India, China show how to compete globally: IFC

India’s policies for the software sector and China’s promotion of special economic zones (SEZs) for the manufacturing sector suggest that well-designed and sector-specific government policies can overcome weaknesses in investment climate and allow developing countries to compete globally in new fields, according to a study by the International Finance Corporation (IFC), the private lending arm of the World Bank.

The study found that India and China pursued policies to alleviate key bottlenecks such as access to power for manufacturing and broadband access for software companies, enabling new globally competitive industries to develop in spite of deficiencies in the national investment climate.

Those policies did not aim to pick winners by supporting specific companies, said the study, which covered more than 300 software and hardware companies in India and China. These governments did not directly subsidise firms or offer protection against imports, it said, adding that instead, they offered tax concessions that lowered costs and reduced government interference in their businesses.

Neil Gregory, a senior IFC executive, said, “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.”

China’s high-tech manufacturing industry has achieved global competitiveness, as did India’s software and biotechnology industries. 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 exports rests largely on the successful use of special economic zones to provide a good business climate, a strategy India is now emulating, and which promises to improve India’s status as a manufacturing base, according to the study.