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On the Foothills

China and India: the next great economic frontiers. Two countries, abundant in culture and rich in human resources, home to 2.6 billion people, over 35% of the world’s population.The sheer population numbers birth vast pools of talent, and several individuals and corporations have already become prominent world players. The CEOs of Microsoft, Pepsico, Adobe, Mastercard, Cognizant, and Deutsche Bank are Indian. Tata and Reliance head a list of multinational conglomerates based in India. China has three companies in the top 10 global firms in terms of revenue, all of them state-owned. Further SOEs (State Owned Enterprises) have acquired ownership in banks, oil, gas, hotel and shipping firms, and other key industries worldwide. However, while Indian talents are leading American and European firms, Chinese CEOs are still mostly based in China, leading SOEs, so companies, rather than individuals, earn recognition on a global scale.Both nations hit on this decade as the time to begin the change from manufacturing and service to first-class, intellectual markets. In 2010, India proclaimed an actual “Decade of Innovation”, and both countries have announced plans for an array of educational, infrastructural, and environmental improvements, stimulus funds, market liberalization, and free-trade zones. Most analysts expect China to surpass the United States as the world’s biggest economy by 2020; the OECD (Organization for Economic Cooperation and Development) says 2016. As developed markets continue to stagnate, China and India could become magnets, even hubs, for global investment, intellectual talent, and innovation. Will they?What Spurs Innovation?

Seizing on innovation as the turnkey for economic growth, China and India will be looking not only to attract individual talents in crucial fields; they will hope for more heavyweight multinationals to open R&D (research and development) labs, and even headquarters, in Asia.Meaningful innovation is a cycle of demand, conceptualization, and realization, with a heavy dose of collaboration between educators, researchers, business, and legislators, all resulting in a market product. Are the conditions in China and India favorable for innovation, and attractive to foreign innovators?Patents: The Stamp of Innovative Success

Successful invention demands patent rights, partly to recognize the talent which created it. But securing those exclusive rights is also imperative, in order to compensate for the large sums funneled into R&D. Take medicine as an example. In August 2013, Forbes cited a 95% failure rate of experimental medicines. Production of a single drug costs anywhere from USD 350 million to USD 5 billion. So, return on investment on the 5% of successful medicines provides the funds necessary for further R&D.Will You Get a Patent in China or India?

In China, probably. In India, maybe not.

Like other industries, pharmacy is attempting ingress into China and India, where demand for prescription drugs is rising rapidly. As the middle class grows, so do the chronic diseases of affluence, like diabetes and heart disease. Price Waterhouse Coopers (PWC) predicts an overall medicine boom in India from USD 16 billion in 2011 to USD 50 billion by 2020.Yet in April 2013, the Economist reported on a 15-year Novartis petition which ended in a denial of an Indian patent. Such patent denials seem designed to fortify India’s position as the producer of 20% of the world’s generic drugs and vaccines. They do not invite foreign investment or innovation.China, on the other hand, now fields more patent applications than any country in the world, granting approximately a third of them, trailing only the United States and Japan. China is also second only to the United States as the nation with the largest concentration of patent holders in the world.Innovators and investors want to know that breakthroughs will be honored and financially protected at a standard consistent with international expectations. To get innovators, you need to award patents.Who Are These Innovators?

Invention in technology, sustainable energy, and medicine begins in the minds of the highly educated, mostly STEM (Science, Technology, Engineering and Mathematics) graduates. Both China and India already excel here in different ways.The OECD expects China and India to be home to up to 40% of the world’s tertiary (university, college, and other post-secondary) talent by 2020. China aims to get 20% of its working-age (24-64) citizens to this level by then. That would be 195 million people, the size of the entire, projected, US working population in 2020. They have already focused on STEM degrees. From 2006-2010 they allocated USD 32 billion to the Ministry of Science and Technology. It worked. By 2011, 41% of Chinese graduates received STEM degrees, outstripping the US by 300%. Questions about whether the quality of the degrees matches the highest international standards persist, however. It is difficult to know whether English or scientific deficiency is the culprit.India is reputed for its computer experts and its engineers. It has institutional capacity for 1.5 million engineering students, and 1 million graduate each year. However, the curriculum needs urgent standardization. In November 2013, The Times of India reported on a pan-Indian study of engineering graduates. Only 15% could write simple computer programs. This is a crucial applied skill in any engineering discipline, and especially the IT field, which currently employs most engineers. A similar study by the same group reported that only 25% of technical graduates, and 15% of general graduates, were employable in high-growth global industries, even in call centers. Another report showed that in rural areas, home to 70% of Indians, 50% of fifth years were only reading at the first-year level. Educational reform needs to be much more progressive for India to be able to capitalize on its enormous youth demographic.

