Prof. Tarun Khanna shares his opinion in Fortune magazine on the recent uprising in Egypt and how can it be reconstructed back. He opines that “Business leaders working in the Middle East should not stand by the sidelines or hop on the next flight out. They should act to rebuild trust, wherever and whenever it is possible.”

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Prof. Tarun Khanna shares his views with India Today on strategies to be adopted by India and other developing nations like China to compete with the West. He insists on continous efforts to be put by the countries for reaching the levels of the developed counterparts. “We have just embarked on a very long marathon. It is not a sprint. So this is no time to be complacent,” says Prof. Khanna.

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Read the article here (Part2)

The blog titled Estrategias para Vencer en Brasil has published a review of ‘Winning in Emerging Markets’.

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China’s economy may lead the region in many ways, but in one surprising area it is lagging behind: microfinance. The concept of distributing small loans to the poor has flourished across Asia since its introduction in Bangladesh three decades ago. Yet it has a notably minimal footprint in China.

A casual observer might say China doesn’t need microfinance. After all, it is now the world’s third-largest economy. But beyond the prosperous cities, millions of people still languish in poverty. China has the second-largest number of poor after India. About 254 million people in China lived on less than $1.25 a day in 2005 (as measured in purchasing power parity dollars), according to the World Bank. The income gap is widening between rural and urban areas and has today reached a historical high.

Microfinance is one tool that can reduce this entrenched poverty by providing entrepreneurs with credit, just as it has in other developing countries. Loan sizes would be larger than in India because GDP at purchasing power parity per capita in China is higher at $5,962 versus $2,972 in India, according to 2008 World Bank figures. But loans would still be used for income-generating activities such as raising livestock, buying materials for micro-businesses and farming, and setting up small trade and services. This is especially pertinent as the government seeks to create a “harmonious society” in part through poverty reduction and human development.

At the moment it is very difficult for China’s poorest citizens to get loans. The absence of civil society in China until recently means there are few established poverty-reduction programs and the role that they can play is relatively new. There is no coherent government policy to foster and oversee microfinance and there are no clear laws governing the industry. In addition, Chinese microfinance institutions are allowed to operate only in the county where they are registered, and obtaining licenses is a highly bureaucratic process.

Despite China’s extensive banking system, which includes government rural credit co-operatives that are meant to serve poor people in the countryside, the neediest are left out. Co-op loans tend to be too big, cumbersome and bureaucratic for the poorest citizens to access, and bank branches are not conveniently located.

Some Chinese microfinance institutions are starting to address this by partnering with foreign groups to learn their methods and put operations into place. That is a crucial first step, but their efforts will be limited unless Beijing creates a regulatory environment favorable for microfinance institutions. The government could start by boosting microfinance through private village banks. This would require dropping investment restrictions on foreigners and loosening local license requirements.

China is understandably cautious after the failure of rural cooperative funds, which were depository institutions established in the 1980s to funnel lending to rural areas. Lack of effective supervision and meddling from local governments led to their closure in 1991. Many peasants never received their deposits back. Microfinance institutions, however, could be restricted from taking deposits, so wouldn’t present the same risk.

It will take hard work and reform to grow microfinance in China. But millions of poor people in China could benefit from the opportunities provided by a small but powerful loan.

Mr. Akula is founder and chairperson of SKS Microfinance. Mr. Khanna, the author of “Billions of Entrepreneurs” (Harvard Business School, 2008), is Jorge Paulo Lemann Professor at Harvard Business School and serves on SKS Microfinance’s board of directors.

Featured in Wall Street Journal Online, October 7, 2009

Prof. Tarun Khanna shares his views on the ‘quiet battle between India and China’ over Burma. He discusses the continuous Sino Indian competition prevailing in the common land of Burma.

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JP Morgan Chase has plans set to tap the overseas market again after the financial crisis, says the recent article by New York TImes. The company aims at unearthing opportunities in the BRIC countries.

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“JP Morgan just announced a major reorganization. The impetus is the bank’s strategic shift to pursue the banking opportunities in BRIC countries. This is one more example of western companies realizing that it is more risky to ignore emerging markets than to pursue them, despite all the institutional voids that characterize these markets. In fact, as we discuss in our book, companies like JP Morgan can gain by filling critically institutional voids in emerging markets, so it is a no brainer opportunity to pursue. Citi, HSBC, and Standard Charter all have been pursuing emerging markets vigorously for many years now. They all made significant commitments to follow through – some of them even considering moving headquarters to the Asia and dual- listing on Shaghai stock exchange. Meanwhile, home-grown world class banks – emerging banking giants as we call them in our book – are building great franchises in emerging markets. Examples include ICICI bank in India and Bank of China. While JP Morgan has recognized the obvious attractiveness of emerging markets, it has to contend with both its western counterparts who have been at it for a very long time, and the emerging banking giants who are determined not concede their home markets to western interlopers. It will be interesting to see who will win this emerging race!”, -Authors, Winning in Emerging Markets.

