Key players in the world economy

what will be the likely impact of the growing economic power of China and India on individuals, national and multinational firms in the 21st century?

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India and China

  • India & china are part of BRIC economies.
  • Brazil, which exports huge quantities of commodities such as iron, oil, soya & coffee
  • Russia, vast energy reserves, are v.different from each other & from India & China
  • elsewhere countries are also changing rapidly e.g Indonesia & s.east asian countries
  • China & India have a profound impact on the global economy.
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Diagram

DRAW

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World output

The diagram uses purchasing power parity (PPP) data to compare incomes in China & India with the developed countries. This makes for realistic comparison because it adjusts the data to allow for the fact that prices are generally lower in developing countries than developed countries. Using unadjusted exchange rates to compare incomes in different countries usually make the differences look even bigger than they actually are

PPP is a way of adjusting values to allow for differences in prices between countries. The cost of living is lower in India than USA. 1 USA dollar will buy more in India than in the USA, hence the adjustment to make it comparable. In other words $1527 in India will buy the same amounts of goods as $3703 in the USA

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Superficially, it is tempting to see India & China as being similar. They both:

  • have a v.large populations
  • are emerging from poverty
  • have phenomenal growth rate (by western standards)
  • are becoming increasingly powerful in economic terms
  • are privatising their state-owned enterprises
  • are trying to reduce big regional variations in average incomes

But digging a little deeper, the differences between them become much more apparent.

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Population size- India

  • within the next 2 decades, India, currently the world's 2nd most populous country, is expected to surpass China in population
  • India added more than 181 million people to its population in the past decade, thats more than the population of Brazil, the world's 5th most populous country
  • in the future its population will be younger than China's & more able to push up economic growth & fill job vacancies & army ranks
  • however this will only be a benefit if India can improve its current educational standards
  • some fear than India's growth rate may not be enough to benefit all of its ever increasing population
  • there will be increased pressure on land & food resources
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Population size- China

  • China is the world's most populous country, almost 1 in every 5 people on the planet lives in China
  • its population growth has been slowed by its 1 child policy (most urban couples are only allowed 1 child)
  • the result is a population bulge called the '4-2-1' phenomenon, in which just 1 child has parents & 4 grandparents
  • by late 2019, China's population is expected to reach 1.4 billion. around 2030 China's population is anticipated to peak & then slowly start dropping
  • this will have implications for China's manufacturing sector because it reduces the no. of workers available.
  • ageing of the  population will narrow the supply of labour, put pressure on wages, reduce capacity to save, change industrial structure & the composition of trade
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Population Trends

these population trends could change. In general, birth rates tend to fall as incomes rise. But ageing populations in many countries are likely to have effects that are as yet v.difficult to predict. also, for both countries the no. of boys born is higher compared to the no. of girls. If this trend continues, it will eventually have long term consequences that cannot be predicted.

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Economic growth & predicted economic power

The growth rate of both countries over the last 20 years or so have been extraordinary, although both economies have been slowed by the credit crunch & the recession in many developed countries. But keep in mind that there are also many other fast growing emerging economies. Brazil's economy is expected to be bigger than any Europe by 2020, when it is expected to overtake Germany. It will become the world's 5th biggest economy. it grew by 7.5% in 2011 after comfortably weathering the financial crisis of 2008 & 2009.

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Comparing growth rate

Expectations about both India & China's growth rates are rather uncertain. Current forecasts are based on the assumption that little political change is expected - and this may be unrealist.

India

  • In the 3rd quarter of 2011 India's growth rate had slowed by 6.9% which was the lowest since early 2009 & well below the Gov's predicted rate of between 8-9%
  • Nevertheless the average annual GDP growth from 2004 until 2011 was 8.4% reaching a high 10.1% in Sept 2006
  • economic growth is expected to lift 367 million people out of poverty by 2015
  • India could get close to the GDP level of the USA by 2030. around 2020 India's GDP should pass the economy of Germany & around 2025 India should pass Japan
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Comparing growth rate- China

  • in the 3rd quarter of 2011 china's growth rate slowed slightly to 9.1% in the 3rd quarter,  from 9.5% in the 2nd quarter
  • China's average annual GDP growth from 1989 to 2011, was 9.3% reaching a high of 14.2% in December of 1992
  • Several hundred milion people have been lifted out of poverty, and living conds have improved for many more people in a shorter time period than ever before
  • despite current problems the growth rate is expected to continue to be strong. estimates vary but China is likely to become the world's larget economy by 2020
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The development process

there are some clear differences in the make-up of each country's GDP. Below digram shows that China's strengths lies in its manufacturing sector. India has far fewer resources engaged in manufacturing but more in agriculture & the service sector.

