Article :: Dragon vs. Tiger: China or India, who will become the next economic giant?

   The 20^th century was hailed as the century for capitalism and democracy, and the economic dominance of the West, in particular the United States and Europe. As the 21^st century begins, there is a new area of the world that is drawing interest with its economic achievements. With the exception of Japan, the Asian economy throughout the 20^th century was weak and stagnant with little growth and poverty ravaging the region. Towards the end of the last century, many Asian economies began to make changes and reform their economies, and the results of the reforms have been in large part positive.

   The two most populous countries in Asia are China and India. Both nations boast populations over one billion and together they account for over a third of the world's population (15:1). For such an immense market, the economies of both countries are not developed and have low GDP per capita. However, many observers are proclaiming the 21^st century as the Asian Century with China and India leading the economic rise of the region (15:1). Economists and finance professionals are undeniably looking at China as becoming a major economic power in the new century, but many are also keeping a close eye on the rise of the Indian economy. Many observers believe that both economies will rise to become a dominant economic power, and believe that the race between China and India to become an economic power is wide open.

   This paper will attempt to bring some clarity to the discussion on which country will rise the fastest and become the next dominant economic power. The discussion will focus on four important areas of the countries that will help find an answer. The first section will focus on the Governments in both countries. The two countries have different political setups, yet both countries have proven to have the ability to accelerate growth in their economies. The second section will focus on the comparison of the two nations' Banking sectors. The third section will discuss the Financial Markets of each country. The Banking and Financial sectors of any country are the fundamental backbone of a strong economy that is capable of sustaining long-term economic stability.  The fourth section will focus on the Foreign Direct Investment, both inward and outward, of each country. The conclusion will follow where a decision will be made based on the discussion, and a country, either China or India, will emerge as the next dominant economic power.     

Government 
India

   The Indian political setup and government is a democratic one. This poses certain benefits as well as barriers for the acceleration of growth of the country's economy. The obvious benefit is that the democratic process allows the people of India to choose whom they want to run the government, and consequently the government has limited control over the people. The governmental setup of India may be one of freedom, but its economic setup was socialist until the economic reforms began in 1991 (1:183). The government did not control all business. They controlled the core industries in the economy through state-owned companies (15:4). This socialist policy created inefficiencies and retarded the overall growth of the economy, which prompted the 1991 reforms. The reforms were designed to open the Indian market to foreign investment as well as selling some of the state-owned companies to private investors.

   Due to the democratic nature of the Indian government, India does not have a clear-cut strategy for achieving the goal of becoming a global power. Instead, the economy is relying on the principles of an open market. The main champions of economic growth in India are its entrepreneurs. India's talents in the Information Technology and other knowledge based industries, is the engine behind the growth of the economy (15:1). This means that India does not have a pre-determined date for its inauguration as a global power, it is simply letting the people and markets decide how soon and how strong the economy becomes a global power.  One can compare the Indian scenario to the rise of the current number one global power, the United States that also relies on the people and market to determine the state of the economy. This may mean the economy will rise eventually, but that the economy will be one that is self generated, and will likely be more durable than an economy that is planned out.

   The problem with a democratic polity is its slow implementation of policies. Democracies often create unnecessary bureaucracies, which add to inefficient implementation of policies (12:458). Another problem is that the power in a democracy essentially lies in the hands of the people, or the voters. Voters often oppose decisions made by the government even though the decision may be good in the long term. A democracy is designed to account for the well-being of each individual, and often this system does not allow the government to make decisions that may adversely affect some people but is for the good of the nation as a whole.

   A prime example of this problem is the Sardar Sarovar Project. The government of India made a decision to invest in a dam project that would help generate hydroelectric power for a large part of India. The project is constantly being hampered by activists who claim that the project is an environmental hazard as well as causing resettlement problems for the people who will be displaced (5:304).