Do you agree? Looking forward to your comments and experiences in similar situations.

The authors present their views on the article by Foreign Policy highlighting the fact that, “If China is going to build on its growth, it’s going to need an industrial policy that backs it up instead of holding it back.”

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“Many western observers think that as the Chinese currency is allowed to float with market forces, it will make Chinese exports more expensive. Couple this with the recent spate of increases in wages of Chinese workers announced by many companies operating in China, it is tempting to conclude that Chinese companies will suffer a setback in their global competitiveness. But this may be at best a short-term effect. To figure out the long-term consequences, one might want to look at what happened to the Japanese companies in the 1980s when energy costs increased dramatically, and Japanese currency appreciated significantly under international pressure. To deal with these pressures, Japanese companies redoubled their innovation efforts. For example, the Japanese auto industry created luxury brands Accura, Lexus, Infinity – brands that have successfully attacked mighty Mercedes, Audi, and BMW. So while we might see less of the low cost Chinese products flooding the western markets, we should also watch out for a slew of innovations from China in the next decade that might change all our lives.”, -Authors, Winning in Emerging Markets.

Do you agree? Looking forward to your comments and experiences in similar situations.

New York Times has recently talked about China deciding to allow greater flexibility in its currency.

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“China announced over the weekend that it will allow its currency Yuan to move with market forces, rather than being pegged to a fixed amount against the dollar. If this policy is really implemented, it will create an “emerging market” in Chinese currency. As we discuss in our book, currency markets, like all the other markets, need institutions to work well. Given that for the longest time, Chinese currency was regulated, there are many probably many institutional voids in this market. The creation of a currency market in China will create big opportunities for many private sector intermediaries.”, -Authors, Winning in Emerging Markets.

Do you agree? Looking forward to your comments and experiences in similar situations.

Recently New York Times talked about Mc Donald’s entry in Russia and how 20 years hence, is outsourcing its last of 200 ingredients, in its article “Russia’s Evolution seen through Golden Arches”.

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“We discuss how to think about this case study in Chapter Four of our book.  As the NYT article says, McDonalds’ entry into Russia required it to invest in a variety of services that it took for granted in other locations – getting potatoes with the right texture and consistency, and getting them in a very timely fashion was difficult, given the absence of the right supplier base; making sure there were logistics providers who could adequately deal with McDonalds’ needs was hard, nor did many logistics providers who served McDonalds elsewhere wish to expand into Russia at the time.   In the language of our framework, there were lots of missing services – institutional voids – in Russia at the time, and McDonalds had to fill these voids to launch its operations, even though these services were not part of what it would consider ‘core.’  Over time, as these voids have been filled by independent entities, McDonalds has withdrawn from these businesses.  The operation, needless to say, has been quite successful.  It is a good example of the framework, and how multinationals have to think about adapting to particular contextual circumstances in emerging markets.”, -Authors, Winning in Emerging Markets.

Do you agree? Looking forward to your comments and experiences in similar situations.

Potential for Sino-Indian Collaboration at the Microeconomic Level

Q (Question): What is the possibility of China and India emerging from the economic crisis?
A (Tarun): China and India are complementary economies. While there are many opportunities for partnerships at the macro level, I am particularly optimistic about the potential to collaborate at the micro level. I believe economic cooperation will supercede current border conflicts.

Q: What are potential areas for collaboration?
A: Biotech due to differences in genetic composition; Microfinance – India has a lot of experience; China is gradually open its doors to foreign participation in the sector

Q: How can Chinese companies have successful M&A transactions like the Tatas of India? Is this a good time for global M&A?
A: Chinese M&A has not been successful as seen from CNOOC’s failed attempt to acquire Unicol. This is not due to the English proficiency of Chinese managers but rather the understanding of Western culture as well as political opposition. I recommend Chinese companies to start by purchasing smaller businesses and practice what Zhou Xiaochuan suggests of being down-to-earth and pragmatic.

Q: How does the role of government differ in these two countries?
A: China too strong but world-class policy making; India too weak due to constant political turnover.

Q: How do Chinese and Indian entrepreneurship differ?
A: Indians are encouraged to experiment. I recommend youth of both countries to visit each other’s countries to better learn about each other.

Q: Why do China and India’s development models differ?
A: India is a far more diverse country than China. This diversity has eased the internationalization of India. Chinese society is comparatively more homogeneous, thus there are many opportunities for it to learn from my diverse societies.

Read the original Chinese version here