Eventually, at a third stage, Indian industry will have to be driven by innovation if it has to become world class. It will have to assume technology and process leadership. Japan and Germany are at this stage. Indian companies will also have to get bigger to be more competitive. Only large companies will be able to make sustained investments in R&D, match the marketing resources and global distribution capabilities of world-scale competitors, and be able to devote huge resources to training and upgrading of their employee skills. Smaller companies will largely play the role of ancillaries or suppliers to the large companies. In Japan, Sony, Panasonic and Toshiba routinely leverage the innovations of their component suppliers into the global market. Microsoft and Intel achieved global leadership on the broad shoulders of IBM. The success of Silicon Valley companies depended on AT&T and Motorola.

The proper role of the government in creating competitive advantage is as a catalyst. The government cannot create competitive industries; only companies can do that. But governments can encourage or even push companies to raise their sights. They can promote sustained investment in human skills and innovation through fiscal policy. They can ensure competition by reducing state and private monopolies, removing price controls and lowering tariff and trade barriers.

Ultimately, it is company leadership that achieves global advantage. A good company chief recognises the central role of change and innovation — and the uncomfortable truth that innovation grows out of pressure and challenge. This has rich implications for our education policy. How do we get our best talents into export industries like tea, gem-cutting, leather, readymade garments, software? If we value exports then we must attach prestige and rewards to working in them so that young talent will be attracted to them. As Porter says, ‘nations tend to be successful in activities and industries that people admire or depend on the activities from which the nation’s heroes emerge’. Japan’s heroes work for Toyota, Sony and Honda; German heroes work for BMW, Audi and Mercedes. While we did not have national heroes in our traditional exporting business, we did begin in the nineties to make our software warriors into national icons. People like Narayana Murthy and Premji increasingly became role models for the young. This is a welcome development.

‘Indians are among the brightest people on this earth,’ said a German statesman in a candid discussion at Davos in the early nineties, ‘and yet India can’t seem to take advantage of the global economy. Why can’t Indians understand that there is only one game in town? Those who learn to play it well will make it in the twentyfirst century; others will be left behind.’ That game is, of course, exports, and no nation in modern times has grown rich or economically strong without becoming a successful world trader. India’s finest economic years since Independence were between 1993 and 1997. It is not surprising that exports also boomed, increasing twenty per cent a year during the period.

India and China had the same level of exports in 1971 — around $ 13 billion. By 2000, China’s exports had crossed $ 200 billion and India’s were languishing below $ 50 billion. The trade numbers, more than anything else, explain why the world respects China and ignores India. By now most people have realised that East Asia’s miraculous success was built on exports. But few realise that to be a top exporter you have to be a top importer. The world’s top fifteen exporting nations are also the world’s top fifteen importing nations — and virtually in the same order — according to WTO data. This makes sense: the more output you want, the more input you need. Since no country makes everything (or should make everything), they import them.

Ignore Pakistan, heed China

A few years ago, the respected head of a multinational company observed the unreal quality of our public discourse. He said that he had read our newspapers voraciously for two weeks and for every report on China he had counted eight on Pakistan. ‘To the world at large only China and India matter in Asia,’ he said. when people say that the twentyfirst century will belong to Asia, they have China in mind, and then India. Japan doesn’t count, because its demographics are wrong. Pakistan doesn’t even exist in the big picture. Although China is currently ahead, India is the only country that could counter-balance it. I realise Pakistan is your neighbour, but so is China.’

Listening to him I was reminded of one of sage Patanjali’s aphorisms: ‘What a man thinks, so he becomes.’ Patanjali was referring to controlling our thoughts during meditation, but what is true for an individual is also true for a nation. We are obsessed with Pakistan and so we will become like Pakistan — a failed economic and political state. Instead, we should engage with China, the most dynamic economy in the world for two decades. Pakistan is a distraction and pulls us down. China will push us up. What can China teach us? The first lesson is to have clear national objectives. For twenty years, China has had only one objective — to become an economic superpower and lift its people out of poverty — and it is pursuing it single-mindedly. Nations, like individuals, perform best when they are one-pointed. The Chinese have learned that law and order, speedy justice, political stability — all good in themselves — also promote growth by creating a sound climate for investment. Chinese leaders wake up in the morning and they think only one thought — the prosperity of their people. What do our leaders think about?

The New York Times reported in January, 2002, that there were five Chinese delegations in Bangalore in the previous month alone, trying to understand India’s success in software. ‘They have beaten us in everything, now they also want to defeat us in software,’ the CEO of an Indian company, who had refused the Chinese entry into his premises, was quoted as saying. Premier Zhu Rongji visited Bangalore the same month to woo Indian companies to come to China. He went to Delhi not to talk about Aksai Chin or Pakistan but to establish a Beijing-India airlink.

‘Foreign investment has been the fuel behind the Chinese miracle,’ reported the Wall Street Journal. ‘Every dollar of foreign investment yields five dollars of additional output to the Chinese economy. That compares with less than two dollars in the state-owned sector.’ More than fifty per cent of China’s phenomenal exports come from foreign enterprises. Even assuming that seventy per cent of Chinese FDI is from non-resident Chinese, the thirty per cent that is not is four times larger than ours. Yet Indians are the ones who fear foreign investment. Our concerns over swadeshi reflect our inferiority complex and our lack of confidence in our ability to compete in the global marketplace. How did the notoriously insular Chinese manage to change their attitude to foreign capital? China realises far more than we do the enormous potential of global capital for creating wealth and eliminating poverty. That is why it is wooing it with much greater vigour and effectiveness. Once investors come to China, they are more hospitably treated by the government. The Chinese government also targets specific multinational companies and goes after them single-mindedly. This is a second lesson China can teach us: how to get more foreign investment.

Why China is growing so fast is the result of a phenomenal rise in labour productivity, according to a study by Zulin Hu and Mohsin Khan of the International Monetary Fund (IMF). They trace this not only to foreign enterprises, but also to Chinese town and village enterprises, ‘which have drawn more than 100 million people from low productivity agriculture into higher value-added manufacturing.’ Started initially as simple agricultural processing factories, many are now world-class exporters, China’s reforms started from below — unlike ours — and the third lesson we can learn is to shift the focus of our reforms on to agriculture and the village.