The scorching pace of expansion in exports of hi-tech manufactured products from China and software and IT-enabled services from India, has supported the view that `knowledge capital' plays a crucial role in the growing global presence of these countries. C. P. Chandrasekhar and Jayati Ghosh discuss the empirical basis for that assessment.

C. P. Chandrasekhar
Jayati Ghosh

According to official statistics, China continued to grow at a scorching 10.2 per cent during the first quarter of 2006


the corresponding period of the previous year. India closely followed China's performance, with GDP growing at an estimated 8.4 per cent during financial year 2005-06. These figures, while concealing much in terms of the distribution of that growth, keep alive the fears of the threat from these two Asian giants to growth in the rest of the world, including the developed countries.

The threat is seen as particularly serious because of indications that exports are an important source of dynamism in these countries and that "knowledge capital" has come to play a crucial role in their export dynamism. In both countries the ratio of exports of goods and services to GDP has risen quite sharply in recent years (Chart 1).

In 1978, when China's reform began, that ratio was more or less the same in India and China, at around 6.5 per cent. Since then the figure has risen sharply in China, to touch 34 per cent in 2004, and much more slowly in India to just above 19 per cent. While much of the expansion in exports in the Chinese case has been on account of exports of manufactured goods, that in the case of India has been principally on account of services (Chart 2).

Between 1985 and 1995, the ratio of goods exports to GDP rose from around 8 per cent to 18 per cent in the case of China, and from 4 per cent to 9 per cent in the case of India. But after that, while the figure for China shot up to 26.7 per cent in 2003, it remained short of 10 per cent in the case of India. Relative to GDP, it is the growth in services exports that explains India's more moderate trade success. Add to this the important role of private transfers, or remittances from non-resident Indians, and the relative resilience of the current account of India's balance of payments in the context of a rising oil import bill is explained.

Effect of larger exports

Larger exports and/or a higher rate of expansion of exports can stimulate growth because of positive net exports or a trade surplus that serves as the demand stimulus and inducement to invest for an individual country. Even if not recording a large trade surplus, successful engagement in trade allows a country to dissociate the structure of domestic supplies from domestic production. This permits using the possibilities of transformation through trade to ensure availability of adequate quantities of commodities crucial to growth. Export revenues may be crucial in financing imports of specific commodities that are essential for consumption without running into balance of payments difficulties. Typical examples of such commodities are food, machinery and oil.

At the aggregate level, of course, it is only China that appears truly mercantilist, exporting more than it imports and accumulating wealth in the form of foreign reserves. In the year to March 2006, China recorded a trade balance of $108 billion and a current account balance of $161 billion, taking its gold and foreign reserves to a record $875 billion. On the other hand, India recorded a trade deficit of close to $40 billion and a current account deficit of $13.3 billion. However, capital flows, especially portfolio capital flows into India's debt and equity markets helped it keep reserves at $145 billion. In sum, the role of net exports as a trigger for growth appears to be true for China, but not so for India. But if current transfers into India, consisting largely of remittances from Indian workers abroad are treated as a form of services income, then the deficit on India's balance of trade reduces substantially.

The rapid expansion of exports has been accompanied by high rates of GDP growth, improving the presence of these two countries in the global economy. Measured in terms of prices prevailing in 2000, China's share of world exports of goods and services was 5.8 per cent in 2003 (up from 1.4 per cent in 1978), and though India's share was just 1 per cent it was up from 0.4 per cent in 1978. In terms of constant price GDP, China accounted for 4.6 per cent of global GDP in 2003 and India for 1.6 per cent, both up from 0.9 per cent in 1978.

A figure of relevance here is the relative size of GDP in these countries, measured in terms of purchasing power parity (PPP) dollars, which is an indicator of the buying power of the Indian and Chinese populations. Measured in those terms, China accounts for 13 per cent of global GDP in 2003 and India for 6 per cent. This compares with 2.9 and 3.6 per cent respectively in 1978. Thus the rest of the world is benefiting from a growing market in these countries.

The role of trade in facilitating growth in the countries, explains in large part the perception that they threaten global growth, including that in the OECD countries. To boot, while China seems to be emerging as the manufacturing hub of the world, India is proving to be the global services hub. And each of these countries has an eye on the terrain occupied by the other. In the circumstance, evidence such as China's large trade surplus with the US only strengthens perceptions of a major economic threat.

Exploiting opportunities

In addition, there are reasons to believe that the success of these countries stems from their ability to exploit the opportunities created by the new knowledge economy. Manufacturing areas that the World Bank defines as hi-tech account for a significant share of China's exports.

