think that they have had much less of an effect on promoting a view of India in China than private-sector, decentralized activity, which includes the propagation of films and songs and those sorts of things. As in other parts of the world, youll find Indian movies and songs popping up in the unlikeliest of places. For instance, theres a brand spanking new hotel in Shanghai, in the Puxi side of the Huangpu River in Shanghai. Its part of the Meridian hotel chain. And the other day I was in the lobby, and there was some Indian theme song playing that I recognized. I immediately began to search for the
3

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

concierge to figure out what that was about. And he assured me it was a Chinese song, but he had no idea what it was. I run into this all the time. The anecdote that you mentioned is particularly revealing to me, because the person humming this song from the very old Indian movie was a cycle rickshaw driver from a poor province, Anhui Province, and singing it flawlessly with all the words and not having any idea what it meant. And it was just absolutely exquisite, hearing that at midnight behind the Tiananmen Square. But, yes, a different version of what you might have said that I would not have agreed with quite as vehemently: that Indians have less knowledge about China than Chinese have about India. But I do agree that whatever knowledge Indians have about China has more to do with its hard power, and whatever knowledge China has about India has more to do with its soft power. Curiously, just playing with that, there is a chapter in the book that talks about a nice, if you will, a natural experiment not something nice, but an elegant natural experiment that unfolded in Burma, in Myanmar. If one thinks of the world of the future being at least rejiggered, to choose an untechnical term, or reset by Chinese and Indian influence, particularly in Asia, then Burma is the first meeting point for Chinese hard power and Indian soft power. I think the verdict there is very unambiguous and Chinese hard power has won. India Knowledge@Wharton: Absolutely. Khanna: I think one can see limits of the influence of both types of power projection in the Burmese story which is a very interesting story to focus on. India Knowledge@Wharton: Well come to Burma in a minute. Khanna: OK. Sure. Go ahead. India Knowledge@Wharton: A natural question that arises in the context of what youve just said is one of the questions that you ask right in the foreword, the introduction of the book is: Why are Chinese much more likely to be open to India than the other way around?
4

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Khanna: I think there are multiple parts to it. The first has to do with the relatively open attitude that China took post-1978, post mid 1980s, which has to do with initially opening up to overseas and asking for reengagement with the post-Cultural Revolution Chinese economy, in an attempt to sort of resuscitate economic activity. In other words, the Cultural Revolution wipes things off so comprehensively that the Chinese administration had to look outside. The most natural people to look to were the ethnic Chinese. What that has done over time is legitimized foreign investments, foreign growth investments coming into China, making it easier and easier for even non ethnic Chinese, non Asian businesspeople to invest in China. This story is very well-known, the amount of foreign investment continuing to gush into China. In the Chinese very practical worldview, any money coming from India is just more money, more foreign growth investment, and there are plenty of companies that have set up shop. Some have been operating in China for quite some time. There are plenty that have set up shop and are busy operating as if there is no obvious value to their operation. India, in contrast, pursued a much more indigenous-centeredeven autocratic--model historically, to its detriment. That general lack of openness to foreign direct investmentopen in different ways to different things, but on foreign direct investment I would still say rather closedhas extended that paranoia to the Chinese and is particularly sensitive about the Chinese because there is this intrinsic appeal to security concerns in a hangover from the 1960s. So I think thats the economic reason why China is more open to outsiders, including India, and India is less open to outsiders, particularly the Chinese. There is also a cultural overlay which as best as I can tell is more of an issue in India than in China. You know, there has been historically some sort of notion of not looking kindly in some social strata at people who left the country to pursue their economic interests outside. Not all social strata have thought that way. Not all castes, if you will, have thought that way, but some have thought that way. And that, I think there is a little bit of a hangover, almost sort of a hangover over the decades, a frowning upon people going outside. This, as you know, has been

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

changing the last three or four years. But I think that change is very recent and still very incipient and nascent, and something that I hope to encourage personally and hope others will encourage. India Knowledge@Wharton: Recently, the writer from Singapore and now the dean of the non technological universitys foreign affairs school, Kishore Mahbubani, made an observation in an interview on PBS, I believe it was with Charlie Rose, that one of the political scientists made this observation to him: that India is an open society with a closed mind and China is a closed society with an open mind. How do you react to this given your travels and study of both countries and their systems? Khanna: I couldnt really comment on what Kishore possibly meant without hearing his elaboration, but let me take a stab at what a phrase like that would suggest to me. I think there are elements of incredible, if you will, institutional inertia in both countries, as well as elements of incredible institutional flexibility, and one could interpret flexibility as openness. In other words, being open to other influences and being willing to morph with them. So I think the degree of closedness and openness in both countries is just very different. In my book I try to make the case that in some sense what is flexible in China is inflexible in India and vice versa, or what is open in China is closed in India and vice versa, and thats really how I would interpret that. For instance, you know there are still elements of the caste system that remain robust in India despite determined attempts to change that form of social stratification and social hierarchy by the British, by the Indian government, by any number of people. So much so that its gotten entrenched in this. In that sense, its very closed. Its not open to outside influences that would try to break that down. But by the same token, the adherence to the principle of stability and the principle of hierarchy as a mechanism to which stability is prized so highly is also a version of inflexibility, if you will, in China. That would be my interpretation without anything official to have to say about the rest of it. India Knowledge@Wharton: Lets for a moment shift to China and the United States and India and the United States. First we will take this question about China. Do you see at some point Chinese businesses becoming strategic adversaries
6

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

to the United States rather than principally playing the role of a supply-chain partner? Think of automobiles, apparel, semiconductors, consumer and industrial electronics, precision manufacturing medical systems, etc. Do you think Chinese companies could become strategic adversaries to the large companies of the United States rather than their manufacturing base or supply-chain partners? Khanna: I think there is absolutely no question that at some point Chinese companies will break out of the straitjacket of being cogs in a global supply chain and aspire to playing a greater role in the economic system in the world, and a lot of that will be manifest as competition for currently incumbent companies in the world economic order, many which are American. However, I would not agree with the version of the proposition that says that all forms of ascending Chinese companies would be strategic competitors of American companies. Many of them may very well offer a strong complementing role. I think it depends obviously on individual companies and individual sectors, but it also depends on the attitude that the American political and economic system takes toward China. In other words, I think it would be a mistake to think in terms of containment of China, if you will, or anything like that. That would not be constructive, nor would it likely work. India Knowledge@Wharton: I think this leads to a very important question both from the business as well as the economic perspective. If you look at television punditry, and you make passing references to this, there are those on cable news who would unleash rant du jour about either immigration or trade, and the focus of much of this is flipping up paranoia about China as a strategic competitor. What damage are protectionist policies on the business side and containment on the political side likely to cause for U.S. business and the U.S. economy? Khanna: In the short run, the damage will be reasonably obvious, despite the rant du jour, as you put it. And it will manifest itself in, basically, higher prices where we need goods and activities, in the first instance, and will hurt ordinary people who are not orchestrating the rants on TV but will be the victims of the rants on TV. In the longer term, in some sense, the rants are going to be of utter irrelevance. The
7