Both India and China have recently faced a disproportionate outflow of native STEM talent to the United States and Europe. But as growth slows in the west, part of the talent diaspora is returning to cosmopolitan centers in China and India.English fluency is another decisive element in both attracting global talent and maximizing the potency of innovation in global business. Here, India has a distinct advantage. According to the CIA World Fact Book, 125 million Indian citizens speak English, twice the English speakers in the UK. But although 95% of Chinese are literate, less than 1% of its population and 5% of its tertiary graduates speak English. This will make it harder to attract foreign talent to its shores, and China will struggle for leadership in the global arena.Beyond Education: The Maverick Mind

High educational standards instill discipline and raise the skill level, but it is independent thought that leads to invention. Forbes observed that freedom of thought and ambition are universal characteristics of the inventor.To achieve transformation through innovation will also require both countries go full throttle at liberalizing patent and FDI (foreign direct investment) policies. This will make the prospect of relocation for global and diaspora minds more inviting. In addition, both China and India will need to address the issues confronting their vast, home talent pools, which still throttle their potential for innovation.Social and Political ThornsThe weakest link can break a chain. Aside from the high flyers, and the growing middle class in both nations, gaping social and financial inequalities make the population figures in China and India both a boon and a bane. When vast swaths of the population are poor and illiterate, it weighs the nation down.The cycle of poverty and illiteracy is difficult to break. The poor do not have access to good education, and the well-educated get better jobs. In both India and China, the great step forward of compulsory education unfortunately has yet to make a difference in rural areas. Rural funding is insufficient to provide an acceptable educational standard, even at the primary school level.In October 2013, the UN praised China for reducing poverty from 446 million citizens in 1999 to 160 million in 2009, primarily as a result of urbanization. The rural populace still waits to be lifted by that wave of progress. Poor jobs for the poorly educated deepen the trench of poverty in these regions, especially in contrast to the growing wealth in the urban areas.The UN also reported in 2013 that one third of the world’s poor live in India, and that over 370 million Indians fall beneath the nationally defined poverty threshold, which is lower than the international poverty line of USD 1.25 per day, set by the World Bank.The more progressive members of government and society have a battle to wage against adherents who resist 21st century reforms. Regional conflicts (in the Kashmir region, Orissa and West Bengal) also continue to drain resources and undermine stability. And bureaucracy is labyrinthine and layered, with severe disagreement between the states on the trajectory of the nation. The May 2014 elections present a unique opportunity for India to reclaim the impetus of reform begun in 1991, when India began to participate seriously in the global economy.China’s social engineering is also yielding undesirable talent and economic results. While youthful India adds 1 million people to the workforce every month, China is aging. The one-child policy has effectively reduced reproduction to the point that, by 2050, the ratio of pensioners to workers in China will be 2:5, a drag on the economy and on intellectual capital.Another challenge has thwarted both countries in different ways: corruption. Both countries are very status-driven, and corruption is closely tied to the lavish lifestyle expected of an illustrious personage.Corruption in India has been denounced as “endemic” by legislators and journalists worldwide, but nobody is more fed up with it than India’s own citizens. India waits for President Mukherjee to sign the anti-corruption bill passed by parliament in December 2013. It would establish federal and state anti-corruption departments, authorized to investigate anyone at any level in government or business. In the meantime, the new Chief Minister Arvind Kejriwal has just established a citizen hotline for reporting bureaucratic kickback demands, and “5th Pillar” activists across India are stuffing zero-rupee notes, fake money, into the hands of greedy officials.China also sweated the spotlight in January of this year. After a year of President Xi’s campaign to exterminate corruption and introduce frugality into the official lifestyle, the International Consortium of Investigative Journalists (ICIJ) published the secret off-shore accounts of the Chinese elite.Infrastructure ReformInfrastructure fuels economic growth, and economic growth pays for infrastructure, another cycle that can move forwards or backwards. A safe, modern infrastructure must also incorporate sustainable solutions.Both India and China are in desperate need of infrastructural renovation, for different reasons. China’s economic blastoff was bought at a cost to the environment and to the health of its urban citizens. Now China is unswerving in its pursuit of clean energy, dedicating USD 277.5 billion to it over the next five years. India, meanwhile, needs better transportation and more power to fuel growth, so it’s an opportune time not only to install clean energy and transport systems, but to invent renewable solutions.A powerful contingent of STEM talent will help both countries not only to implement existing renewable solutions, but also to claim innovative territory in the renewable sector, which may be the most lucrative of this century.The New Intellectual Summit?Could future global leadership forums take place in the Himalayas, rather than the Alps?The age of Asian innovation: Both India and China have voiced their aspiration to join the ranks of intellect economies.It will require talent and investment: the talent to innovate for growth, and the investment to pay for the talent and R&D. The recession and stagnation in developed markets makes it a propitious time for them to succeed. Multinationals everywhere are looking for higher growth margins; and top talents are looking for the best possible opportunities.Talent demands freedom, recognition and reward. To keep and attract the top global talent, including a returning diaspora, both nations will have to work on eradicating corruption and social injustice. Attractive growth will also require greater regulatory consistency, more liberal market policies, political stability, fiscal discipline and transparency, and improved infrastructures.2020 is too soon for either country to establish itself as the global talent headquarters, but if they gain steam in confronting the challenges facing them, they could achieve those goals by 2030, and become the future intellectual hubs for technology, medicine, clean energy, and commerce.


Philippe Lutgen is Managing Director of XL Group and Country Manager in India.

Philip Chan is the Country Manager for XL Group’s insurance segment in Greater China.

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