China and India Current Development in Manufacturing and Service Sector

Chapter One: Introduction

Background

India and China comprise some of the emerging economies in Asia that were able to recover from the damaging effects of the recent financial crisis and resume their high-speed economic growth trajectory. At the same time, a number of developed economies still recover from the financial crisis (Andonova, 2014). The developed economies have been the basis of global economic growth prior to the recent financial crisis. Anyway, owing to the uncertainty regarding the economic outlook for them, developing and undeveloped economies are now hoping that Chinese and Indian economies will act as the economic growth engine of the world. China has reported an unprecedented economic growth following its implementation of economic reforms and open trade policies during 1979 (Bosworth & Collins, 2007). The economic growth of Chiba has been especially impressive during the first years of the 21st century to the financial crisis, recording a double-digit economic growth. For the case of India, its economy started growing rapidly after the country adopted economic reforms in 1991; however, its economy reduced during the early 21st century. To this end, it is evident that all the countries are currently in a rapid economic growth phase. In addition, China and India are members of the BRICS (Brazil, Russia, China, India and South Africa), all of which are newly emerging global economic and political powers (Cammack, 2012; Dossani & Kenney, 2007).

Rising powers comprise of nations having the potential to receive the status of a global superpower but are not capable of setting agendas (trade, political and economic) at the international level (Harris, 2005). A noticeable trend among the rising economic powers is the establishment of alliances that draw upon strategic interests. Examples include the aforementioned BRICS, India, Brazil and South Africa (IBSA), and Brazil, South Africa, India and China (BASIC). All the above-mentioned strategic alliances have been established with the primary aim of enhancing South-South economic cooperation (Harris, 2005). The increase in emerging powers has been likened to the “rising of the South.” In fact, such rising economic powers contribute a significant amount to the global economic productivity. For instance, during the 2000-2010, the share of Gross Domestic Product (GDP) in the global GDP increased from 9 to 18 percent. In addition, the G8 summits associated with the industrialized economies gradually seem out-of-date (Bosworth & Collins, 2007). Contrary to the previous century, rising economies are now in a position to manage their local affairs and influence economic processes occurring beyond the limits of their borders and regions. Therefore, rising powers are imposing substantial changes in the global economic landscape. In addition, rising economies are embarking on strategic partnerships and alliances through strong bilateral arrangements (Medeiros, 2005).

Through such strategic partnerships, countries with rising economies are starting to increase their economic power across the globe. From 1990s, bilateral strategic partnerships gained prominence as substitute for the traditional conventional multilateral partnerships. Strategic partnerships can be in the form of simple bilateral arrangements, such as the strategic partnership between Indonesia and Brazil, and China - Argentina strategic partnership. They are mostly commodity-based to complex strategic partnership, such as the one between China and the US, and between European Union and various other countries, including Brazil (focusing on environment, energy and trade), Canada (all inclusive focusing on environment, energy, trade, investment and global peace), and China (focusing on investment, human rights and trade) (Vieira & Alden, 2011). Despite their prominence, there are little or no attempts aimed at examining the role of strategic partnerships in the global economic system, which is the focus of current study. A strategic relationship between India and China has the potential of being successful owing to the complementarities of the economies. In such way, China has a thriving manufacturing sector, whereas India has a thriving services sector (Medeiros, 2005).

Statement of the Problem

Since the 1990s, countries have been embarking on strategic partnerships. Consequently, the number of strategic partnerships between countries has been increasing. Regardless of their prominence and important role in the global economy, little attention or discussion has been directed towards exploring their potential, especially in rising economies, such as India and China. In addition, there have been no case studies exploring complementarities of various economies. One of the economies that have the potential of complementing each other is China and India, especially in the manufacturing and service sector respectively.

Purpose of the Study

The purpose of current research is to explore the prospects of strategic partnerships between China and India in manufacturing and service sectors. In addition, current study seeks to explore the potential impacts and implications of such strategic partnership between the service sector in India and the manufacturing sector in China.

Significance of the Study

The study offers important insights regarding the trends in global economy, especially with respect to strategic partnerships between emerging economies that seek to strengthen their bilateral relations. As a result, the findings presented in current research project can be helpful in assessing the international trade implications for rising economies, such as India and China. Moreover, the research study provides the neglected discussion regarding the potential and role of strategic partnerships between emerging economies. Thus, the study fills an identified gap in literature and augments current knowledge relating to international economy.

Chapter Two: Methodology

Research Approach

Current study adopted a qualitative approach to collecting and analyzing data. Qualitative research approaches emphasize on the discovery of novel information. It is contrasted with the quantitative research approach, which seeks to measure and analyze causal relationships between variables of interest. Qualitative research approaches are more flexible and are employed in situations whereby the researcher seeks to provide a comprehensive understanding of the issue being investigated. Therefore, a quantitative research studies have the primary objective of exploring the phenomena through the use of flexible methods for collecting data (McNeill, 2005).