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

locus of economic power is gravitating in a certain direction. Its going to take time to move away materially from the New York and London axis, if you will. There is a moving away already, in terms of international investment, in terms of interesting activities, etc. And whether the U.S. or any particular country in the West is for or against it and expresses it in TV or finger-pointing or what have you, I think its sort of, in the grand scheme of things, rather incidental. I think the imperatives are that economic activity will happen in China and India, and a lot will happen in the Asian sphere. We already know that in the world system, for the last 10 or 15 or 20 years, that the ratio of intraregional trade of the total world trade has been rising quite sharply. In other words, theres much more going on within the Americas, theres much more going on within Europe and Africa, and theres much more going on within Asia. So youve got, more or less, internally consistent systems. It is true that there are huge links between China and the U.S., Brazil and China, what have you. But its also the case that even if the U.S. were to effectivelyand this is a different use of the term than has been bandied about recentlyeven if the U.S. were to effectively decouple itself from Asia, as a thought experiment, I think the development of Asia will, in the long run, not be stalled. In the short run, five, seven, nine years, it would be affected. In the long run, it wouldnt be stalled. And I think it would be to the detriment of everybody, but most of the entire West, if this decoupling were orchestrated, or if movement to this decoupling were encouraged by some of this silliness on TV. India Knowledge@Wharton: Lets come to India and the United States. Most of my research has been on the services companies, more focused on business process outsourcing. But as I look at Indian firms, I see, in some areas, over a longer run, they could end up being strategic competitors. There are very few sectors where Ive seen the 5-to-10-year horizon. There are some sectors, but there are very few of them in which they could be strategic competitors. What would your thoughts be on the kinds of firms and the kind of industrial sectors where India is likely to become something more than a supply-chain component to companies in the United States?
8

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Khanna: Just to understand your position in this, what is an example of a sector you think would be a strategic competitor? India Knowledge@Wharton: I think the best example would come in IT services: Wipro and Infosys take on Accenture and IBM. Pound for pound, they take them on in competition, clearly. Pharmacy, low-cost manufacturing: Ranbaxy, Cipla, initially with low cost manufacturing, are beginning to get into drug formulations. Bioinformatics is another area where youre beginning to find that firms in and around Hyderabad, Bangalore, and, to a lesser extent, Madras, are beginning to do interesting work. But largely, when I look at India, the other areas that are booming are not really a threat to the United States directly, but they are a component, like automobile manufacturing, apparel, etc. Even semiconductors, which is beginning to pick up some chemicals, is beginning to pick up some momentum in India. These are not going to replace American firms, because those firms have shut shop and moved on. Theyre going to take on Korean and Chinese lower manufacturing cost locations. Automotive components, taking on the Thai automotive component industry in the pickup and truck area. So, to go back to the question ... Khanna: Yes. So I understand your position. In the short run, I would agree. As you know, India is sort of short on hard infrastructure and long on soft infrastructure, at least relative to a developing country paradigm norm. And therefore, it stands to reason that the kinds of industries that are likely to thrive in India are those that need the soft infrastructure more than are handicapped by the lack of hard infrastructure. So bioinformatics and software and media and advertising and things like that, you would expect to see thrive in India and, indeed, thats exactly what you do see. And therefore, it stands to reason that you should see more competition emerging from here than from resident U.S. companies, which are still in the grocery-services sector. So that part I agree with.
9

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

However, I guess I would part company with the latter part of what you were saying. For instance, in the auto industry, I dont know that it is at all clear that there will not be competition between, say, Indian car companies and American car companies in the fullness of time. I think whats interesting to speculate about a little bit is, what are the contours, if you will, the radiation of good business practices that has taken root in India in the last 10 years? What are the contours that would follow in the future? If you think of good business practice as a [positive] virus in the Indian bloodstream, how could this virus spread? And I know I think of it as being sort of concentric circles, right? It used to be just the BPO and the software and whatever, the body shopping. And then it spread to Remember attending analyst meetings in Bombay, and the conventional industrialists would say things like, In India, we dont do it this way. And then, suddenly, the media and the analysts had an example to point to, to say, Wait a second. If Mr. Bhuti at Infosys can do it, then why cant you? In other words, Why cant you disclose this sort of stuff? Why cant you be on time? Why cant you do all the things that we consider to be hygiene factors in American commerce? Right? And then that gradually began to affect specialized manufacturing and farmers and so on. The good news is that the spread in good practices follows some kind of increasing-returns curve, so that it really affects everybody. And then, at some point, the constituency demanding improvement in areas that are utterly lackingin particular hard infrastructure and, say, primary education, primary healthbecomes so overwhelming that it begins to address, in a serious fashion, what is lacking. And then all bets are off. Then any sector can compete, because theres enough weight and human capital. But this is a very good news version of how things might transpire. But my point was that, as in the Chinese case, I wouldnt rule out saying that there are sectors where we currently dont think of Indian and Chinese companies as competing [against each other], but where nonetheless, you will see that competition in the future. And I think that that competition, as well as the possibility of cooperation, or symbiosis, is more likely to come from India than it is from China, because I think India has better DNA at generating new enterprises than China does.
10
http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