As Chart 3 shows, hi-tech exports from China exceed those from all countries except the US, including Germany and Japan. Similarly in the case of India, software services, identified as hi-tech services account for a significant share of services exports. IT services exports are estimated at around $16 billion currently. What is more, in terms of indicators of technological competitiveness reported by the National Science Foundation of the US, China and India rank well when compared to some European countries and many developing countries,

However, it is necessary to differentiate between knowledge in the production of goods and services and knowledge for the production of goods and services. While knowledge is being applied in production in these countries, the US still monopolises the control over knowledge. This comes through from evidence of various kinds.

To start with, even relative to their own GDP, China and India lag far behind the developed countries in terms of R&D expenditure. While the figure is close to 3 per cent in the case of Japan and the US, and between 2 and 2.5 per cent in France and Germany, it stands at 1 per cent or lower in China and India (Chart 4).

According to the UNCTAD's

World Investment Report 2005

, individual firms such as Ford, Pfizer, DaimlerChrysler, Siemens, Toyota and General Motors each spent more than $5 billion on R&D in 2003. In comparison, among the developing economies, total R&D spending exceeded $5 billion only in Brazil, China, the Republic of Korea and Taiwan Province of China.

Licensing the use of this knowledge ensures significant revenues to firms from the US, far exceeding that received by other countries (Chart 5). What is noteworthy is that both receipts and payments of royalties in the case of the US are in transactions with affiliated firms. That is, the US is reaping the benefits of its control over knowledge through transactions conducted with affiliates abroad (Table 2).

Foreign funded enterprises

It is for this reason that we need to examine the role of foreign firms in the export performance of India and China. According to George Gilboy (

Foreign Affairs

, July/August 2004), foreign-funded enterprises (FFEs) accounted for 55 per cent of China's exports in 2003. This dominance increases in the case of hi-tech exports. The share of FFEs in exports of industrial machinery, which stood at $83 billion in 2003, increased from 35 per cent to 79 per cent over a decade. While exports of computer equipment rose from $716 million in 1993 to $41 billion in 2003, the FFEs' share rose from 74 per cent to 92 per cent. Similarly, the share of FFEs in China's electronics and telecom exports ($89 billion in 2003), rose from 45 per cent to 74 per cent.

The situation appears to be similar in the case of IT services exports from India.

According to Nasscom, offshore operations of global IT majors accounted for 10-15 per cent of IT services and BPO exports and captive BPO units accounted for 50 per cent of BPO exports. Further, MNC-owned captive units have been scaling up their operations steadily with the headcount forecast to grow by at least 30 per cent this year.

Thus, foreign firms with control over knowledge appear to be exploiting the availability of skilled and educated labour in these countries. What is more, there is evidence that the best talent is being used to strengthen control over knowledge. According to the National Science Foundation, of the approximately 280,000 foreign graduate students enrolled in US universities, 63,013 were from India and 50,796 from China. Further, of the 37,608 non-US citizen who received doctoral degrees in 2002-03, 10,089 were from China and 3,238 from India. Two-thirds of these students had definite plans to stay back in the US and another 20-25 per cent was considering the possibility of staying back. The US has become a destination for some of the best talent from these two countries.

Internationalisation of R&D

Finally, even to the extent that talent remains in the developing countries, there are signs that through a process of internationalisation of R&D operations, transnational firms are exploiting that talent to retain control over knowledge. According to the UNCTAD's

World Investment Report 2005

, transnational corporations (TNCs) account for at least 70 per cent of global business R&D. In 2002, the top 700 R&D spenders reported R&D expenditures of more than $300 billion.

A rising share of these companies' R&D expenditures are undertaken in developing countries. Between 1994 and 2002, the developing-country share of all overseas R&D by US TNCs increased from 7.5 per cent to 13 per cent. As of now, more than half of the world's top R&D spenders conduct R&D activities in developing countries.

In India, leading firms such as Intel, Microsoft and Adobe have R&D operations within the country. In China too, the trend is clearly visible. According to the

Wall Street Journal

, almost all the global giants in the automobile, telecommunications technology, computer, software, machinery, electronics, biotechnology, pharmaceuticals and other major industries have made R&D investments in China. These companies include General Electric (GE), General Motors, P&G, Unilever, Microsoft, Intel, IBM, Motorola, Siemens, Ericsson, Nortel, AT&T, Lucent Bell and Samsung.

All these developments suggest that even while China and India are important bases for knowledge-based production of exportable goods and sources, important beneficiaries of this development are transnationals from developed countries, even if not the mass of the workers in these countries who fear job losses. This implies that as yet countries such as India and China are locations that serve as instruments of battle for transnational firms. The war among the latter results in strategies that may be threatening extant or future employment in the developed countries.

But when faced with that prospect it is not India and China that need to be feared by developed country citizens, but their own home-grown transnationals who have taken wing.

(This article was published in the Business Line print edition dated September 5, 2006)
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