In addition, the present research is primarily exploratory. Exploratory research seeks to explore what is occurring, looks for new insights and evaluates the topic using novel perspectives. It is important for exploratory studies to be adequately flexible in order to take into consideration any changes regarding the direction of the research. Current study used the literature-based methodology, which entails collecting information from the existing literature followed by undertaking a critical analysis of the information collected. The literature-based methodology can be administered using two main methods, which include the traditional review of literature and a systematic literature review (McNeill, 2005). A systematic review of literature was used for the study, which involves collecting information from the existing body of literature and then performing a critical analysis of the information obtained. Simply stated, the systematic review of literature is characterized by re-analyzing past empirical and theoretical findings associated with the research issue under investigation. In addition, the literature-based methodology played a crucial role in helping the researcher to identify, synthesize and combine pertinent literature regarding the research problem. Systematic literature reviews can be used in offering a comprehensive summary of current literature relevant to the research issue. The literature-based methodology adopted for current research was based on a review of international economics literature, especially relating to the Chinese manufacturing sector and India’s service sector, as well as strategic partnerships between China and India in their sectors. Literature for review was obtained from a number of citation indexes and electronic databases, such as Ebscohost, SpringerLink, Questia, Pubget, JSTOR, Emerald and Google Scholar (McNeill, 2005).

Data Collection

Current study used secondary research, which implies that current body of literature was the main source of information for tackling the research issue. The sampling strategy involved the use of selection criteria, which served to ensure that the data sources incorporated in the review were reliable, up-to-date and could yield valid results. In such respect, a mix of current and old statistics was incorporated in the review in order to explain the trends in China and India’s manufacturing and services sector respectively. Second, the analyzed data was taken from credible publications of diverse types, including books, peer-reviewed journal articles and government reports among others (McNeill, 2005). The search strategy used phases, such as “Trends in India’s service sector,” “Trends in China’s manufacturing sector,” and “Strategic partnerships between India and China.” The electronic information search yielded vast information from the databases that were included in the review. An additional Internet search was also performed to gather information from concept papers, published theses and conference papers among others. The results of the study are presented in the following chapter.

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Chapter Three: Findings and Discussion

Introduction

Current chapter presents literature concerning service and manufacturing sectors of India and China. Conventionally, the economy is divided into three segments: agricultural sector (primary), manufacturing sector (secondary) and services sector (tertiary). The agricultural sector constitutes of faming, forestry, animal husbandry and fishery. The manufacturing sector constitutes of construction, mining and production. The service sector comprises of all other activities not included in neither agricultural nor manufacturing sector. The service sector constitutes the services provided to the agricultural sector, which include activities linked to the supply of water, gas, electricity, transport and communications, finance, insurance, business and personal services and community and social services (Andersen Consulting, 2009). The agricultural sector will not be considered in current paper. Different countries have different capabilities in the above-mentioned three sectors. China is recognized for its manufacturing, while India is recognizing for its service sector. Various factors determine the performance of a nation in a certain sector. However, studies show that no country can survive working in a single sector. Consequently, countries engage in global trade in order to exchange goods and service (Bensidoun, Lemoine, & Ünal, 2009).

Service Sector

Studies focus on the service sector mainly due to its size, as signified by either employment or GDP contribution, relative to the other two sectors: manufacturing and agriculture. The study conducted by Bosworth & Collins (2007), noted that contemporary economies are significantly dominated by services. Several researchers, including Chakraborty & Nunnenkamp (2008) and Mukherjee & Goyal (2012), who link economy development to structural transformations, have backed Bosworth & Collins (2007) sentiment. The manifestations of the attention accorded to the service sector are the increasing share of service in national income. Initially, economic analysts, including Chakraborty & Nunnenkamp (2008), debated whether such increasing share of service in national income was caused by the occurrences linked to demand. According to Dossani & Kenney (2007), the association between service and demand emerged because the cost of foods and essentials was perceived to increase more slowly than income, enabling huge amount finances to be channeled to services or factors affecting supply.

Nevertheless, recent researchers have refined the understanding of the contribution of the service sector to economic development (Mukherjee & Goyal, 2012). Such researchers, including Mukherjee & Goyal (2012), do not explicitly or implicitly treat service as being bought by the final consumers. Rather, they consider the role of business and producer of services as significant factors of the productivity level in manufacturing or service sector. In addition, the factors influencing productivity and various services have attracted greater focus, which also emphasizes the extent of specialization. China and India have varying capabilities in the service sectors and reflect varying levels of economic growth. It makes them a good case for analysis for current literature review.