   In the Indian democracy, freedom of press has allowed the activists to make people both in India and internationally aware of the project and its flaws. The constant negotiations between the government and the activists, has caused major delays for the project, whilst energy supply is failing to keep up with the energy demands of the economy. Economically this is hampering industry as the costs of energy keep rising. The freedom of press is good in the sense that it allows people to voice their concerns however, it is also retarding the overall growth of the economy. While the government wants to use a utilitarian approach, sacrifice a few for the good of the whole, democracy is getting in the way. 

   The advantage that India has is that it is a democracy and will likely be a democracy for a long time. The people of India by law enjoy more civil liberties than countries where communism governs. There are certain states in India that still have communist parties however, these parties are elected into government by choice of the people of those states. India will not have to make a transitional change in the basic structure of its government since it is already a democracy and the people have a say in who they want in government. Since there will be no transitional stage, there will be no change in the civil liberties of the people and certainly the social structure will not change, and the economic structure should only change for the good based on what the people want.

China

   The Chinese government and political system is communist. Since the communist revolution in China, its economy was closed to the global markets which caused stagnant growth in the economy. In 1978, the government decided to gradually open their economy to the global market. This allowed foreign direct investment to flow into the country and has now made China the number one country in the world for foreign direct investment, and helped the country achieve a consistent 10% growth in its economy (3:390). 

   In the short term, less than thirty years, the Chinese government has a focused plan and strategy for the economic growth, and where they want the country to be. Since they control the country, their plan is a specific one and is aimed at achieving specific goals which they will achieve thanks in part to the communist structure. The implementation of this "grand strategy" will be easy, as the government will ultimately control the implementation of the strategy. The goal of becoming a global power is aimed at being accomplished by the year 2020 (15:1).

   The communist system has its benefits as well as its problems. The benefit of having a communist system of government is the easy implementation of policies. Unlike the problems faced by India regarding the Sardar Sarovar Project, the Chinese government used force to allow the Three Gorges Dam project to be undertaken. Regardless of what the communities affected by the construction of the dam thought, the government simply used its total power to tell the communities that they had to relocate whether they opposed it or not. (7:183,184)

   Free press is non-existent in China and so this did not allow people to voice their concerns on the project. The Chinese communist and totalitarian structure allows the government to implement project and policies with ease (15:2). This gives China a distinct advantage in the implementation of growth policies.

   There are many problems with a communist structure, especially when the government is controlling over a billion people. As the economy strengthens, people will likely begin to question whether the government is fairly distributing the wealth of the nation now that there is plenty of it. The rise in communication technology will allow people to realize that other countries enjoy wealth based on their individual earning potential. They will see that capitalist and democratic nations have just as strong an economy as China, and have more social freedoms.

   It will be difficult for the communist government to restrict all flow of information, and the people of China will likely begin to push for a change in the government by asking for a greater say in the policies of their country. It is foreseeable that the communist structure of the Chinese government will struggle to maintain its hold on the people and eventually will have to give up large quantities of power to the people. There will be a transitional period from the communist structure to a more democratic one, perhaps not a full democracy, but this transition may pose problems both social and economic. China's crucial stage in economic growth will be this transition stage, and if China can make a smooth transition, the effects of the change may not be too damaging to long-term economic growth.

Banking Sector

India

   The Banking and Financial sectors of any country are the backbone of the economy. Although these sectors may not be the leading producer with respect to GDP, it is difficult for business to be conducted efficiently. In 1955, the State Bank of India was formed as the first state-owned national bank in India. In 1969 and 1980 further nationalization of banks resulted in the dominance of state-run banks. As mentioned earlier, in 1991 the government began the liberalization of the economy; this included the privatization of several state-owned banks. The government now allowed private banks to enter the market, both Indian and foreign, as well as reducing the share held by the government in any bank from 51% to 33%. (14:84)

   Although financial liberalization has begun in India, it is still moving at a slow rate compared to liberalization in other developing countries (1:183). India is now adopting a Western approach, and banks have to adhere to standards of management such as capital adequacy standards, with monitoring of these standards conducted regularly (1:185). Western levels of these standards are perhaps too high, however the idea of implementing and monitoring the standards is what will help the banks achieve higher levels of efficiency.

