India and China’s raise as the world’s largest economies

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Abstract

 

This assignment is constructed in three steps. The first part of the assignment is a brief introduction of India and China’s economic growth and shows topic of this assignment: to examine the India and China’s raise as the world’s largest economies. The second part of this study has been contributed to the analysis and review of the economic growth theory to support the raise of India and China as the world’s largest economies in the next few decades assumption; the third part of this assignment provide impacts to the current leading economies as India and China keep fast economic growth together with the implications to the MNCs.

Content page

Abstract………………………………………………………………………………………………………….. 1

1.     Introduction……………………………………………………………………………………………… 4

1.1      Objective of the report……………………………………………………………………… 4

1.1.1     To analyze China’s and India’s economic growth………………………… 4

1.1.2     To examine the assumption of China’s and India’s raise………………. 4

1.1.3     To list out the impacts on the current world leading economies…….. 4

1.1.4     To find out how the MNCs could succeed in the Chinese and Indian market    4

2.     Findings…………………………………………………………………………………………………… 4

2.1      Country profile………………………………………………………………………………… 5

2.2      China and India in 2020……………………………………………………………………. 9

3.     Analysis………………………………………………………………………………………………….. 12

3.1      Impact on United States………………………………………………………………….. 12

3.1.1     Difficulties in job creation……………………………………………………… 12

3.1.2     End of US global dominance………………………………………………….. 13

3.2      Impact on European Union……………………………………………………………… 14

3.2.1     Weakening R&D power…………………………………………………………. 14

3.3      Impact on Japan……………………………………………………………………………… 15

3.3.1     Economy slowdown……………………………………………………………… 15

3.4      Impact on ASEAN…………………………………………………………………………. 16

3.4.1     More cooperation with China and India…………………………………… 16

3.5      Impact on multinational corporations………………………………………………… 17

3.5.1     International management and cultural differences……………………. 17

3.5.2     Customized international marketing………………………………………… 18

4.     Conclusions…………………………………………………………………………………………….. 19

Reference……………………………………………………………………………………………………… 20


 

List of chart, figures and tables

 

Chart 1.0 2009 Nominal GDP ranking by countries…………………………………..4

Chart 2.0 China GDP growth rate……………………………………………………..5

Chart 3.0 China GDP value……………………………………………………………6

Chart 4.0 India GDP growth rate………………………………………………………7

Chart 5.0 India GDP value……………………………………………………………10

Chart 6.0 China dependency ratio from 1950 to 2050……………………………….10

Chart 7.0 United States dependency ratio from 1950 to 2050……………………….11

Chart 8.0 India dependency ratio from 1950 to 2050………………………….……..12

Chart 9.0 Manufacturing employment from 1941 to 2009 in the United States……..12

Chart 10.0 United States unemployment rate…………………………………………13

Chart 11.0 Japanese demographic trend- birth and deaths……………………………15

Chart 12.0 ASEAN’s trade relationship with P. R. China……………………………17

 

Figure 1.0 India population trend…………………………………………….………..8

Figure 2.0 Top 10 biggest economies: 2010 VS 2020…………………………………9

 

 

 

1.        Introduction

 

Despite the current economic crisis, some developing still contribute to the global economic growth by keeping fast economic development, the most eminent two countries which feed the largest populations in the world: P. R. China and India. According to some prediction, these two large countries with the fast growing trend would in the next few decades surpass the United States to become the largest economies in the world, this study will focus on the examination of this prediction on a theoretical analysis base and try to describe the impacts that the raise of the two countries in term of economy would bring about to the business world.