India Knowledge@Wharton: Which is a question that I want to ask you in a minute, but theres something here that I want to ask in association. The ability of Indian companies, lets say, in the five-to-eight-year window, to compete in industries such as manufacturing, or primarily manufacturing-driven industries Dont you think its greatly abridged by the long arm of the interventionist state in India? You give numerous examples. But the fact that politicians in India will not and cannot, because of political reasons, behave entrepreneurially, the fact that there are policies starting with the industrial disputation fact or labor wage machines, etc., which are going to make manufacturing, the activity, inefficient. And even if you get your manufacturing act together, it still requires logistics. It still requires the hard logistics of roads and transportation, and associated issues of port and clearance and shipping, all of which requires considerable displacement of the population in a densely populated country, your own example of the slum close to Kolhapur, for instance. Those things are going to be exceedingly slow. And therefore, the political economic context of Indian companies in the manufacturing sector, wherever they come into contact with the policymakers, their ability to take on the world at large Dont you think its going to be greatly abridged by the socio political context of India? Khanna: If one were to project candidate futures, in the next five to seven years, I think that would be, certainly, a very plausible candidate future. But I want to suggest that there might be some other candidate futures, too. And I honestly cannot adjudicate between these other candidate futures. So heres another example. One of the attributes of intelligent politicians is that they understand these constraints as well as you and I do. And so rest assured that at least the well-meaning parts of Indian political circles are wrestling as we speak with exactly these same conundrums, which is, how can we, on the margin, at least find some way of instituting this change that appears so preposterously difficult to engineer? And I rather think that one of the nice things thats happened, vis--vis the Indian state, is that it has learned to take some sort of implicit backseat to the private
11

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

sector. In other words, if you take your own area of research, a lot of the good practices that originated in the software industry have influenced, as a simple example, the corporate governance code that the Securities and Exchange Board of India has adopted eventually. And that, in turn, has influenced other parts of the financial markets, which, in turn, has influenced other rules and regulations. So one can imagine that the private sector learned that it cannot always run away from the state or operate in the interstices of the state, and that occasionally it is going to have to engage with the state in funded private partnerships. And I think one future that would be more attractive than the sad one that you painted would be one where the private sector educates the state about sensible ways of bringing public investment to bear in ways that limits violence and spurious things, to get to equilibrium, and that the state acquiesces, as it currently does, to listen to the private sector. And then I think one can have a very different dynamic unfold in a rather short period of time. But I recognize thats an optimistic reading. So, on the one hand, your reading, I think, would anchor the pessimistic end of a possible spectrum, and the version that I just painted would anchor the more positive end of a possible spectrum. And I think its sort of, as social scientists would say, the outcome is rather androgynous, going forward. India Knowledge@Wharton: Let me ask you something related to what you just now said. In your research, have you encountered Khanna: Can I say one thing, really? India Knowledge@Wharton: Sure. Khanna: If you take my response to your question, one of the things that I feel that Ive had to appreciate, doing a deep dive into China and India in recent times, is that the one thing that often seems wrong is linear extrapolation, right? And I think if one linear extrapolates Indias problems in hard infrastructure, for sure we would end up with a very pessimistic outcome in five to seven years. But Im not so sure. What I am sure of is that, at least in thinking about likely scenarios unfolding, the linear extrapolation can be one possible scenario, but there should be two or three other ones.
12

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

And I have one other thought, if I may. If one were to ask, in India, what is the most interesting issue, in terms of the most interesting bottleneck to development, I would submit that its one that is focused on less than the manufacturing one that you correctly identified as being very important. But it has to do with the rule of interconnectivity. The rule of interconnectivity is basically absent in India both for reasons of absent roads and those sorts of things, hard infrastructure, but also the soft infrastructure linking villages and semi-urban areas, which are basically sources of cheap supply to urban demand for the same factors. The soft infrastructure to make that market happen is also missing. And given that 60% to 70% of people still live in a village, thats just a huge first-order thing that needs to be addressed before India can make any progress beyond where it cant do that. India Knowledge@Wharton: I like the idea of linear versus nonlinear extrapolation, and linking this to the rural-urban divide. Let me ask you a question before we move on to corporations in China and India. It has to do with this, though. Most of the nonlinear, convex growth in the hygienes that you have identifiedthings that originated in the software sector and the ripple moved on rapidly to other areas, in terms of governance, in terms of transparency, in terms of capital market hygienethese are aspects where public policy has not touched the voting masses. Capital-market hygiene doesnt really cause a ferocious backlash from the average man. Khanna: Yes. India Knowledge@Wharton: So governance issues of splitting and having greater shareholder advocacy, these things dont really cause political backlash. Khanna: Absolutely. India Knowledge@Wharton: But where the rubber meets the road is in where you actually have to pave the road, if you forgive a bad pun. Khanna: Yes.

13

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

India Knowledge@Wharton: Thats where policies touch the democratic polity. And where policies touch the polity, growth has been very linear from 1947 till today. Wouldnt you say so? Khanna: I agree completely, and this is why the next phase of development cannot be a clearly private-sector-led development, as has unfolded in the last 10, 15 years, as nice and pleasant to watch as that has been relative to the stasis and miasma over the years before that. But again, there are a couple of silver linings in the dark clouds. The first has to do with increasing the willingness of the private sector to engage with non-private-sector issues, whether its in the form of companies learning to interact constructively with the state. Not just in the form of dodging the state or bribing the state, theyre actually working with the state in a positive way. There are lots of examples of that happening, much more so than attempted before. Or in the form of individuals from the private sectors walking away from lucrative careers and setting themselves up as political entrepreneurs or setting themselves up as creators of NGOs and civil society, and bringing private-sector methods to bear to civil society actions to try to address some of these issues, right? And for the first time in India, one is beginning to see good human capital, entertaining the prospect of public service. Im sure this is true at Wharton, but certainly, at Harvard Business School, I am struck by how many of my students, both of Chinese and Indian origin, but particularly of Indian origin, in the last few years have begun to evince a mindset that is so encouraging, which is to say not just that we want to be materially successful, but we want to be materially successful up to a point, and then figure out a way to give back in society. And this is a worldview that is quite common in the United States. Its a little bit of a luxury of affluence, and its starting to take root in India. That makes me hope that some of a different cast of characters would show up in civil society and politics and perhaps be infected by the private-sector efficiency, or again, the private-sector way of thinking, which is in short supply. India Knowledge@Wharton: Id like to draw attention to a very interesting point
14

