Why are Chinese Firms more Productive than Indian Firms?

Diagnosing Development Bottlenecks–China and India, By Wei Li, University of Virginia; Taye Mengistae, World Bank; Lixin Colin Xu, World Bank

Livemint.com 21/5/2011

Do we need another paper comparing the Chinese and Indian economies? Everybody knows that China’s economic performance has been significantly better than ours. This paper, however, takes a different tack, looking not at the macro numbers, but instead at differences between firms in the private sector in China and India to identify key constraints to development. The surveys have been conducted exclusively among manufacturing establishments.

The researchers take as their starting point the fact that Chinese firms have significantly higher total factor productivity over their Indian counterparts. In their sample, the median Chinese firm is 156% more productive than the median Indian firm. The paper attempts to find out why this is so.

The lack of infrastructure in India, of course, is so well-known as to be hardly worth mentioning. The authors take power scarcity as a proxy for the level of infrastructure and compare the proportion of annual sales lost due to power outages. The result: on an average, sample Indian firms report 9% in lost sales against 2% in the China sample. It’s an indication of China’s better performance in the power sector.

The authors then compare the skill levels among the firms, employing usage of computers as a proxy. They find that on an average, 22.2% of Chinese workers use computers regularly on the job, compared with 16.7% of Indian workers. That gives a slight edge in skills to the Chinese, according to the paper. On the other hand, access to finance is easier in India, with 59% of the Indian firms in the survey sample having an overdraft facility, against 26% of Chinese firms.

Labour market flexibility is one of the main reasons for higher productivity. The study finds that the median proportion of non-permanent workers in the Chinese firm is more than four times that in the median Indian firm. Moreover, the median firm size in China is 134 employees, in sharp contrast to only 18 in India.

What about regulatory hassles and government interference—does it not hobble productivity? The researchers try to gauge its impact by considering the amount of time senior managers have to spend dealing with regulators. They find that while Indian firms on an average spent 14% of their senior managers’ time on dealing with regulators, the corresponding number for China is 20%. The authors say that higher labour flexibility accounts for much of the difference in productivity. China’s larger firm size is a big advantage, since larger firms are more productive. India’s strict labour laws result in a proliferation of small firms, hampering productivity. There are also indirect benefits of larger firm size. The authors say, “By removing the regulatory constraints on firm size, firms within a city grow larger and more firms enter. Each firm benefits from economies of agglomeration. Our estimates show Chinese firms benefit far more from economies of agglomeration than their Indian counterparts.”

In short, for India to bridge the productivity gap with China, we need more investment in infrastructure, the removal of restrictive labour laws and more usage of information technology in the workplace.


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