 

1.1    Objective of the report

 

1.1.1            To analyze China’s and India’s economic growth

1.1.2            To examine the assumption of China’s and India’s raise

1.1.3            To list out the impacts on the current world leading economies

1.1.4            To find out how the MNCs could succeed in the Chinese and Indian market

 

2.        Findings

 

Chart 1.0 2009 Nominal GDP ranking by countries (Source: World Bank 2009)

Before examination of how Indian and China would be the biggest economies, it is import to define the standard of measurement of the scale of economies. An economy has been defined as bigger than another economy is in term of GDP value. GDP refers to the measurement of the overall output in an economy in term of market value of the final products and services made by the economy (Un.org 2010). As shown in the chart above, according to the World Bank’s ranking, China and India were ranking 3rd and 11th in year 2009 by the nominal GDP value and both of these two countries are far away from the economy superpower, the United State, in term of GDP value. Below let’s focus on these countries separately to see how China and India can catch up with the United States in the next few decades.

 

2.1    Country profile

 

 

Chart 2.0 China GDP growth rate

Source: Tradingeconomics.com

 

Chart 3.0 China GDP value

Source: Tradingeconomics.com

 

As illustrated in the charts above and complied by the most recent data showing that in 2010 the GDP growth rate is expected to achieve 10% (Worldbank.org 2010), probably due to positive effect brought by the huge stimulus package that lasts from 2009 to 2010 to stimulate the domestic demand while the export decreases due to the slow demand from the developed countries. Anyway with the hopefully double digit growth and China will be almost definitely surpass Japan as the world’s second largest economy in the end this 2010 fiscal year with Japan’s just about 1% growth and the not large difference in GDP value last year between Japan and China, this ranking change is also supported by various media and research institutions (Cnn.com 2010). And in term of GDP growth, as shown in chart above, in the last 10 years term, China’s GDP growth has slowed down a little, but still maintains strong growth trend with average 9.55% which is astonishing to the world. If the current high growth rate could be kept then China will surpass the United States in the next few decades which will be discussed later.

 

 

Chart 4.0 India GDP growth rate

Source: Tradingeconomics.com

 

Chart 5.0 India GDP value

Source: Tradingeconomics.com

 

India though is only ranked in 11th in the GDP value ranking in 2009 with USD 1,296 trillion which is around just 9% against the GDP of the United States, but it is still widely recognized as the one of the most fast potential economies and a superpower in the future with its large future largest population and sustainable economic growth. As demonstrated in the chart 4.0 above Indian has an average GDP growth rate of 8.5% which is little less than that of China, but according to the view of Oxus Research and Investment chairman Surjit Bhalla, India will achieve a more than 9% GDP growth which China’s growth will decreased accordingly to about 8% in the near future (Financialexpress.com 2009). The most promising incentive that drives the Indian economy to maintain a fast growth is believed to be coming from its population growth. As the figure 2.0 below illustrates and complied by the various prediction that India will overtake China as the world’s most populous country by 2026 (Nelson 2010), without the similar population control like “one child policy” that had been adopted since the 1980s, Indian’s large young population will soon become labor force who with good English proficiency will become India’s most precious asset and thus sustains the country output in a fast growth trend. And weather could catch up with the United Stated in the few decades or even surpass China to be the largest economy in the future is still a popular topic in the field of economy and the this possibility would be examined below.

 

Figure 1.0 India population trend

Source: United Stated Bureau of the Census 1997, IPC, International Database

 

2.2    China and India in 2020

 

Figure 2.0 Top 10 biggest economies: 2010 VS 2020

Source: (Euromonitor Internationa 2010) from IMF, International Financial Statistics and World Economic Outlook/UN/national statistics

 

As the figure above shows, calculated by GDP in term of PPP, China would overtake United States to be the largest economy in the world while India is expected to overtake Japan to be the third largest economy as Japan probably would be trapped in a period of economy stagnation which could be worse due to is serious aging population that poses great burden to the economy.

 

Another proof that also supports the raise of India and China in the next decades to be leading the world’s economy comes from the dependency theory that tries to use one simple number (dependency ratio) to illustrate the future of the current economies. The dependency ration refers to the percentage of population that are not in the work age against the working population to describe how many of population actually are counting on the others to survive (Weinschenk 2010). And obviously a low dependency ratio contributes to the economy development more than a high ratio.