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

that you make, in the neighboring regions of China and India, first with Chinese replacement of India in Burma, Myanmar, and then the Bandung Conference. Tell us what your key takeaways in that context are. Khanna: I think that Burma is interesting from the standpoint of comparative Sino Indian study for the simple reason that its the first theater of activity, if you will, where Chinas and Indias goals have come into first inadvertent and then potentially direct conflict. What I mean by that is that, for quite some time, particularly when Burma was part of so-called British India, or the administrative unit in which Burma was together with India, there was a lot of Indian migration, both from Northeast India and from South India and, indeed, even from the Punjab into Burma. The cities, like Rangoon, were heavily settled by Indians. I think the estimates are that more than 50% of the population in many of these cities was Indian. So you had sort of a situation where a country or a geographic region had heavy Indian influence. And over time, a combination of Indian policiesin particular Nehrus decision not to intervene to support the Indian diaspora in then-independent Burmaled to the Indians leaving when they felt they were not being treated right by the indigenous [people]. And simultaneously, or near simultaneously, China began a gradual process of realizing that it was in its strategic interest to have more Chinese people in Burma, for a variety of reasons. And over time, Chinese penetration into Burma has increased, with the net result that a city like Mandalay, which used to have a lot of Indians in it, now is mostly a Mandarin city, so to speak. And so, in the first geographic theater where you see China and India coming face to face, you see that India loses hands-down in terms of influence. And thats the sense in which Burma is an interesting place where Chinese hard power and Indias soft power collide. India Knowledge@Wharton: Would you say the loss of influence in Burma was a miscalculation on Nehrus part? Because, as your book points out, he did not intervene to help the Chetyas claim their collateral rights. As you point out, the Chetyas from South India took land as collateral, and they repossessed it, so the economy collapsed, right?
15

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Khanna: Mm hmm. India Knowledge@Wharton: Was that actually a miscalculation on Nehrus part? Or was it inevitable, given the trajectory of history? Khanna: Its always hard to address counterfactuals in history. I wouldnt say it was a miscalculation. I would say that it was a set of principles that Nehru adhered to. But the exodus of Indians that resulted, as a result of not just that decision but other pure political events that were happening in the region, meant that Indias hand was significantly weakened by the time Chinese infiltration into Burma began. India Knowledge@Wharton: You also point out this very intriguing point in your book to this particular phenomenon, which is very widely beginning to be noted now: Wherever India and China compete, at least in the very short term, as much data as is evident now, China has been rather easily outmaneuvering India. The competition for oil resources, for energy in general, for minerals, for commodities such as lumber, India is getting outmaneuvered by China. Tell us what the lessons were of Bandung, and then why and how India seems to be losing out to China in this competition. Khanna: So, if I may, I would not draw equivalence between Bandung and competition for commodities today. And let me explain why I think those are separate things. I think Bandung was basically a personal outmaneuvering of Nehru by Chou EnLai. Not so much an institution or a country, or not a reflection of country strategy, if you will. Its just that the deck of cards that Nehru dealt everybody proved to be such that Chou En-Lai was a master user of that deck of cards and outmaneuvered Nehru in terms of drawing attention to himself and using it in a charismatic fashion. One could ask what the counterfactuals would have been had Nehru not allowed Chou En-Lai a seat at that Bandung table. Then, maybe, history would have unfolded differently. But, that, again, is in the realm of what might have happened, which is hard to address.
16

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

But today whats happening is more of institutional systems clashing or cooperating, depending on the particular theater. So I would also perhaps characterize things a bit differently. I think you are right to say that when there is a clash for things like commodities, these clashes are mostly occurring in places where the West is not already present. In other words, regimes of the West consider it unsavory, like Burma, Iran India Knowledge@Wharton: Sudan. Khanna: Sudan. Places like that. Those are the places where there is even an opportunity for China and India to play, because in other places, its locked up by BP and Shell and Total and whatever else. I mean, these places, I think, Chinas hard power is more than a match for Indias soft power. In other words, as witnessed by the embarrassing fiasco between Subir Raha, who was then the head of the Oil and Natural Gas Commission in India, and the gentleman who was then the petroleum ministerI think it was Mani Shankar Iyer India Knowledge@Wharton: Mani Shankar Iyer, yes. Khanna: That was such an embarrassing brouhaha in the Indian media. And thats the kind of thing that would never happen in China. Its not that there wouldnt be differences of opinion, but they would be dealt with behind closed doors, and a unified policy would ensue. And moneys would be paid, and actions would be taken, and China Incorporated would get the oil or the lumber or the rubies or what have you. And so their ability, at least to the external world, to put forward a cogent point of view, and Indias inability to do so, because of contending power sectors and interest groups and so on in the country, have meant that Indias not able to project its hard power, or any version of hard power. And so it loses these battles in unsavory places, which are susceptible to hard-power maneuvering, so to speak. But I would also have two additional qualifications to this little dissertation. The
17

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

first is that, when there is a competition in other theaters, conventional informationbased industries, its not at all clear that China is better than India. There are tons of software companies, as you well know, coming up in China. They are having a hard time competing against India. There are, for instance, customer relationship management companies. There are analytics companies that are popping up all over Hangzhou, Dalian, Beijing, Shanghai, Guangzhou, places like that, that are competing against small entrepreneurs from India and are not doing so well, so to speak, and even seeking to be acquired by Indian companies. So the competition depends on the theater of operations, again. The second caveat is that even going back to the oil competition, the one thing that, in some sense, China has a monopoly on, hard power It knows how to project hard power, and India doesnt. But there is one other thing that India can provide, which is competition. And even if it ultimately loses the bid for, lets say, a particular oil concession, it can make life quite inconvenient for the Chinese by bidding up the value of that. And thats the one card that India has in its back pocket, and sometimes its able to use that to cooperate with the Chinese to get some access to oil. So India just has to learn to be a bit smarter in this competition. India Knowledge@Wharton: Can you give me, from the top of your head, or lets say, from your recent example, where soft power yields tangible economic gains in the face of competition? Khanna: I think there are simple examples that are in the currently heavily contested market for international mergers and acquisitions. So, just yesterday, I was meeting a very prominent lawyer in Washington. And a statement this gentleman made, at a prominent think tank in D.C., was that there is such antipathy to cross-border mergers and acquisitions where a Chinese company is the acquirer. For a variety of reasons, there is China paranoia. Some people are worried about human rights issues in China. Some people are worried about environmental records. Some people are worried about China as a strategic competitor. For a variety of reasons, the projection of hard power by China is not being interpreted very charitably, shall we say, in the United States. So all sorts of deals
18

