091608 Tarunkhanna Interview

8/6/2019 091608 Tarunkhanna Interview

1/33http://knowledge.wharton.upenn.edu/india1

An Interview with Tarun Khanna, author of

Billions of Entrepreneurs: How China and IndiaAre Reshaping Their Futures and Yours India

China and India, the worlds two largest countries by population, sharea 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-ofce 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 Centerfor 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 whensomebody 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





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 longer-

term 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 themodern 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 aboutChina, 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 Iwant 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





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 conict 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 intentionalmiscommunication, 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 lms, 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 gaina 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 lms and songs and those sorts of things.

As in other parts of the world, youll nd 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





concierge to gure 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 awlessly 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 Indianshave 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 inuence, particularly in Asia, then Burma is the rst meeting point

for Chinese hard power and Indian soft power. I think the verdict there is veryunambiguous and Chinese hard power has won.

India Knowledge@Wharton: Absolutely.

Khanna: I think one can see limits of the inuence 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?


5/33





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 exibility,

and one could interpret exibility as openness. In other words, being open to

other inuences 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 exible in China is inexible in India

and vice versa, or what is open in China is closed in India and vice versa, and thatsreally 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

stratication 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 inuences 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 versionof inexibility, if you will, in China. That would be my interpretation without

anything ofcial 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





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 Chinesecompanies 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 bothfrom 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 ipping 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 rantdu jour, as you put it. And it will manifest itself in, basically, higher prices where

we need goods and activities, in the rst 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


8/33





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 nd that rms 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 reallya 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 rms, because those rms 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.





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 affectseverybody. 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.





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 ve-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, inefcient.

And even if you get your manufacturing act together, it still requires logistics. Itstill 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 contextof India?

Khanna: If one were to project candidate futures, in the next ve 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 speakwith exactly these same conundrums, which is, how can we, on the margin, at least

nd some way of instituting this change that appears so preposterously difcult 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





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 inuenced, as a simple

example, the corporate governance code that the Securities and Exchange Board

of India has adopted eventually. And that, in turn, has inuenced other parts of the

nancial markets, which, in turn, has inuenced 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 getto 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, isthat 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 ve 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.





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 identied 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 rst-order thing that needs to be addressed before India can makeany 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

identiedthings 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 thevoting 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.





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 rst 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 ina 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 rst 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 mind-

set 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 gure

out a way to give back in society.

And this is a worldview that is quite common in the United States. Its a littlebit of a luxury of afuence, 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 efciency, 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





that you make, in the neighboring regions of China and India, rst 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 rst theater of activity, if

you will, where Chinas and Indias goals have come into rst inadvertent and

then potentially direct conict. 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 theestimates 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 inuence. 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 itsstrategic 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 rst geographic theater where you see China and India coming face

to face, you see that India loses hands-down in terms of inuence. 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 inuence 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?





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 signicantly weakened by the time Chinese inltration 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 belosing 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 En-

Lai. Not so much an institution or a country, or not a reection of country strategy,

if you will. Its just that the deck of cards that Nehru dealt everybody proved to besuch 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.





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 byBP 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 asco 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 unied 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 pointof 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 qualications to this little dissertation. The





rst is that, when there is a competition in other theaters, conventional information-

based 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





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 rm 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 askedabout 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 rst time to buy

assets.

So thats probably the best systemic example of the use of hard power in some

sense backring in the West that I could think of.

India Knowledge@Wharton: I think you make a really valid point here. Thosecountries 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





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 nance 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 rst, 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 buildinggreat 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 conscations 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:


21/33


22/33





as a screening and a disciplining mechanism and an incentive mechanism.

And remember that its not inconsistent with giving incentives to people in thehierarchy, 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 ofcial 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

benets. 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 x that

political accountability measure? And I dont think the task is that one shouldthrow 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 difculty.

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.





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 modications 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 degreesof labor and capital ows, 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?





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 transnationalelites, 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 intriguingthought 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,





while India may become a strategic ally afar. There are a lot of inuential political

scientists that advance various avors of this view. What are your thoughts about

this?

Khanna: The rst 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

deciencies, or selling to the West as a way of earning resources, etc. But primarilythey 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 rst 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. Indiahas 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, populouscountries, 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 inuence relations with the U.S., or the Western world

in general.


27/33





that are realizing that what they are providing within China and Indiathat has

nothing to do with cross-border tradeare also things that could nd a market in

other large, populous, low-income countries. So Indians nding markets in China,

Chinese nding 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, micronance that is burgeoning in India and nonexistent in China. Some of

the Indian micronance rms 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 inChina 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 nancial services market, the service market, is more open in India.In many ways India is more open to nancial services, especially retail nancial

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 efcient, 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.





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 ination 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 ination. They would

rather have local companies doing this, so they are trying to put a lid on foreigninvestment 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





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 articially get around them. Thats the example.

In India, I guess, I know some of the micronance companies are actually very

interesting. In fact, some of the better micronance companies in India are, tome, 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-prot micronance

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 villageeconomy, which, in India, anyway, is sort of the last frontier, where development

has simply passed these people by. If they can gure 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 avor 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


31/33





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 ofces 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 serviceswhat 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 nancial 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] thatarbitration 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 andIndia, 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 nancial 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


33/33

Date post:	07-Apr-2018
Category:	Documents
Upload:	jillian-therese-dc-olazo
View:	215 times
Download:	0 times

091608 Tarunkhanna Interview

Documents