 

Chart 6.0 China dependency ratio from 1950 to 2050

Source: Investmentu.com 2010

 

Chart 7.0 United States dependency ratio from 1950 to 2050

Source: Investmentu.com 2010

 

 

Chart 8.0 India dependency ratio from 1950 to 2050

Source: Investmentu.com 2010

 

As illustrated in the three chart above, according to the dependency theory, in the new centaury the United States will face a gradual increase in the dependency rate which too some extent explain the slow economy growth that the largest economy will be struggling to improve, the this increasing trend in the dependency rate also decides that the US economy in the next few decades will be growing in a low pace. As for China that is enjoying the honey moon with the large scale of working population that forms the lowest dependency rate. And in the next twenty years the dependency rate will still in a relatively low level below 45% and with around two decade’s high growth China could achieve the no.1 in economy volume. But when the working population step into their retirement, the turning point of economy growth may show up. In India’s case, according solely to the dependency ratio trend with the decreasing dependency trend, there is reason to believe that an accelerated growth rate will push forward India’s position in the GDP ranking list. But such effect may become more obvious after 2020 since from 2010-2020 the dependency ratio is still as high as around 50 percent. But it will is reasonable to expect that China and India will raise as two dominant economies in the next few decades to lead the world’s economy development especially in term of growth.

 

3.        Analysis

 

3.1    Impact on United States

 

3.1.1            Difficulties in job creation

 

Chart 9.0 Manufacturing employment from 1941 to 2009 in the United States

 

As shown in the chart, the manufacturing employment has been declining since the 1980s  though the US manufacturing output grew the first time in 19 months in August this year (Bbc.co.uk 2010) according to a recent survey, but the decreasing trend of employment contribution from the manufacturing industry has been quite clear. What is more in 2009, the United States contributed 19.9% of the world manufacturing output following by China with 18.6% of the world factory output, and with the fast growth in Chinese manufacturing industry, it is expected that in 2011 the manufacturing crown will slip from US to China (Financial Times 2010). As shows in the chart below, the US unemployment rate has been keeping an average 5.62% especially during the period of economic crisis. When China and India surpass the United States and become the leading economic power in the world, two major reasons will deteriorate the unemployment situation in the United States: firstly, with the labor intensive industries transferring to China or the India because the huge low cost workforce, enormous difficulties will appear in keeping the unemployment rate low; secondly, raising service industries in the United States could abort the unemployed labor forces, but apparently the service industries could not hire the vast unemployed workers since the industries are not labor intensive fundamentally.

 

Chart 10.0 United States unemployment rate

 

3.1.2            End of US global dominance

 

As early as 2005 there was a CIA report predicting that the United States will lose its global dominance in 15 years away and regress back as an “important shaper of international order” with the raise of China, India and others countries (Kaplan 2005) as these countries will be trying to excerpt their power over formation of the new international order to benefit themselves as much as possible. The restructure of the international new order could be done through various platforms such as the United Nations framework by playing active roles, as we know China is the initiative founders of the United Nations as one of the five original founders with permanent member of the UN Security Council and it can uses more veto rights to restrict the influence of the United States which is not common nowadays. What’s more India is also one of the most populous candidates to enter into the new permanent member of the UN Security Council as one country that possesses nuclear weapons.

 

3.2    Impact on European Union

 

European Union (EU) was set up by six European nations with the initiative to form a common market and strong political force to add the bargaining power especially against the super power, United States after the second world war (Griffin & Pustay 2010, p301). European Union (EU) is currently the most important regional trading bloc in the world with the GDP of USD 16,414,697 millions in year 2009, around 2.3 trillion USD more than the GDP of the United States (International Monetary Fund 2009), like the United States, European Union (EU) will also face the challenges from the rising China and India.