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

are getting blocked. CNOOC and Unocal, which I mentioned in the book, was one sort of wakeup call. But even recently we had Huawei and 3Com, which you could have thought should have happened, because it had Bain Capital working along with them. So you would think that Bain Capital would kind of know its way around. It wasnt able to do it. Without going into the details of the deal, its a case where at least you can interpret it and say that even with a powerful firm like Bain Capital on its side, Huawei was not able to overcome whatever angst or distrust people have. Whereas, in Indias case, its not interpreted as much of a threat, or as a projector of hard power, if you will, and at worst you have questions being asked about the competence of Indian companies at acquiring assets in the West and running them. But that question is no different than the questions that have been asked of any number of companies coming to the West for the first time to buy assets. So thats probably the best systemic example of the use of hard power in some sense backfiring in the West that I could think of. India Knowledge@Wharton: I think you make a really valid point here. Those countries that see themselves as long-term strategic competitors to China are really wary of Chinese and cross-border acquisitions and mergers with Chinese companies. Khanna: I think its a mistake for the U.S. to be in this. The U.S. can have its cake and eat it too. It should use its bargaining power against the Chinese to put constraints and strictures on the deals and structure the deals in a way thats advantageous to the U.S. And if, in the process, China does well, I dont see that as anything other than a win/win. But, I think, its a measure of the paranoia. India Knowledge@Wharton: Its more the political sentiment than economic rationale that is driving this behavior. Khanna: Theres another thing thats going on, which is that the Chinese are extremely inexperienced in doing this. Right? Which is that, basically, all the
19

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Chinese companies that are orchestrating these dealsI would not include Huawei in that example, but certainly the prior folks who have tried to buy assetshave, to some extent, been playing with other peoples money. What I mean is that they have a little bit of a soft budget constraint that allows them to finance these bids. And so theyve gone out swinging for the fences right away. And to mix metaphors, they have tried to essentially run before they can walk. Whereas the Indian guys who are trying to buy assets, for the most part, theyve been buying small assets first, learning how to run them, and then going on to bigger deals, because theyre playing with their own money, so theyre appropriately more cautious. India Knowledge@Wharton: That gives segue to something that is of considerable interest that I found in your book, which is the difference between Chinese and Indian corporations. You have some tremendously insightful observations, and I thought wed like to hear from you directly. Lets talk about the difference between Chinese and Indian corporations. India seems to be able to build world-class corporations, starting from governance and on to productivity, and making sure they get compliance right. Their strategic thinking has proved successful, whereas China is really struggling with building great domestic companies. Why, and what are your insights? What are your takeaways from your research? Khanna: This is a very big canvas. So let me start painting some blotches on this canvas and see if we can connect the dots together. I think some of the factors are historical. As I had written in an article [with another author] some years ago, the fact that China eviscerated its own [commercial] system in the Cultural Revolution by wiping clean most of the soft-institution infrastructure that you would need to run a well-functioning market economy What I mean by that is individual property rights are violated by confiscations and so on. And free transmission of information and ideas are compromised by moving people away from where they used to be, by prohibiting them to engage in this, that, and the other, etc. So, at the end of the Cultural Revolution, the Chinese are faced with the task of:
20

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

How do we basically feed hundreds of millions of people? We dont have any indigenous economic activity going on, and they turned to the outside world. And in the outside world they turned to primarily overseas Chinese, who are the ones who had the most emotional connection as well as had the most wherewithal to get around the tough environment. Over time, that, in turn, legitimized foreign direct investment. And non Chinese began to invest also. But they delivered a path dependence, which is that the more that China began to rely on outside investmentand the more that succeeded in the sense of bringing a lot of money into Chinese coffers, providing goods and servicesthe less there was a need to do things like fix the underpinnings of the financial systems within China, think about enshrining private property rights (which has been done only very recently after a very long time), things that would restore the infrastructure for private commerce. So these didnt have to be done because the alternative of relying on private enterprise from the outside seemed to be working just fine. And so, the story of that dependency, I think, thats ... Some people like to tell a little conspiracy story also, which is that it was doubly convenient for the Party not to support private enterprise, because if private enterprise really became powerful, they would be a contending power structure within China for the Party. And it would rather rely on outside investors to build businesses than to let local businesses become, in effect, too big for their britches. India went the other way, which is it never had a Cultural Revolution. So it never wiped anything clean. Indigenous entrepreneurs stuck around. Some of them did good jobs. Some did poorly. But they were never wiped out. And the infrastructure was always there for them to basically operate in a private-sector economy, even though it was heavily interventionist and regulated and so on. But when the country opened up in 1991 and thereafter, the nuclei were in place, around which good companies could be built. And its not the case that all of them became world-class companies. Far from it. There are plenty of dregs in India still. But some of them did. And theres a path dependence story there as well. That when you had some good ones that were governed well, then the markets could use them as exemplars and use them basically as disciplining rods to beat other companies into compliance. And say if
21

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Infosys can do it, why cant you? And that has created the possibility of better and better companies to be created in India over time. So there is a little bit of historical story here having to do with the Cultural Revolution. The flip side is that if the markets were better in India The state works much better in China. There is a long tradition of hierarchy. But hierarchy shouldnt be seen as a negative word. Its hierarchy with a heavy dose of meritocracy. In other words, its a hierarchy where anybody who does well in the examination system, which is a draconian one, as you know, can aspire to move up some sort of social ladder and some sort of economic ladder. So its a different kind of screening mechanism to sort out good talent from bad talent in the market. But it is a functioning screening mechanism. And thats one thats worked well in China for centuries in the version of the Mandarinate or neo Confucianism or Confucianism or whatever label that one wishes to assign to it. In India we also had hierarchy, but its a class-based hierarchy. And its not particularly meritocratic. So our hierarchical selection systems in India dont work very well. But the hierarchical selection systems work with meritocracies in China quite well. And the flip side is the markets dont work very well in China. But they work really, really well in India. So there are different systems, one supporting indigenous enterprise and one supporting more top-down, government-led enterprise, as the agents of productivity. So thats my starting attempt to paint that. India Knowledge@Wharton: Let me ask you a quick question about your observation on hierarchy. The fact that the Chinese hierarchy is largely meritocratic, while it is task-centered in India and not at all meritocratic, would you say thats because democracy at best sits uneasily with meritocracy; and China, not being impeded by democracy, is able to pick the best, or is able to run a meritocratic system of state-controlled hierarchy, whereas India struggles with that. Would that be a fair summary? Khanna: In a sense, its fair. But I would state it differently, which is that its a conceptual issue. On the one hand, you can use meritocracy and hierarchy
22