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Why did the 2 countries develop differently?

As the Chinese gov sought to liberalise its economy in 90's, it created opporunties for western businesses to outsource some of their production. They could take advantage of Cheap Chinese labour, cutting costs & prices

  • Offshoring created many manufacturing jobs for the Chinese & helped to raise incomes there. Specialists in supply chain management sprang up, 1st in Hong Kond and than elsewhere, businesses that could help customer companies to find appropriate suppliers. at first Chinese employees had to be trained in the skills they needed but in time, the workforce came to include many highly skilled people. Rising Chinese wages created a consumer market within China itself, a further stimulus for the manufacturing sector
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Supply chain management means organising the sequence of processes that leads to the sale of the final product. The supply chain may have many different suppliers, often located in different countries. Managers must locate the supplier with the greatest competitive advantage so that costs are minimised

  • the India gov has in the past been less keen than China to encourage foreign business involvement in its economy. Also, there were many regulatory obstacles that hindered new business start-ups. but india has a good supply of engineering & it graduates.
  • india's IT specialists set up v.competitive business that could export IT services; the best known is Infosys. As it became possible to supply IT services remotely, Infosys & other firms in the IT sector brought in v.signifiant export revenues
  • perhaps because India has created fewer manufacturing jobs than China, more people are still engaged in agriculture- reflecting India's general level of economic development. As india develops more areas of expertise & more jobs are created in the cities, this will change
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Balanace of payments

Imports & exports

Since 2000 Chinese & Indian exports have risen by an average of 20% a year. China is now the larget exporter of Information & Communication Technology products & India dominates the market for off-shoring of IT business services. As their economies have grown, Chinese & Indian imports of goods and services have both rise rapidly. Both coubntries have reduced tariffs (import duties) on imports

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  • China runs a v.large balance of payments surplus, and has done for many years. In simple terms China exports much more than it imports. This suits the Chinese gov because it keeps the exchange rate low & this contributes to the competitiveness of Chinese exports. This is important because China needs to create more jobs for the massive no. of Chinese people who are still poor
  • China balances this trade surplus with large capital outflows. It invests overseas in factories, mines and other businesses & lends to govs e.g US
  • the UK imports over £30 billion-worth a year from China but exports less than 1/2 that to China. UK companies have often found it hard to break into Chinese markets. However, UK exports to China have grown on average by 19% a year since 2002, & there are big plans to sell more
  • India tends to import more than it exports. many UK companies have strong links there, some of them based on the old colonial relationship. since 2002 UK exports to INDia have grown by 14% a year

Like China, India has a plentiful supply of people willing & often happy to work for low pay. Many UK comapnies benefit from traditional links with India but China was the 1st to offer significant off-shoring & this means that India has lagged behind in terms of development of the manufacturing sector.

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Increased purchasing power & foreign investment

With increased growth & increasing wealth comes the ability to spend & invest. Both India & china are increasing the amount of foreign direct investment (FDI) outflows to other countries. China in particular wants to secure future supplies fo essential raw materials & is using FDI to do this

  • in 2010, China's FDI reached $57.9 billion nearly 20 times 2003 levels, & accounted for over 5% of global FDI. Since 2007 Australia has become one of the world's larget destinations for CHinese FDI although this is mainly concentrated in minerals & energy resources
  • in 2009-10 China was the 6th biggest source of FDI in the UK; there was a 25% increase in the no. of projects, leading to a 76% increase in jobs generated
  • the majority of CHina's FDI goes to the Asian region & fellow ASEAN memebers, but CHina is also v.active in buying & developing mineral rights in Africa

India has emerged as the world's 21st largest outward investor & it is now powerful enough to acquire some of the world's leading companies

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Entering new markets

Barriers to market entry

Both India & China has introduced wide ranging economic & financial reforms since the 1990's to make their economies more accessible & to modenise them

  • both India & China can be hard markets to enter. there are considerable differences in the culture, society & language which have to be overcome
  • in China, it can be hard to compete with state-owned enterprises which have gov subsidies
  • to start with, both countries insisted on joint ventures before allowing western firms to enter their markets. This is no longer the case although certain sectors are still safeguarded in this way. Both countries now allow wholly foreign owned companies acces to their markets. nevertheless joint ventures are still usually seen as the most viable way of entering the Chinese & Indian markets
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Joint ventures involve collaboration between 2 businesses. Typially 1 will provide finance from abroad, while other provides the local contacts & know-how to get the business going. Can be particularly helpful in recruiting suitable employees & dealing with local regulation. In China they help to ensure that relevant permissions can be obtained from the local Communist party