 

3.2.1            Weakening R&D power

 

So far the United States and European Union (EU) are the leaders in the field of research and development (R&D), and this has been debated widely under the topic of “brain drain” saying that there is a trend scientists and researchers tend to move to Anglo-Saxon countries together with their studies and researching activities (Euractiv.com 2009) when developing countries focus on the other activities such as manufacturing. But there will be a shift in this trend according to a report released by European Union (EU) in predicting the future in 2025. The report, namely “The world in 2025: Rising Asia and socio-ecological transition, has predicted that there will be around 645 thousand Chinese students and 300 Indian thousand students studying abroad while there is another trend of increasing students and researchers from the European Union (EU) studying and doing researches in China and India and so China and India will double their current share in research investment to occupy 20% of the world’s R&D investment (Europa.eu 2009) and thus overtake the leaderships of European Union (EU) and the United States in term of R&D power.

 

3.3    Impact on Japan

 

3.3.1            Economy slowdown

 

Chart 11.0 Japanese demographic trend- birth and deaths

Source: National Institute of Population Research 2006

 

As shows in the chart above, in the new century the number of the deaths has exceeded that of birth and at the same time those born in the mid of last century have come to retime age and this trend has proved the fact that Japan is one of the most earliest and serious country troubled by aging population. Such serious aging population will increase the dependency ratio thus makes the social and economy burden more heavier. What’s more, the death rates could even be lower than the original prediction as the life expectancy has been anticipated to raise by 2.4 years between 2000 to 2020 for women according to the recent statistics (Deutsche Bank Research 2006). So for the accelerating slow economy, the problem is more internal caused rather than external sourced.

 

If the current trend continues, China and India would become two major leading economies in the next few decades, the position that Japan would have in the future would be worse if the relationship with China is still not well built. As know to everyone well that Japan had in war with China for centuries especially during the Second World War, hatred is not easy to forget as tens of millions of people are killed directly or indirectly caused by Japanese invasion. And most recently, Japan has been in cold war with China over the Diaoyu Islands, and there are large scale of protest against Japan which has not been widely reported since the media block by the Chinese government (Cnn.com 2010). But please notice that any demonstration if permitted to hold publicly with military suppression actually express the position of acquiescent from the government. And so in this point, reconciliation with China and Korea likewise would be critical for Japan to maintain its business relationship with these raising markets.

 

3.4    Impact on ASEAN

 

ASEAN, the abbreviation for Association of Southeast Asian Nations, was set up in the August 1967 and right now has ten member states under the same purposes to speed up economic growth, social progress and cultural development within the Southeast Asian countries (Aseansec.org 2009). With close corporation relationship that is being constructed between India, China and ASEAN, this will put ASEAN in a more advantageous position in the future economy development.

 

 

 

 

 

3.4.1            More cooperation with China and India

 

Chart 12.0 ASEAN’s trade relationship with P. R. China (Value in million USD)

Source: ASEAN Trade Statistics Database (Data as of July 2009)

 

As demonstrated in the chart above, the trade volume between China and ASEAN has been increasing during the term from 2004 to 2008, and the trade growth is expected to growth in an accelerated rate in the next few years as the average tariff of 93 percent of products will be reduced to 0% according to the treatment of the establishment of the China-ASEAN Free Trade Area (Ministry of Foreign Affairs, 2005). And on the other hand, another future economy, Indian, also start the dialogue relations as early as 1992. And soon such dialogue relations evolved from partial dialogue partnership in 1995 and later even lead to the first ASEAN-India Summit held in 2002 (Aseansec.org 2009). With the fast growing trend, if in the next few decades the economy growth of China and India become two leading power in the world, it will also foster the economic growth of ASEAN members by increasing corporations between India, China and ASEAN.

 

 

 

 

3.5    Impact on multinational corporations

 

3.5.1            International management and cultural differences

 

For multinational corporations that intend to extend their business in the domestic market in China or India, it is critical to realize the uniqueness of these two cultures which are quite different from the western business culture. Different business strategy is needed in these two countries. For example, traditional Chinese culture is a relationship based social system and business activities are heavily influenced by such relation based culture. Quanxi, the word which means relationship in Chinese, has been widely studied for its particular social and economic implications that it has for the business activities within the cultural environments. To expand the business in Chinese market or build up partnership with the Chinese counterparts, it is important to establish good “Quanxi” network with the local government officials and the partners especially the personal relationships with them as there is an old Chinese saying going like this: friendships first, business comes at a second priority”. And the rule “when in Rome, do as the Roman do” principle also applies for international business operations in Indian which has a more complicated and diversifed culture cultivated through thousands of years.

