Investment Environment and Intercompany Cooperation between China and India

In 1996, China and India were considered complex and challenging markets within the Asia-Pacific region, both classified as "high context" markets. Aware of the complexities of the Chinese market, local Indian product managers often highlighted the intricate and challenging nature of doing business in India during their conversations. Each visit to India reinforced the perception of it as a mysterious market characterized by stark contrasts and chaos. India presented itself as a diverse country, blending Asian diligence and intelligence with the compartmentalized thinking typical of the Western world. However, the current reality is that China and India do not fully understand each other. Given this context, there is a growing desire to discuss the investment opportunities in major global economies in 2023 from a market growth perspective, focusing on interpreting India's investment prospects through a numerical lens. Today, multinational companies frequently ask for views on India's recent impressive economic performance. When pondering how to concisely answer these inquiries, one is often reminded of the early 1980s when multinational companies first entered China, experiencing confusion and doubts about China's market potential and actual conditions. This article aims to resolve these confusions.

Is India an Attractive Growth Market?

The first question is: "Is India an attractive growth market?" An insightful illustration to consider is Figure 1, which shows the ranking of the top five global GDP economies in 2022: the United States, China, Japan, Germany, Indonesia, and India. This ranking provides a compelling context for discussing India's potential as a growth market, highlighting its position among the world's largest economies.

[Figure 1] GDP, GDP growth rate, per capita GDP, population size and average age of the six countries (Source: economic data from the World Bank 2023 data, population data from the United Nations 2023 data)

From a business perspective, investments are primarily driven by considerations of return on investment (ROI) and risk management. Factors influencing ROI include market size, economic scale, population base, and average age, each indicative of a country’s development potential and capacity for high growth.

The United States continues to be the largest economy in 2023, with a per capita GDP exceeding $76,000. With a population of approximately 340 million and an average age of 38, the U.S. market is undoubtedly one that should be prioritized, despite the potential complications arising from geopolitical influences, Sino-U.S. trade relations, and technology competition. However, given geopolitical factors, Chinese investment in North America carries a high risk, which explains the recent decline in significant Chinese investments in the North American market.

Ranked third after China, Japan’s market has always been very conservative, requiring foreign companies to exercise great patience to break into it. Japan's economic scale is commendable, ranking among the top mature economies, and in 2023, it emerged from years of stagnation with a growth of 1.8%. However, Japan faces severe aging population issues and conservative business practices, which make achieving good investment returns and high growth difficult. Similarly, Germany's economy is comparable in scale to Japan's but has been stagnant in recent years, with a population base about one-third smaller and rapidly aging.

Among the second-tier economies, India stands out. In 2023, India's economy experienced rapid growth at a rate of 6.1%. As a populous country with an average age of only 28, India has a per capita GDP of $2,500. The large youth population provides sustained growth momentum and significant future growth potential for the Indian economy. However, it raises the question: why have so many Chinese companies paid a substantial learning cost when doing business in India?

Many investors agree that the Indian market is a "big pit" that specifically traps Chinese companies. Some European investors have noted that European investment in India has proliferated recently. European companies consider low labor costs and the potential for a huge market as their main factors, and thus, they have been strategically positioning themselves in the Indian market. If Chinese investors find the Indian market too troublesome and miss its potential growth opportunities, where else should they look? One possible alternative is Indonesia, but its market size, economic scale, and population base still fall short when compared to India.

From an investment perspective, if it is challenging to find investment opportunities that offer both excellent returns and controllable risks, Chinese investors should realistically think about how to find safe investment opportunities rather than hastily concluding. The following Figure 2 illustrates how to identify favorable investment opportunities. The horizontal axis represents whether there is a standard commercial interest link between the target investment country and the source of investment capital. In contrast, the vertical axis assesses whether the business environment governance values can align between the source and target countries. The ideal quadrant is the upper right, where values align and both parties can prosper together. Based on such research judgments, one must ask: Is India a growth opportunity from a strategic investment perspective? If so, how can investors find common interests?

[Figure 2] self-developed indicative graph (Source: author self-made)

Shared Ideological Foundation for Sino-Indian Cooperation

Observations and research indicate that structural challenges and differences in business environment values between China and the U.S. are difficult to reconcile in the short term. In contrast, China and India share some common values. Both are populous, developing nations with long histories and rich cultures, where family values are paramount, and most people believe in hard work and education as key to changing their fate. China has achieved significant success over the past forty years of reform and opening up, and its current economic scale is five times that of India. However, India's growth momentum is strong, and it is expected to become the world's third-largest economy around 2030, following the U.S. and China.

China has also played a significant role in India's economic growth. According to the Global Trade Research Initiative (GTRI), in the 2023-2024 fiscal year, China surpassed the U.S. to become India's largest trading partner. The report indicates that Sino-Indian trade reached $118.4 billion in the 2023-2024 fiscal year, with both exports and imports from China growing and exports increasing by 8.7%. According to India's Ministry of Commerce, China was India's largest trading partner from the 2013-2014 fiscal year to the 2017-2018 fiscal year and again in 2020-2021.

A recent report by GTRI indicates that in the 2023-2024 fiscal year, India's total import value was $677.2 billion, with imports from China amounting to $101.8 billion, accounting for 15% of India's total imports. Among the products imported from China, 98.5% were industrial goods. India's total imports of industrial goods valued at $337 billion, with China contributing significantly, holding a significant 30% share. Fifteen years ago, this share was only 21%; in the following 15 years, the share of Chinese products in India's industrial imports grew faster than the overall growth rate.

If China and India can establish stable bilateral economic cooperation and trade relations, China's status as the "world's factory" and India's as the "world's office" will further promote sustainable bilateral economic growth. This collaboration would contribute more Asian wisdom and capabilities to the global economic reconstruction in the post-pandemic era.

Historical Comparison of Sino-Indian Economies

As an old Chinese saying goes, "study history to understand the present." The following Figure 3 illustrates trends in the global economic share of major economies over the past 200 years. In 1820, 20 years before the Opium War, China accounted for about 33% of the world's wealth, and India 16%. In other words, Asia held half of the world's wealth at that time. Through forty years of reform and opening up, China's economic scale has regained a double-digit share of the global economy and became the world's second-largest economy in 2010. History often repeats itself; whenever China's economy reaches a specific scale, it attracts particular "attention" from other countries, leading to new rounds of geopolitical challenges.

[Figure 3] Share of global GDP of the United States, Europe, China, India, and Latin America, 1820-2012 (Source: Angus Maddison, University of Groningen, OECD)

Figure 4 shows the GDP, population, and export volumes of the U.S., China, and India in 1973. Before the reform and opening up, China and India were both populous developing countries with weak influence on the global economic stage.

[Figure 4] Comparison of GDP, population, and exports of the United States, China, and India in 1973 (Credit: WawamuStats)

In the past decade, China's exports to India have doubled (see Figure 5). According to the 2022 data in Figure 6, China's largest export to India is electronic products, particularly mobile phones, followed by machinery products, nuclear reactors, and boilers.

[Figure 5] In the 10 years between 2014 and 2023, India's imports from China doubled (Credit: Deloitte)

[Figure 6] China's largest export to India is electronic products, mobile phones being the primary item, followed by mechanical products, nuclear reactors, and boilers (Source: Indian Customs Statistics)

Conclusion

If China and India can establish stable bilateral economic cooperation and trade relations, China as the "world’s factory" and India as the "world’s office" will further promote sustainable bilateral economic growth and contribute more Asian wisdom and capabilities to global economic reconstructionin the post-COVID-19 era.