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

as a screening and a disciplining mechanism and an incentive mechanism. And remember that its not inconsistent with giving incentives to people in the hierarchy, right? So, in other words, think of talent coming into a system. Those who do well move up, but doing well, it is monitored. So a provincial official has to deliver jobs and economic growth, and then he or she moves up. Thats one method of accountability. In India, theoretically, there is a different method of accountability. Its called voting behavior and political accountability. Youre supposed to, in theory, vote for someone who delivers local benefits. And if they work well, you vote for them again, or you kick them out. So, conceptually, its not clear which system is better. Theyre just different methods of accountability. Practically, the Indian political system has degenerated so that people being voted in are not people by and large who are paying attention to public goods provision. And within public goods I include soft public goods like health and primary education, also hard public goods like roads and power plants. And that political accountability measure has not worked, as an empirical matter, in India. Conceptually, I dont see a reason why I would rule it out, ex ante, as a possible mechanism to work. So, really, the task in India is: How do you fix that political accountability measure? And I dont think the task is that one should throw out the baby with the bathwater and say that democracy is the reason for the problem. Its the particular implementation of democracy interacted with the class system and diverse ethnic groups and diverse languages and diverse preferences that is causing the difficulty. India Knowledge@Wharton: You mentioned how foreign investment overseas Chinese came into China when they opened up, whereas India had a capitalist infrastructure to absorb it and to modify it and to grow with itwhich, also, is an interesting aspect of how Chinese look at their overseas citizens, as opposed to India. And you make this interesting point that India celebrates ties to the soil. China celebrates ties of blood. And they have very different attitudes toward their overseas diaspora. Tell us a little about it. Khanna: The background here is that, broadly, there are two notions of, how shall we say, citizenship that different countries have embraced over time.

23

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

And essentially, China has embraced a version of what, in Latin, is called jus sanguinesanguine meaning of the blood. And India embraces jus soli, which is of the soil. In other words, in India, you are a citizen and treated as an Indian if you were born in India, with lots of modifications to that. And in China, you were considered to be Chinese, traditionally, if you had Chinese ancestry or Chinese blood in you. These are sort of stark statements, and reality is blurry versions of these stark statements. But the net is that the modern Chinese state was more willing to think of the Chinese diaspora as being of China, and the Indian modern state was less willing to think of overseas Indians as of India. That was, if you will, the supply side of the diaspora being able to provide input to the country of origin. On the demand side, as we discussed earlier, China had a need for a diaspora, and India had much less of a need for the diaspora, because of the Cultural Revolution. So the net result of all this is that China embraced its diaspora very early on, to incredible effect. And India, in one of what must rank as the most catastrophically silly decisions in modern economic history, shunned a pretty successful and talented diasporaand I dont just mean in the U.S., I mean around the world. Thankfully, thats changing a little bit, but its in the early days. India Knowledge@Wharton: Let us contrast this, for a moment, with the United States, or even Singapore. You have ties of blood, which is ethnic ancestry, and ties to the soil. In some sensewith some blurry distinctions, as you saidthe United States tends to look upon itself as the idea of the melting pot, the huddled masses yearning to breathe free, which says that We will celebrate neither ethnicity, neither ethnic ties, nor ties to the soil. If you come here and you adopt certain tenets of the American way of life, you can be an American. Do you think, in the modern, globalizing world, with the extraordinary degrees of labor and capital flows, the third model, the United States model, in some sense, is likely to be more successful? Especially given the category of human beingshighly successful, committed human beings emerging in many parts of northwestern Europe, Asia, and America who can be called transnational citizens. Given that and this globalized world, do you think this is a better model than the other two?
24

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

Khanna: My liberal biases incline me to say yes. But I think one should have a degree of humility before pronouncing judgment. And what I mean by that are a couple of different things. If you do research into this jus sanguine/jus soli spectrum, you see that the United States is a complete outlier, that there are very few countries, if any, that have adopted United States-type policies. India Knowledge@Wharton: Canada, Australia, Singapore? Khanna: Singapore, only very recently. And Singapore hasnt really treated, for instance, Indians fully equally as Chinese. At least the Indians didnt perceive to be treated as fully equally as Chinese, until recently, I think. Australia went through a period of Asian bashing, until, again, just about 10 years ago, when they decided that they were quite closely hinged to China. And this has been cemented by the recent resource boom. And Canada, maybe so. I dont have enough of the details. But I think there is a degree that is exceptional in the U.S., and so that should cause one to ask, If this really is such a universalist model, why isnt it being adopted anywhere else? And I dont have a good answer to that. But at least its a question that deserves somebodys attention. And I think this business of sort of having transnational elites, so-called diverse men, wandering around is a relatively new phenomenon. So I dont think anybody really knows what to quite make of it. And in some sense, for a very small fragment of humanity, we might be getting back to the olden days, when you could literally wander around the world relatively unencumbered. So I suppose you could do a thought experiment and say, if there really were maybe a couple of million people who fell in the category of being desirable in all locations, then they could just get about as they wished and whenever they wished. I think were very far from that. But its an intriguing thought experiment, and I dont really know how to peer into that crystal ball yet. India Knowledge@Wharton: Lets take the triangle, for a moment, of the United States. Im going to actually restrict this to the United States. In China, India, and the U.S. there is a strong view, espoused in certain quarters, that, over a period of time, China would be the strategic, competitive, opposing pole to the United States,
25