   Since the privatization process began, the number of private banks in India has grown, and so has the number of branches, deposits, and credits. The reason for the increase in deposits is that people now realize that the private banks are in business to make money. The banks will therefore operate with greater efficiency and the return on the deposits would be higher. Since the banks will not have the government to bail them out, the banks will be less likely to engage in more risky business and will likely be more stable hence, the deposits will be safer. Appendix A shows Tables 1 and 2. Table 1 illustrates the points mentioned above. Table 2 illustrates the financial performances of the banks. It is clearly seen that the private banks are steadily growing and this is a positive indication of the privatization act. (14:86,87)

   Privatization and the freedom for new entrants into the banking industry have created competition amongst the banks. This competition has prompted the innovation and application of new technologies in order to satisfy customer needs and become more efficient. India has already established itself as an Information Technology (IT) leader in the world. The banking industry has used the innovation of the Indian IT industry to enhance the products and services offered to their clients. IT services such as ATMs, Internet Banking, Tele Banking, Core Banking Solutions, Credit/Debit/Kisan/Smart Cards, Mobile Banking, Cash Management Services, Electronic Fund Transfer and Electronic Clearing Systems, has made life for the regular person dealing with a bank much easier (14:87).

   The private banks also train their management and employees better. Since there is more incentive for employees to perform better, they become more dedicated and work harder, and this is good for the bank as well as its customers (1:184). In a private bank, the shareholders are the owners and ultimately decide via the board who will run the company and how. The system means that personnel have to be hired based on their skills and not their relationship to the managers, hence eliminating unnecessary bureaucracies (14:92).

   There are some disadvantages in the privatization of the banking industry. Since the banks are in the business of maximizing profit, one of their objectives is cost cutting. The private banks do not see much revenue generation in rural areas and therefore do not open many branches in those areas. In addition, the size of the banks may not be as large and the opening of rural branches requires significant investment with a slower return. The main problem that private banks face is the issue of trust. Since the banks are not backed by the government and have not been around as long, it will take some time for people to realize that the private banks are just as stable if not more stable than the state-run banks. (14:92,93) 

   The privatization of the banking industry in India has caused a shift in the policy of the state-run banks as well. The state banks have to compete with the private banks and this has caused the public banks to improve their employee training, as well as their use of technology in their banking process (14:93). As far as the industry as a whole is concerned, the privatization act has only strengthened the industry and instilled confidence in the minds of the customers, both depositors and borrowers. With the banking sector in India being more efficient, it allows other businesses to run their own operations with more efficiency, and this can only result in a positive outcome for the economy as a whole. It also encourages people to save their money and deposit it in the banks both for safekeeping as well as for earning a return on their money.

China

   Much like the liberalization of the banking sector in India, China underwent a reformation process of its own in 1998 (11:53). The reforms are not yet complete and Chinese banks still have some time before they can fulfill their potential as major commercial banks (11:52). However, the changes are occurring at a good pace and the future for the banks looks good. For the time being, Chinese banks will struggle to handle international capital until the regulations and reforms are implemented fully. The current situation in some areas has improved though. The major improvement has been the steady decline of non-performing loans as a percentage of total assets (11:53).

   The Chinese banking industry is dominated by four large state-owned banks, known as the Big Four, which account for 53% of the banking activities in China (4:322). Since the Big Four accounts for over half the banking sector's assets and liabilities, the government thought it best to reform them first. Recapitalization of the banks was the first step. There were three main options for the recapitalization process. Since the banks were state-owned, the expectation was that the government would inject funds. This posed a problem as it was the same solution as before and would only result in complacency by the banks in their lending trends. The second option was improving profits from the banks themselves, which would encourage the banks to be more efficient. The problem was that not enough capital could be raised from within. The third approach was the capital markets. The Big Four had never used this approach in the past, as the government was always there to bail them out. (4:323,324)

