NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Wednesday, January 30, 2008

By Martha Legace

Entrepreneurship in the world’s 2 most populous nations, China and India, has through modern times been somewhat asleep. But now, says HBS professor Tarun Khanna in a new book, both societies “have woken up,” and the results could reshape business, politics, and society worldwide.

“In some sense people in these societies are running faster than their rules and laws can keep up. So they are creating the rules as they go along. And entrepreneurship is, after all, doing things in new ways, ahead of social norms and customs, and establishing the rules and laws. In both countries, these processes are unfolding not just in the mainstream business sector but in society writ large and even in politics and civil society,” says Khanna.

Khanna’s book Billions of Entrepreneurs: How China and India Are Reshaping Their Futures and Yours will be published by Harvard Business School Press on February 1. Each chapter compares China and India on a broad range of factors in entrepreneurship, including access to capital, freedom and reliability of information, governmental involvement, and infrastructure. Khanna examines the landscape of big, medium, and small entrepreneurship, including rural health-care initiatives and even Bollywood.

As Khanna explained to HBS Working Knowledge, “One can see China clearly when juxtaposed against India, a neighbor that, like China, is a large, populous, and ancient country that chose a different path. The difference is stark. The same is true when we look at India with China as a backdrop. That’s why I wrote a comparative book.”

In our interview Khanna outlines the business landscape in both countries. He also describes how indigenous and foreign entrepreneurs could get a foothold, how China and India relate to their own diasporas, and how entrepreneurial activity is reshaping both countries for the better.

Martha Lagace: Why did you choose the title Billions of Entrepreneurs?

Tarun Khanna: The title captures the ferment that is taking place in both China and India. Entrepreneurship is not only about hotshots taking companies public. A lot of entrepreneurial activity in these countries is in the exercise of getting things done more efficiently and creatively in response to constraints that people find themselves immersed in. Some of these constraints are societal; some are political. And so this book is full of stories about social entrepreneurs, political entrepreneurs, and others whom we study in business schools?investors, capitalists, and so on.

Q: What’s different about entrepreneurship in both countries?

A: The extent and type of government involvement and the nature of openness are 2 dimensions in which the countries are different. These dimensions pervade all aspects of societal existence, whether that means raising capital to start a new business, the nature of markets, copyrights, the media, movies, and religion, as well as the ways in which both countries themselves project their power, the way they deal with each other, and the way the village economy works.

In China, the government is often the entrepreneur. It is in many instances a very efficient entrepreneur. Of course there are bankrupt state-owned enterprises, but there are equally dynamic companies starting out in villages, small towns, and major cities, often with a sizable amount of investment or involvement by local government authorities. It is hard to find any reasonably sized Chinese company in which government authorities do not have input.

In India, some islands of excellence notwithstanding, the government remains inefficient for the most part, and most pockets of entrepreneurship?interesting, vibrant new ways of doing things?are in the private sector or civil society, staying far away from government intervention. So here the private sector leads many significant initiatives; in China, the lead is often provided in a top-down manner.

The second difference is the nature and extent of openness to outside influence and foreigners. Foreign direct investment pours into China. India has embraced foreign direct investment much less, for good and bad reasons. On the good side, India never had to endure a cultural revolution. China “wiped its slate clean” in the Cultural Revolution. Literally and metaphorically, it got rid of intellectuals, human capital, private enterprise, everything. With a clean slate in those circumstances it came to rely on FDI, and help from the overseas Chinese was a big piece of that.

Because India did not follow a similar extreme path it didn’t need to embrace FDI quite as much. So that’s a reasonable reason to expect low FDI levels. On the negative side, however, India, with its indigenous entrepreneurs, still engages in some protectionist behavior and lobbies to keep foreign investment out.

There are other aspects to openness, of course, than just FDI. Traditionally, India has been more open to ideas than has China, for instance.

Q: How should a foreign entrepreneur size up the potential of each country?