  • despite reforms & other progress, it is still not easy to enter these markets. the world bank ranks China & India 83rd and 122nd easist places to do business in the world. Corruption & bureaucracy are still siginficant issues
  • protection of intellectual property rights remains a major issue for many firms operating in China & India; enforcement measures are often inadequate
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Structural Change

Impact on individuals and businesses

Key conmsequences of the growth & development of China; & India arise from the impact of strong comp. Cheap manufactures have been produced- consumers saw the prices of many household appliance & electronics fall. they also gained from a wider choice of many products. to some extent, the relatively stable rates of inflation in the UK & elsewhere throughout th 90's & earlt 2000's can be attributed to cheaper imports from China. they had the effect of cancelling out rising prices elsewhere. they helped to increase real incomes significantly

there is considerable impact on individuals whose employers are affected either negatively or positively by the growth of these economies. some will find jobs businesses that can expand exports to emerging economies, while others will lsoe jobs when their employers cannot compete with imports/ want to produce off-shore

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Positive outcomes for individuals

  • lower prices
  • more choice
  • job opportunites increase when real incomes rise

Negative outcome for individuals

  • jobs lost where comp from imports it stiff/ employers outsource/ produce off-shore
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Businesses may see the increasing power & welath of emergin economies as either an opporuntity or a threat. others may see little change, depends on what business produces

Opportunties

  • access to new export markets & increaisngly welathy consumers- rapid growth
  • access to new skills e.g IT in India
  • offshoring & reducing costs
  • access to new trade areas e,g ASEAN
  • FDI inflows from growing economies e.g Tata

Threats

  • comp from producers with lower costs
  • reduced market power where comp is stiff
  • rising costs for commodtities & energy driven up by rising demand from India, China etc
  • china's low exchange rate makes it more hard  to compete
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Trade opportunties for UK & other firms

there are fantastic opportunties. by 2020 & wthin the course of 1 decade, real consumption will have double to $4.8 trillion & China will then be the world's 2nd biggest consumer market after the US. other emerging economies will also create opportunties

by 2020, India is expected to overtake China as the world's fastest-growing economy. The country;s 50 million strong market of English-speaking, middle-class consumers is predicted to mutiply tenfold over then next 15 years, creating many opportunties for UK companies into this surge in demand for infrastrucure, tech, education, consumer goods, media & service

However these opportunties are not always easy to exploit. Businesses have to be nimble & adaptable, capable of finding new ways to compete effectively. Demand in emerging economies may be affected by weak export markets in Europe & the USA, if recession continues

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Trade opportunties- China

  • C in particular has demanded increasing quantities of raw materials & energy supplies. Prices have risen considerably & for those businesses involved this has been a period of expansion & increasing profitability. Australia has managed to avoid the worst of the recent downturn because it has large reserves of the mineral & energy resources that China needs
  • increasing growth rate goes hand in hand with increasing incomes & in particular increasing no. of v.welathy consumer. China now has a million millionaires & they are v.keen on branded luxury goods. In a recent survery LVMH was voted top luxury brand, than Hermes, Chanel & Armani. English schools are apparently favourite desintation amongst Chinese billionares for their children's education
  • chinese consumers can be quick to adopt what were once unfamiliar products, opening up whole new areas of growth for foreign businesses
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Trade opportunties- India

  • the I gov is planning to invest £600bn in infrastructure projects over the next few years, from roads & railways to the urband built environment, all areas in which the UK has many world-class companies & a tradition of exporting to India
  • the manufacturing sector is expanding rapdily too, led by companies such as Bharat Forge, Tata Motors & mahindra. this provides opportunties for British engineering firms, many of which have developed successful high-end tech operations in India
  • UK businesses that specialise in pharmsceuticals, advanced health care, diagnostics & medicate quipment should do well as the India healthcare sector expands
  • the entertainement & media sector, fuelled by rising income level among India's youth, is expected to be woth £15bn by 2014, crreating more opportunties for UK tech & content business
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introduction

When thinking about global sourcing it is helpful to look at the production process as a supply chain. this starts with the purchasing of the inputs follows through the process of creating the product, moving the product to the point of sale & finalising the payment process. Inputs will come from a wide range of sources. for each input there will be alternatives. starting with raw materials, they can usually be bought in from a range of posb suppliers. components can be produces by the company, in-house, or they can be bough in from other businesses. the capital equipment & the labour needed in the production process can be part of the company. but equally, the production process can be contracted out to an independent business - outsourcing

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Supply chain the sequence of processes which starts with acquiring the most basic inputs & ends with delivery of the product to the customer

Outsourcing means buying neccesary inputs from independent suppliers, either in the same country/ abroad. it can apply to components, complete products or services such as IT

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Diff produc

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