 

3.5.2            Customized international marketing

 

Though in the next few decades, let’s say 2020, China and India have become two major leading economies in term of GDP value, as there are no authoritative studies suggesting that the export oriented growth mode of China will have substantial change, but still the Chinese market and India market are of no doubt will become more than and important with the increasing purchasing power from these two countries. So it would be necessary for any multinational corporations to attribute enough of focus on these two large markets. The MNCs could customize their international marketing mix to better fit the customers’ need which is quite different from consumers from other markets due to a lot of factors such as the cultural differences. For example, in term of product strategy, for example many consumers might need to customize their product and services by design to better satisfy the target consumers’ preference.

 

4.        Conclusions

 

According to many of the recent studies and researches, some of them are from authoritative institutions, Indian and even China may not catch up the United States exactly in 2020, but as stated in the beginning, with the current trend of grow and the advantage of China’s and India’s low dependency rate, these two ancient countries hopefully would repeat their old history as the world’s largest economies that could be dated back to the 19 century. And the raising of these two Asian giants would have profound impacts on the world’s current super economic power such as the United States, EU and Japan as the shift in the ranking happens. And such change also means opportunities for the multinational corporations provided that they could enact appropriate business strategies such as customized product  design to conquer the challenges accompanying the opportunities.

 

 

Reference

 

Aseansec.org 2009, Association of Southeast Asian Nations overview, accessed on 6th Nov 2010 [online] available: http://www.aseansec.org/about_ASEAN.html

 

Aseansec.org 2009, ASEAN-INDIA DIALOGUE RELATIONS, accessed on 6th Nov 2010 [online] available: http://www.aseansec.org/14802.htm

 

Bbc.co.uk 2010, US manufacturing output ‘grows’, accessed on 6th Nov 2010 [online] available: http://news.bbc.co.uk/2/hi/business/8232083.stm

 

Cnn.com 2010, Security high in China after days of protest against Japan, accessed on 6th Nov 2010 [online] available http://articles.cnn.com/2010-10-19/world/china.anti.japan.protests_1_diaoyu-islands-boycott-of-japanese-products-japanese-embassy?_s=PM:WORLD

 

Cnn.com 2010, China poised to pass Japan as world’s No. 2 economy, accessed on 6th Nov 2010 [online] available:http://edition.cnn.com/2010/BUSINESS/08/16/china.economy/index.html

 

Deutsche Bank Research 2006, Japan 2020- the decline in trend growth is home-made: falling labor input and sluggish opening slow growth, accessed on 6th Nov 2010 [online] http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000202702.pdf

 

Euractiv.com 2009, EU sees China and India leading R&D by 2025, accessed on 6th Nov 2010 [online] http://www.euractiv.com/en/science/eu-sees-china-india-leading-rd-2025/article-185758

 

Europa.eu 2009, The world in 2025: rising Asia and socio-ecological transition, accessed on 6th Nov 2010 [online] http://ec.europa.eu/research/social-sciences/pdf/the-world-in-2025-report_en.pdf

 

Financial Times 2010, US manufacturing crown slips, accessed on 7th Nov 2010 [online] available: http://www.ft.com/cms/s/0/af2219cc-7c86-11df-8b74-00144feabdc0.html

 

Financialexpress.com ‘India to pip China in GDP growth’, 2009, accessed on 6th Nov 2010 [online] available: http://www.financialexpress.com/news/india-to-pip-china-in-gdp-growth/480870/

 

Griffin, R. W. & Pustay, M. W. 2010, International business, 6th edition (Global edition), Pearson education, Inc, Boston, p301

 

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Kaplan, F. 2005, 2020 Vision: A CIA report predicts that American global dominance could end in 15 years, accessed on 6th Nov 2010 [online] available: http://www.slate.com/id/2112697/

 

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