Washington, D.C., April 30, 2009
—India’s software-sector policies and China’s promotion of special economic zones for manufacturing suggest that well-designed sector-specific government policies can overcome weaknesses in the investment climate and allow developing countries to compete globally in new industries, according to a new study by IFC, a member of the World Bank Group.
The study, “
New Industries from New Places
,” offers important lessons for other countries hoping to emulate the success of India and China. It asserts that the two countries pursued policies to alleviate key bottlenecks such as access to power for manufacturing and broadband access for software companies, thus enabling globally competitive new industries to develop in spite of deficiencies in the national investment climate.
Those policies did not aim to pick winners by supporting specific companies, according to the study, which covered more than 300 software and hardware companies in India and China. Governments did not directly subsidize firms or offer protection against imports. Instead they offered tax concessions that lowered costs and reduced government interference in their businesses. In doing so, they laid the foundations for entire industries to emerge on a competitive basis.
China ranks 83
rd
among 181 countries on the overall ease of doing business, according to the World Bank Group’s
Doing Business 2009
report. India’s rank is 122. Yet China’s high-tech manufacturing industry achieved global competitiveness, as did India’s software and biotechnology industries.
"India has been taking Chinese lessons, and in recent years has moved in the direction of creating special economic zones to provide infrastructure and simplified regulation, thus enabling manufacturing to flourish." said Neil Gregory, a senior IFC executive and co-author of the book, which was co-published by Stanford University. "Meanwhile, China has been developing a strong software industry for its domestic market. Over time, expect India to increase its manufactured exports of hardware, and expect to see Beijing compete with Bangalore for your software spending." Gregory added.
The study also finds that China’s software industry, although less well-known than India’s, is set to expand its share of the world market. Similarly, China’s prowess in manufacturing exports rests largely on successful use of special economic zones to provide a good business climate, a strategy India is now emulating, and which promises to reverse India’s lagging status as a manufacturing base.
The study also dispels some common myths about China and India’s growth in IT manufacturing and services, including the role of expatriates and English language skills, suggesting that other countries can aspire to achieve global competitiveness in new industries even without some of the unique factors which benefited China and India’s IT industries.
About IFC
IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. Our new investments totaled $16.2 billion in fiscal 2008, a 34 percent increase over the previous year. For more information, visit
www.ifc.org
.
