He has come up with a new vision on how companies should look at business opportunities in India and China. Tarun Khanna, Jorge Paulo Lemann Professor, Harvard Business School, argues in his illuminating book (Billions of Entrepreneurs: How China and India are reshaping their futures and yours) how the two countries are embracing the world on their distinct terms and initiating changes through new business models. He underlines the rise of India and China as an opportunity for both profit and hope and how the two neighbours should learn from each other. After obtaining an engineering degree from Princeton University and a PhD in Business Economics from Harvard, Khanna joined the faculty in 1993. He has served as the head of courses on strategy and international business and serves on boards of several firms in the financial services, life sciences and automotive sectors. In 2007, he was elected a Young Global Leader by the World Economic Forum.
Khanna in an interview to fe’s Saikat Neogi talks about opportunities for Indian companies in China, lessons companies can learn from the current economic downturn and cross-border M&A architecture for Indian companies. Excerpts:
India and China are expected to lead the next wave of innovation for affordable products and services. How similar or dissimilar will the two nations be in this aspect?
Companies in both countries would need to identify aspects of their immediate economic ambience that are not available in other countries. There are certain demands for goods and services that are not as obviously needed in the developed world. Financial service provides a good example. It is underdeveloped in both China and India. In India, for instance, there is a lot of discussion around financial inclusion, which needs to be enhanced. It means financial services need to be made more broadly available to the masses. There will be quite a lot of innovation in that area. The other area could be life sciences where patient recruitment for clinical trials, with appropriate safeguards and ethical standards, is proceeding apace in both countries. Even within life sciences, there are some things that you can do better in India and there are some things that you can do better in China. More and more innovation will take place in these two nations and whatever is unique in the two nations will be leveraged.
How crucial is it for Indian companies to have a China strategy and which are the sectors where Indian companies can look for business opportunities in China?
There?s a lot of potential between the two countries. The last 40-50 years have been an aberration but historically there have been a lot of cultural exchanges, trade exchanges and business exchanges between the two countries. It is very unusual anywhere in the world to have two large proximate countries that don?t trade with each other. Trade scholars have called this the gravity law of trade where two large countries near each other will inevitably trade. So, it?s rather unusual for large Indian companies not to have a China strategy in place; in some cases, I would even say it is short-sighted. Some Indian companies have been working in China for a long time. The Mahindras have a joint venture with Jiangling Motors Company Group in China since 2005, called Mahindra China Tractor Company Limited. The Birlas have operated plants in China for some time. NIIT runs training centres all over China and some software companies are setting up their China operations to source talent. It is prudent for every Indian company of size to be thinking about a China strategy as it has a potential market.
Post global meltdown, should China look at India through a different prism? Will the soft power between the two nations strengthen business ties?
Awareness of India is growing in China, but, at the end of the day, India is still small on China?s world economic map. The bulk of their trade is with the EU and the US, and China is one of the biggest holders of US treasury bills. I would rather think that economic relations between India and China will change not in response to the global meltdown or any global recession but because the fundamentals for symbiosis are in place, as long as the countries choose to nurture them. As far as soft power is concerned, if there is promotion of interpersonal ties between the two nations, it would be much more effective in the long run than an exclusive focus on formal diplomacy.
What are the challenges for Indian companies at home after the global meltdown and how do you think they can come out of the slowdown?
The slowdown is not as pronounced in India as it is in the west. Companies that are providing the basic services like financial services or elementary healthcare are not really affected by the global slowdown. The place for some concern is perhaps in the market for risk capital. Angel investors, private equity capital providers etc are sitting more on the sidelines. This will reverse in the years to come.
After the global financial crisis, what kind of cross-border M&A architecture should Indian companies build now?
Companies with a strong balance sheet should look at opportunities. There are not only good opportunities in the US, but also incredible opportunities in Africa and the Middle East, for instance. There are opportunities across all sectors. But there is one word of caution.
Indian companies would find it hard to compete with state-run corporations and in places where large deployment of capital is required. In general, Indian entrepreneurs should be asking not just where the opportunities are, but whether they are the best positioned to attack these.
A lot of corporate governance issues are cropping up with family run-business. How should firms cope with the challenges and how can they win back the trust of their stakeholders?
It’s been a dark phase in corporate governance all over the world with the Madoff scandal, financial meltdown, subprime crisis etc. India is not an exception to this. We should look at the process of corporate governance. Improvement in shepherding society?s resources requires continual scrutiny, adjustment and learning.
After Billions of Entrepreneurs, what is the next book you are working on?
There are couple of new book ideas that I am working on. One is about the diaspora population in the world like overseas Indians, overseas Chinese, Arabs etc, who have a major role in bringing change or catalysing change in their countries of origin and the social aspects of these communities and the interesting cross-border business they do. The other one is on rural economy in the world where three billion people live. What are the ways for urban companies to tap into this segment and help in social and economic change?