   When Premier Wen Jiabao took over the premiership in 2003, he used a mixture of the first and third option to recapitalize the banks. The banks would for the first time sell shares to the open market, in particular to foreign investors, as well as have some injection of funds from the government (11:54). This was a good decision as private ownership now meant that the banks had to become more profit oriented and efficient in order to satisfy their shareholders. The required efficiency means the banks have to cut down on non-performing loans and stop their careless lending to projects that are too risky. The improved performance of the loans, and hence the banks, has created confidence in the market, and foreign investors are now beginning to see a more stable banking environment in China. Figure 1 and 2 in Appendix B shows the improved performances of the Chinese banks with respect to their non-performing loans.  

   The Chinese banking system is still far from where it needs to be. The communist mindset of the officials in charge will still get in the way of complete reform towards a fully commercialized banking sector. The young Chinese officials have seen the positive impact of liberalization and as they climb up the ladder of the communist regime, they will begin to make an accelerated move towards a liberalized banking sector. Foreign investors for the time being will just have to be patient and wait for the old regime to retire and the new regime to take over and make the necessary changes if China wants to become a global economic power. Once these changes are made and the banks are fully commercialized, the true potential of the Big Four and the Chinese banks as a whole will be realized and business will continue to grow at a phenomenal rate.

Financial Markets

India

   India has two major stock exchanges. They are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE was the only major stock exchange in India up until the liberalization act in 1991. The exchange was outdated and inefficient, and investors did not have a large variety of stocks to choose from since there were not as many companies listed. The NSE was created following the 1991 liberalization, and incorporated the latest technology, and began listing private companies.

   The BSE is owned and operated by stockbrokers. The president is elected by the brokers and therefore acts in the interest of the brokers and not the other stakeholders, namely the investors and shareholders of the listed companies. Trading is conducted on the trading floor and there is little automation involved (10:1862). This makes for inefficient trading practices as investors have to be present at the exchange in order to conduct a transaction. This system of trading does not boast well for the BSE's customer service and many investors are left out of the trading simply because they cannot physically be at the exchange. The only other option for an investor is to use a broker, which means the investor will be charged brokerage fees, hence reducing the return on their investments.

   The NSE on the other hand is almost a complete opposite of the BSE. The NSE is privately owned and is managed by a full-time Managing Director who reports to a Board of Directors and does not in any way have ownership of the exchange (10:1862). This eliminated the agency problem whereby there is no incentive for the manager to act in favor of the brokers since they do not own the exchange. The manager's job is solely to run the exchange in a way that provides quality service to all the stakeholders including brokers as well as investors and shareholders. The NSE is also a fully automated exchange and is therefore accessible from any computer anywhere in India (10:1863). Immediately this opens up the possibility of a greater market of investors as they can trade securities from a location that is not physically at the NSE headquarters. This eliminates the need for brokers, unless wanted by the investor, and hence saves on brokerage fees and increases return on the investment (10:1865).      

   A key issue that economists and investors were worried about was the effect that the liberalization would have on the stock exchanges. A sharp increase in the volatility of the stock markets would result in several short-term problems, namely investor confidence would decrease resulting in a bust. The level of volatility was in fact reduced, contrary to the concerns of most investors (8:393). This is an important result as both local and foreign investors are able to invest in the exchanges knowing that volatility will be based on market perceptions rather than what the government might do. The efficiency is hence increased and investors are always looking to invest their money in exchanges that are efficient. 

   The market share for the BSE has fallen significantly and the only factor saving the BSE from falling quicker is its location in the financial hub of India, Mumbai (formerly Bombay). The loss of market share has finally prompted the BSE to begin upgrading its system of exchange to an automation process. This has helped the BSE regain some of its lost market share but it will take a lot more in terms of technological advancement in the exchange to woo clients away from the higher quality NSE. Figure 1 on Appendix C shows how trading volume on the NSE has been consistently higher than trading volume on the BSE due to the greater reach and higher quality of service provided by the NSE.