A: First, does it make sense to try to enter either of these countries? How does entry fit into a broader business model? In some cases it would be more sensible to enter China, in some cases more sensible to enter India. What China is good at, India may not be, and vice versa. Some companies?GE Healthcare is just one example?are finding that they can leverage both countries symbiotically.

Second, conduct a series of experiments. An entrepreneur has to make many decisions: how much money to sink in, whether to partner, how to work with relevant government or regulatory entities, whether to invest in local or global brands or none at all, et cetera. And several of these contextual factors that matter, which I illustrate through examples in the book, matter differently in China and India, so you might make different decisions in the 2 countries. It often takes a lot of time to experiment, but that doesn’t have to mean losing money. They have to be clever experiments, not expensive ones.

Q: How does each country treat its diaspora in terms of stoking entrepreneurship at “home”?

A: To put it bluntly, China has embraced its diaspora, and India has shunned it. While the numbers should always be taken with a grain of salt, it is said that about 50-plus million Chinese and 20-plus million Indians live outside their home countries.

India’s tendency to shun its diaspora must rank as among the most disastrous decisions made by a nation in modern times: disastrous in the sense that a successful group of people is willing to give time, money, energy, and good will to their country of origin and is being pushed away. Fortunately, this situation has been changing in India in the last 4 to 5 years.

In China, by and large, the diaspora has played a much bigger role. In 1978, China didn’t have the internal markets to rely on, so it turned to the overseas Chinese because they were the only people who could understand China well. To other people China seemed too difficult, too alien, too foreign.

In the case of both countries, there is a broad spectrum of people in the diaspora, so we should be careful about not lumping them all together. That said, the success of the Silicon Valley community and the massive wealth that some people have accumulated have caught the eye of India. And as in most things in life, timing is everything: In some sense the combination of India having its back to the wall in the early 1990s and rejuvenating its reform process, and the wealth accumulating among the diaspora, were the supply and demand side for getting the diaspora together with its home country.

Q: How does entrepreneurship affect the playing field in each country in terms of urban/rural divides, caste (as in India), and so on?

A: We’re at the point where half the world’s population lives in cities. There is an ongoing debate about whether the overall quality of life is better in cities compared with rural areas. But certainly if you look at the migratory patterns of human beings in recent decades, there’s no question that people by and large move from rural to urban areas in search of better economic conditions. In India, most social and economic indicators show that life is better in the cities than in rural areas, on average, even given the fact that there is wide disparity within the cities.

Is it easier to be an entrepreneur in a city? The answer depends on the meaning one assigns to the term “entrepreneur.” In the more narrow sense of starting a business, then yes, it’s easier to start in the city due to better infrastructure and support. But since entrepreneurship means doing things in new and clever ways, there are lots of stories in my book of rural entrepreneurs?people in India who are in civil society, and people in China who act as entrepreneurs in rural settings. In both China and India I don’t think there is any reason to think there is less entrepreneurship in rural settings.

Caste in India is both less important and more important than it used to be. In some sense business is a great leveler. In the cities a low-caste person may earn a lot more than a high-caste person. Business cares about the bottom line. It doesn’t care whether you are in caste A or caste B if you can produce a product, manage a sales force, or produce the capital. On the negative side, politicians have whipped up caste frenzy. A lot of voting in India happens along caste lines in so-called vote banks. And so politics has become fragmented with some politicians highlighting caste differences in the electoral process. That has been pretty much a disaster for the system of governing.

Q: China and India have had tense relations in the past. Will these persist?

A: I think there are lots of ongoing sources of concern, as you know. There are unresolved border issues, and people point to both countries flexing their military muscle increasingly: China’s blue water navy, India’s nuclearization. But I think to focus exclusively on this, even primarily, is a complete mistake. The on-the-ground productive ferment, and the possible complementarity between the China and India story, are far more interesting and promising to me. Building economic relations between the countries, not just through arms-length trade, but investments by individual companies in each other’s countries, will cement ties. These will counterbalance the political tensions. So I see the glass as much closer to half full than half empty going forward. This is a happy story, a story of hope.

Q: You have watched India change dramatically in your lifetime. How has China surprised you?

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