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

while India may become a strategic ally afar. There are a lot of influential political scientists that advance various flavors of this view. What are your thoughts about this? Khanna: The first thing I would say is that what the United States wishes, wants, and aspires to, vis--vis China and/or India, is, in the grand scheme of things, somewhat inconsequential. And thats kind of an extreme thing to say, but the reason I say that is that these countries are being fueled by their internal dynamics. And in some occasions they may be leveraging the West to get a leg up, for instance, using the institutions of the West to compensate for their own deficiencies, or selling to the West as a way of earning resources, etc. But primarily they are engaged in solitary deviation in their own countries, and thats going to happen regardless of U.S. preferences, one way or another. So thats the first thing to address anytime somebody brings up this triangle issue. The second thing is that, in some sense, to me, the most interesting leg of that triangle is the China-India leg. And I think, here, the conventional wisdom is that China and India are competitors. And they have border disputestheyve had them since 1962, if not beforeand the border disputes are unresolved, and they continue to sprout up inconveniently. China is building a blue-water navy. India has nuclear weapons. And so on and so forth. And my own view is that all that is true and should not be dismissed and is worthy of a lot of attention by eminent political scientists. But it overlooks the potential power of a possible economic symbiosis, which is a much more positive-sum story. The border disputes are inherently zero sums. I think that, at a minimum, a scenario that should be on the table is massive economic engagement, because, after all, its unusual to have two large, populous countries, cheek to jowl, not engaging in economic intercourse. And if that [economic engagement] comes to pass, then I dont think its going to solve the political issues, but it will relegate them to a smaller part of the conversation between the two. And I think thats the most interesting leg of the triangle. What happens there will heavily influence relations with the U.S., or the Western world in general.
26

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

India Knowledge@Wharton: So let us take the China-India leg of the triangle for a moment. In many aspects of commerce, they are on the same side of the transaction. It is not a buyer-supplier, but two suppliers, and for many, many aspects, two suppliers competing for the attentions and dollars of one common set of buyers. It manifests itself in many ways: the competition for commodities, the competition for minerals and metals, and the competition for energy resources and the competition for influence, in an indirect way. In all of theseexcept bilateral trade, which you mentioned a few minutes agothey seem to be strong strategic competitors. And if you go one step further, historically, when India was offered a seat at the United Nations, Nehru is reported to have said that You must include China first. Without China, a United Nations would not be a United Nations. Much later, history repeated itself once again, and China actually lobbied India to help its inclusion into the World Trade Organization. And recently, when India wanted a seat at the Security Council, of the five permanent members the one that was most vocal in its oppositionand popular press, at least, seems to suggest itwas China. And even more recently, with the nuclear deal, China is supposed to have lobbied against it to the extent possible, to scuttle the deal from the U.S. side. This is, again, reports from the popular press. Do you really see, then, bilateral trade being a force [strong] enough to overcome the geographical and historical rivalry between these two countries, which has largely gone Chinas way, if one may note? Khanna: I think these observations are all correct, and I dont have any intention of downplaying the importance of these observations. But, if I may, I think its subject to recent bias and, basically, is guilty, to some extent, of exactly that linear extrapolation of the last few years. But let me take issue with the very first premise of the question, which was that, in most cases, China and India are on the same side of the transaction. I think thats true, descriptively, today. But if you also look at the so-called small signals, from the ground, there are lots of companies, primarily in India but also in China,
27

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

that are realizing that what they are providing within China and Indiathat has nothing to do with cross-border tradeare also things that could find a market in other large, populous, low-income countries. So Indians finding markets in China, Chinese finding markets in India. If those would come to pass For instance, the low-horsepower tractors that I talk about in the book from the Hindus; for instance, something I dont talk about in the book, microfinance that is burgeoning in India and nonexistent in China. Some of the Indian microfinance firms are now wandering around in China at the invitation of the Chinese government asking for ways of leveraging that in China. For instance, life sciences, where a number of companies are trying out products in China that started in India. Things like that. And so these are small signals. Theyre small right now, but they could amplify, and they would not be picked up in the bilateral trade statistics, by the way. They would be picked up more in mutual investments and so on. So theres potential. Whether it comes to pass remains to be seen. But my own view is that optimistic scenario should at least be on the table along with the more strategic, competitive-type scenarios. India Knowledge@Wharton: Lets take the markets of these two countries. By and large, the financial services market, the service market, is more open in India. In many ways India is more open to financial services, especially retail financial services, than China. On the other hand, in manufacturing, in retailing, China welcomes Wal-Mart, whereas India pushes them away and is very uneasy with large retail chains coming in. Do you see that these two countries are likely to liberalize and open their markets even more, or do you think one of them is more likely to be able to go further than the other in the near future? Khanna: I think, generically, India will go slower, for the simple reason that it has indigenous competitors to the outsiders. Some of them are efficient, so it is legitimate for them to say that the foreigners are not necessary since we can compete with them. Some of that opposition is illegitimate in the sense that its purely seeking of protectionism. Either way, there are indigenous companies that will slow down Indias move to embracing FDI.
28

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

India Knowledge@Wharton: Do you see China likely to open deeper and faster in the near future? Khanna: No, I think that China will open slower, actually. The reason is that the Chinese are now facing their own mini-backlash, in the sense that there are a lot of companies within China saying, Havent we favored outsiders for a long time and can we not rethink this? Case in point is in the agri-business sector, where there is so much food price inflation going on, China now thinks that, Well, gee, if we were not subject to the whims of American grain companies, maybe we would have more degrees of freedom with controlling food price inflation. They would rather have local companies doing this, so they are trying to put a lid on foreign investment into agri-business-type products. I think you will see more of this, that China will not be able to maintain its current speed of opening up, but it will generally be predisposed to keeping things open more than India. India Knowledge@Wharton: You wrote a really interesting article some time ago which I use in some of my classes, Building World-Class Organizations in Developing Countries. Would you like to throw some light on some intriguing, unusual corporations in India and China doing things very different from the traditional way of growing them? Khanna: That line of work, which Ive done with my colleague Krishna Palepu, suggests that there are, in fact, a host of things that we would consider to be unusual in the West that one should conceptually, and, I think, sincerely consider to be more usual in developing countries. The particular kind of peculiarity that you see in China is different than the one that you see in India, because the background institutional context is so different in China and India. So consider some examples. What are some good Chinese companies? Haier is a good example which I quoted in a case study with Krishna. What you see is that it is still very much a collective enterprise. It still has to harness the energy and incentivize its workers in Jiangsu and Shandong Province, and increasingly around China, by providing a different system of incentives from what you are used to
29