   The important issue here is that the introduction of the NSE to the stock exchange markets has made the sector more competitive, hence has improved the quality of both exchanges. The NSE may be of higher quality, but the BSE is still the major exchange in India. The NSE has however forced the BSE to improve its service quality and technological advancement in order to compete with the NSE. This competition will further improve both exchanges and make both exchanges more efficient and of a higher quality, which will be beneficial to investors, listed companies, and the economy as a whole.    

China

   There are two main stock exchanges in China, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). The two stock exchanges were formed in the early 1990s. Since China is a centrally planned economy, the stock exchanges were also devised to serve in the interest of the state and to prevent excessive privatization of the companies listed. The listed companies, many of which are state-owned companies, arrange shares in three levels.  A third of the company's shares are owned by the state, and these shares cannot be traded unless approved by the state. Legal persons who ultimately represent other state-owned companies own another third of the shares. These shares can only be traded amongst the state-owned companies. Private investors own the final third of shares. These shares can be traded regularly on the stock exchange. In reality only between 25% and 30% of the shares is market tradable, although this figure is increasing slowly, as shown in Figure 2 on Appendix C. (6:164)

   Since only a third of the shares on the stock market are actually tradable by private investors, the liquidity of the stock market is greatly reduced. One of the important dynamic that makes a stock market efficient is its level of liquidity. The markets in China are simply not liquid enough compared to other markets that are fully commercialized (6:174). This adds to the level of liquidity risk and overall risk for foreign investors and adversely affects capital inflow into the market and the listed companies. Investors now expect a higher return on their investments, resulting in the shares having a lower value and share price, therefore reducing the true value of the listed companies and the stock markets as a whole.

   The socialistic mindset of the Chinese government has caused them to view the stock market as a passive instrument for developing the economy. Both the major stock markets in China are heavily regulated, although the one benefit to investors in trading shares on the Chinese stock markets is its zero capital gains tax. This was the case up until February 2007 when the government proposed the introduction of a new capital gains tax. This news disrupted the stock markets and caused a major downturn in the markets. This was not the only occasion when a government statement affected the markets. Appendix D shows various dates when government announcements caused large shifts in share prices. This causes a high level of volatility in the markets as the share prices are always subject to the activities of the government, rather than the performances of the companies and economic data, which is what determines share prices of listed companies on commercialized stock exchanges. The level of volatility causes increased risks and this ultimately under-values the share prices as investors will pay less for a more risky stock.

   The Chinese stock exchanges and corporate set-up of their shares allocation has to be changed by de-regulation. There is immense potential for the two major stock exchanges in China to contribute to economic growth by providing companies with capital, and investors with investment opportunities. The de-regulation and decrease of government interference in the stock exchanges will make the market less risky and increase the value of share prices and hence capital inflow both domestic and foreign.

Foreign Direct Investment

India

   Foreign Direct Investment (FDI) has been relatively low in India. However, in recent years the level of FDI in India has increased substantially, especially in industries such as Information Technology and service jobs. Most of the FDI in India has come in the way of foreign companies outsourcing service jobs to India. 

   Inward FDI in India has come from several sources. Much of this FDI has been invested in areas of non-traditional exports (2:558). India's traditional exports mainly consisted of agricultural products. Foreign companies have now realized that Indians are innovative people with a large number of graduates every year in fields such as IT. Companies are now using India as a base for innovating new technological products. Several software companies have opened bases in India in the hope that Indian innovation will lead to new products that will help the companies grow.

   Not only do the foreign companies provide jobs for Indians, they also provide competition for the domestic Indian companies. The competition leads to improved efficiency for the Indian companies as well as increases emphasis on new product innovation. Another important effect of FDI is that "foreign firms may open up new channels of exports for the domestic firms through enhancing the reputation in the international markets of those products made in the host country that do not have a share in world exports (2:560)".  The FDI has intensified the exporting of non-traditional products from India as well as diversified Indian exports as a whole.  