China’s Service Sector

China has transitioned from a closed, centrally designed system to a more market-oriented one. China’s present market oriented system plays a key global role. In fact, it has been evidenced by the studies ranking China as the world’s largest exporter (Dossani & Kenney, 2007; Dossani & Kenney, 2007). China adopted reforms that enabled it to occupy the present position in the global trade. According to Dossani & Kenney (2007), reforms commenced with the liquidation of the collectivized agriculture and extended to constitute the eventual liberalization of prices, increased independence for state enterprises, establishment of stock markets and fiscal decentralization among others. As noted by Mukherjee & Goyal (2012), the restricting of the Chinese economy and the emerging efficiency gains have contributed to more than tenfold GDP increase since the late 1978. The purchasing power parity (PPP) ranks China as the second largest economy in the universe after the US. It outdid Japan in 2001 based on PPP. The average yearly percent GDP per capita of China increased from 9.5% in 2000 to 10.2% in 2011 (Mukherjee & Goyal, 2012). Researchers have differed on whether the economic growth of China can be attributed to its services sector development or not.

Mukherjee & Goyal (2012) investigated the factors behind China’s economic growth. The study findings revealed that China’s service sector has been limited by the focus of the country on manufactured export and considerable barriers to trade and investment in the service sector. According to Mukherjee & Goyal (2012), China’s service sector accounts for comparatively small portion of GDP in relation to the global average for developing nations, such as India. Whether China’s population plays a key role in the service sector or not, statistics from World Bank, World Trade Organization (WTO) and other well-known institution can reveal China’s service sector position on the global map. In the last 20 years, the service sector in China has increased twofold to contribute 46 percent to the country’s GDP as of 2013. During the same year, for the first time, the service sector outperformed the secondary ones. The service sector of China, in terms of GDP contribution, comprises of real estate (6 percent), financial services (6 percent), catering and hotel services (2 percent), retail and wholesale trades (10 percent) and storage and transport (5 percent) (Mukherjee & Goyal, 2012). The Figure 1 below shows the trends in Value Added (percentage of GDP) in China’s service sector. As mentioned earlier, China’s emphasis on the manufacturing sector has caused the development of the service sector for several years, coupled with significant investment and trade barriers. The service sector in China has been neglected for a long time. Recently, the government gas began paying attention to the service sector economy as evident by the initiation of the five-year plan during 2011. However, the contribution of the service sector in China to the country’s GDP is still lower when compared to other countries, such as India (57 percent), Brazil (69 percent), Japan (73 percent) and the US (79 percent) (Mukherjee & Goyal, 2012).

Another important step taken by China in an attempt to grow its service sector is through the opening of the services industry following its accession to the World Trade Organization during 2001. It resulted in the global ranking of China services’ export from position 8 to 2. During the Twelfth Five-Year Plan for the period 2011-2015, the government of China placed strategic priority on improving its service sector, especially the Trade in Services (Luolin, 2015). In addition, China is gradually adopting a preemptive strategy aimed at opening its key subsectors in the service industry like healthcare, education, logistics and finance. China is also striving to be among the global leaders in exporting construction, tourism and transport as China has a comparative advantage in such subsectors. The Five Year Plan has a goal of establishing collaborative development between Trade in Goods and Trade in Services by exploiting the scale advantages associated with Trade in Goods in order to start the development of Trade in Services, as well as enhance its share in China’s foreign trade. China is not only targeting its size of Trade in Services subsector to reach $ 600 billion, but is also aiming at enhancing its knowledge and technological capacity with the ultimate goal of enhancing global competitiveness of its economy (Yeh & Yang, 2013). In order to further develop the Trade in Services subsector, the government of China has shown the commitment to formulate new rules and regulations aimed at promoting in Trade in Services. Moreover, it enhances the fiscal and legal system for China’s service sector in order to build an environment that is conducive for business and channel investments to the services sector. The core sectors of priority under the Five Year Plan include the financial services industry, logistics industry, high-tech industry, business services and tourism (Jiwei, 2013). The financial services industry will focus on enabling international operation of businesses, development of novel service formats, such as online commerce, scientific innovation and the development of new financial services and products. The logistics industry will focus on reducing the costs of logistics, enhancing the efficiency of logistics, constructing and interlinking logistics infrastructure and development of modern logistics systems. Efforts in the high-tech services industry will focus on enhancing information services, digital and online content services, information security services and software development. The business services sector is poised to include market research services, management consulting, brokerage, credit assessment, consulting, taxation, auditing and accounting among others. With respect to tourism, efforts target the development of outbound tourism and domestic tourism, as well as development and protection of tourism resources (Yeh & Yang, 2013).

The services sector of China has reported significant growth; however, it is still smaller considering the stage at which China is in terms of economic development. In order to reveal the potential of China services industry, there is a need for the business sector to be strengthened, to ensure that the increasing labor force is employed, facilitate trade, enhance the overall efficiency of Chinese economy and adopt improvement methods and techniques of management (Chen C. , 2009).

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