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

seeing in the West. And that system of incentives, I think, makes much more sense when one views things from the standpoint of the collectivist heritage from which it comes. Rather than dismiss the collectivist heritage as something that should be scorned or laughed at because it doesnt accord with the theories they are used to Hu is sort of the engine behind the Haier company, has harnessed it for his own ends. Thats an example. Because of labor market peculiarities, they found a way to leverage them instead of trying to artificially get around them. Thats the example. In India, I guess, I know some of the microfinance companies are actually very interesting. In fact, some of the better microfinance companies in India are, to me, a forerunner of some of the most interesting corporations in India in the next 10 or 15 years. The reason I think so is that these are the for-profit microfinance companies, as opposed to the Grameen Bank model, which is more of a social organization. These are the companies that are increasingly listing in the stock exchange and have market caps that are fairly sizable, but also routinely tens of thousands of women, potentially women entrepreneurs, in different parts of India, Asia and South America. But some of these folks have deep tentacles into the village economy, which, in India, anyway, is sort of the last frontier, where development has simply passed these people by. If they can figure out a way to really tap, with skill, into the rural population, then that access can be leveraged for a variety of good purposes: economic good purposes, social good purposes, and even political good purposes. So those are very exciting corporations that are worth looking out for. India Knowledge@Wharton: Four years ago, you had written this interesting article in Foreign Policy magazine, where you sort of assessed these two countries. Has your thinking changed? Khanna: At that time China was the flavor du jour and India was not even on peoples radar screens. The reason it got attention, that it seemed such a manifestly odd, or even silly, thing to say, that India might, as the title of the article suggested, overtake China. The intent, of course, was more to suggest that there are pluses
30

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

and minuses in choices China has made, and they were paying inadequate attention to the minuses. And correspondingly, there were pluses to the India model that scholars and observers and businesspeople and investors had overlooked. And I think that, since then, India has become the fashion of the month, and, to some extent, at least empirically, I dont think the contesting or anything has changed one iota, but at least empirically its going in favor of that article. That said, my thinking has changed, but not in the direction that you might think. Its changed in the direction of saying that the question that you asked is perhaps not the right question. That, in some sense, it is sort of uninteresting to know which of these two are better systems. In a sense, if youll allow me to retreat to the world of economic theory, what were really saying here is there are a world of what economists call second best, that neither of these is an optimal solution to organizing an economy. Theyre both caricatures of a good system. And were really asking which is the betterto rank second-best, so to speak. And thats not an exercise to which economic theory has as much to say as it, perhaps, should. I certainly dont know how to rank second best. In some sense, the more interesting question is how can you leverage the respective strengths of China and India to create some collective good, not just for Chinese and Indians, but for anybody who wishes to tap into the complementary strength of the country. And in that sense, thats a fairly significant, not shift, but evolution, in the way I think about these countries. For historical, empirical, and conceptual reasons, there is reason to think that we will see much more symbiosis going forward rather than pure strategic competition, as you were characterizing it in an earlier question. India Knowledge@Wharton: One last question. The idea of regional hubs is emerging. If you look, for a moment, at when Ye Jianying opened up China in 1978. For four to six years, essentially, most of the investment that came into China was overseas Chinese. Khanna: Yes. Thats right. India Knowledge@Wharton: And then they realized that one way of getting massive manufacturing capacity was to use Hong Kong, which had a rule of law
31

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

and English dominion and a charming British governor. They said, look, Hong Kong can be this interesting proposition that says you can locate your headquarters and monitoring offices here. We are connected to the worlds largest labor market, and you can put the factories there. We speak Chinese and well manage them. Its a long tradition of people from Guangzhou, the Canton province, settling in the northeastern region entrepreneurially. Khanna: Yes. India Knowledge@Wharton: Now, in some sense, for some years Ive been working with the Infocomm Development Authority and some of those places in Singapore. Interestingly, Singapore sees itself as being able to do for services what Hong Kong did for manufacturing. Its making investments in broadband connectivity between India and Singapore and China and Singapore. It has been increasingly making capital market investments in financial institutions. Temasek has actually been very active, as you know. Do you see Singapore as playing as central HQ, as a very Western country in an Eastern region, providing all the Western ways of life and a squeaky clean government and the rule of law, and helping For instance, a lot of Indias software contracts that are written with an arbitration clause, [require] that arbitration will be done in Singapore. Do you see Singapore playing the role of a regional hub for the internationalization of services? Khanna: First of all, I hope so. I wish the Singaporeans enormous success in this venture, because, ultimately, its for the good of all of us. My answer, I guess philosophical bent of mind on this issue, is that, again, its not a fearsome thing. I think that Singapore can catalyze enormously for the investment in China and India, and in turn, those will catalyze further developments in the Bombay Stock Exchange and in the Shanghai exchange, and so on. And at the end of the day, whether Singapore emerges the financial supreme of the region or not is, frankly, immaterial. At the end of the day, what matters is improvement in per capita GDP and some
32

http://knowledge.wharton.upenn.edu/india

An Interview with Tarun Khanna, author of Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours

India

encompassing measure of human welfare. If Singapore can be the catalyst for the region to do that, its wonderful. One of the things that I find most heartening about Singapores recent story is that it has recognized that it is far more useful to the system by being a bridge between China and India, or a bridge to China and India, and not just playing a role as an adjunct of China. And indeed, if you look at Singapores own role in the development of China, it has been one of enormous catalysis. After all, Ye Jianyings open-door policy was stimulated by an encounter with Lee Kuan Yew. He very famously got a little bit of a sermon from Lee Kuan Yew, saying that we are, after all, the less educated descendants of the Chinese Mandarin, who settled in Singapore. And if we can do it, so can you. That has, of course, gone down in lore. The point is that Singapore has played a catalyzing role already in China. And if it does the same for the region, I think, we should all stand up and applaud. India Knowledge@Wharton: Any interesting research that youre working on currently that youd like to briefly tell us about, your immediate research horizons? Khanna: Its all continuing on the same, so, institutions and foundations in developing countries. Im working a lot on this issue of the diaspora, and how the diaspora can and cannot play a role in, not just economic development of the country of origin, but also political development in the country of origin, and social development. Thats one area. And Im also doing a lot of work in rural China and rural India, just understanding the economies in those very different, if you will, sub-countries.

33

http://knowledge.wharton.upenn.edu/india