   Besides innovation benefits, cheap labor is also an attraction for foreign companies. Since the cost of living in India is still amongst the cheapest in the world, cheap labor is plentiful. Much like China, India has begun to open its labor market to foreign manufacturers who want to utilize India's cheap labor. This has created jobs for lower class and less educated Indians and has further diversified Indian exports.

   India is not only receiving FDI but is also investing in other companies around the globe. India's main outward FDI destination is the UK (17:10).  Several Indian companies have also become some of the largest in the world by acquiring companies outside of India. Tata Steel's recent acquisition of Anglo-Dutch steel maker Corus has made it the world's fifth largest steel company with India's Mittal Steel being the largest (18). Tata group of companies also has operations in 50 countries around the world with manufacturing and sales of various products. Tata Motors' innovation of the Indigo has also sparked debate as to where the next automobile exporting will come from, with India as a possibility (19). Infosys Software has also invested in R&D projects in the US, providing both innovation possibilities for the company, as well as creating jobs in the US (17:10). The innovation and expansion of Indian companies around the world will not only create growth for India but also create jobs and growth for people in other countries where Indian companies operate.

   India is beginning to create a middle-class. The economic upturn has seen the emergence of a middle-class in India. This is beneficial for both domestic as well as foreign firms as it creates a new market for profitable products. Companies that take the initiative to move into India as a first for their products will perhaps not realize profits immediately, but will begin to see real gains in the future (13:141). The key for many companies wishing to sell their products in India is to enact a long-term plan. This creates jobs as well as competition for domestic firms, which can only enhance the value of goods in the country and help the economy.

China

   For decades, China has been the preferred destination for manufacturing. Cheap labor and favorable labor laws have helped create an environment for foreign companies to utilize the cheap labor for the manufacturing of goods. Inward FDI in China has nearly reached a total of $1 trillion (16:6). The FDI has created millions of jobs and has played a major part in the rise of the Chinese economy.

   China's inward FDI has focused on manufacturing and hence copying products and manufacturing them in bulk. As wages increase, cheap labor will no longer be the main attraction for foreign companies' investment in China. China is lagging with its higher education. Many universities have teachers who are not qualified to teach higher degrees. Due to the Soviet-style planning, universities and research centers are separated causing a lack in innovation of new technologies (16:7). This may cause problems in the future as the manufacturing jobs will decline due to higher wages, and these jobs will need to be replaced by service jobs which most of the Chinese are not qualified to do. The lack of innovation will also affect companies, as they will be less competitive with new product development and will hamper profit growth. The government has realized this problem and is making higher education a priority (16:7).

   Chinese companies are also investing outside China into other countries. Companies such as Lenovo and Haeir are investing in projects in the US, making the US the number one destination for Chinese FDI (17:10). Free trade agreements with countries in Southeast Asia have created opportunities for both inward and outward FDI. Korea and Japan are heavy investors into China and are setting up R&D centers across China. Chinese companies are also investing in Korea and Japan by employing innovators that are more educated for their companies since innovators are lacking in China (9:178). This will provide some competitive edge for the Chinese companies through innovation of new products.

China is also seeing the emergence of a middle-class. This provides companies with a large market for selling their goods. Much like the situation in India, companies wishing to grow their presence in China, must look towards a long-term plan (13:141). Profits may not be as high now, but a few years from now China could have a strong enough middle-class that is consumer driven, just as in the US.

Conclusion

   The issue of this paper is to answer the question of which country, India or China, will become the next dominant economic power. The paper looked at four main sections that are believed to be vital if the countries are to be successful. They are the governments, banking sectors, financial sectors and the foreign direct investment associated with the two countries.

   After comparing the two forms of government existing in the two countries, it was found that both forms had their pros and cons. India's free democratic system allows people to choose their government officials, and the economic reformations have helped boost private ownership. The problem with free press and democracy is that the implementation of certain policies becomes troublesome if the citizens involved are not in agreement with the government. Such an example is the Sardar Sarovar Project, which has not yet been completed due to protests. These are the issues that the government of India has to resolve quickly without breaking laws to continue the growth of the economy. The advantage that India has is that it is already a democracy and so will not have to make any new transition to a new form of government.

   China on the other hand is a communist country and this is an advantage as the government has total control and can go through with projects such as the Three Gorges Dam project, without much protest from the citizens. The problem is that once people begin to realize the freedoms that people in free democratic countries enjoy, they too will want such a government. This will be a trying time for the government and the transition period will be vital to the continued success of the economy.

   India's banking system is not yet fully commercialized. The process has begun however and private banks, both local and foreign, are entering the market. This has made the banking environment more efficient since the private sector is for profit making and competition is fierce. New products and services have made banking in India popular with businesses as well as depositors as they now have faith in the efficient banks. A good banking system will help Indian businesses deal with their financial transactions with more efficiency, which in turn makes them more productive.
   The Chinese banking industry is well behind in its efforts to reform. There is still far too much state influence, and the banking sector is not yet realizing its true potential. For the Chinese banking sector to become more efficient, commercialization will have to be enacted and private banks, local and foreign, will have to be allowed to enter. This will make the industry more efficient and will bring confidence to businesses and depositors, which will help the growth of business and the economy.

   India's two stock exchanges are fully commercialized. Shares of most companies are privately owned and are traded freely on the stock exchanges. The stock markets in India are being used by companies to raise capital. Investors are using the stock markets for gaining returns. The BSE is still inefficient and lacks the services provided by the NSE. The competition provided by the more efficient NSE has led the BSE to begin upgrading its trading practices and making itself more efficient. The little interference of the government in the dealings of the stock market has made the markets less volatile and less subject to what the government does, much like the markets in developed countries. This gives Indian companies a large market for raising capital as well as providing investors a less volatile environment in which to trade.

   The Chinese stock exchanges are influenced greatly by government interference. Only a third of a company's stock is traded on the exchanges and the government has a large say in how the exchanges operate. This causes volatility in the markets as investors react to what the government does instead of focusing on the companies. This has disvalued stocks and the market as a whole. It has also discouraged foreign companies from listing themselves on the Chinese exchanges as well as discouraging foreign investors from investing their money in the Chinese stock markets. This has not allowed Chinese companies to raise as much capital as they could from the markets and hampers the growth of those companies.

   India still has very little inward FDI. In order for India to make a greater leap in its economy, it will have to do more to attract FDI in areas such as manufacturing where cheap labor will be an attraction. The innovative nature of Indian companies has helped them attract FDI in the service and IT sectors, which provide high paying jobs. India's excellent university system has produced more innovative people whom companies both local and foreign are out to hire. The innovation of Indian companies will make them more competitive in the world market and help the companies and economy to grow.

   China will have to become more innovative as the wages for manufacturing jobs will increase and foreign companies will look elsewhere. The education system will need to be improved in order to produce more innovative people who can create products that are competitive in the world market.

   Of course, several other issues could be looked at in developing this debate, however this report has been limited due to the quantity of information limitation, and the scope. Both countries will likely become economic powers. China has a head start on India and will probably win the race in the next twenty or so years. India will also achieve this status but probably fifty or so years from now. The question is whether one looks to the short term or whether they look long-term. India's superior innovation will be the basis for its rise and this was the same basis for the rise of the US and Japan. China will struggle to compete with innovation and this will slow its economic growth whereas India's economy will be further accelerated by its innovation. The future remains to be seen on how China will deal with an ever more freedom seeking society and a government that is based on control. Whatever happens, so long as both countries' economies continue to grow and peace is maintained, it will be beneficial for the world economy when a third of the world market is improving. The rise of India and China will help other countries as well since outward FDI from those two countries will increase and this will help improve the overall global economy.    

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