Why Chinese Bred Innovation While India Inc. Laxed — Geopolitical Cushioning?

The early 1990s were a pivotal period for both India and China.

In India, Dr. Manmohan Singh under Prime Minister PVN Rao kickstarted India’s liberalization after a balance of payments crisis. In China, rocked by Tiananmen Square and calls for a return to Maoist principles, Deng Xiaoping embarked on his famous “Southern Tour” to restore confidence in China’s SEZs and economic reforms.

Thirty years later, it was ironically the state that transitioned from the harshest of Maoist Communism that adapted to capitalist-industrial development the best. Even though India grew at a rapid pace, India Inc. was unable to keep up with China’s newly minted Red Capitalists.

Successfully Unsuccessful Indian Business Elites

While liberalization of regulations and public sector entities was a welcome shift for India Inc. during the 1990s, the Indian industry was rather tepid towards the possibility of reduced tariff barriers and foreign investment.

The “Bombay Club” of influential industrialists commanded immense influence among the government and bureaucrats, even pressuring Finance Minister Manmohan Singh to protect them with an extended period of tariff barriers. They opposed loosening FDI restrictions and campaigned against government benefits for foreign investors in infrastructure projects.

This culture of tariff-induced complacency among Indian businesses slowed efforts to reduce tariffs for nearly a decade.

In the same period, China also faced many similar questions regarding liberalization. Chinese trade negotiators maintained that high tariffs were important for the development of local industry. However, many industrialists were still sensitive to going against the prevailing policy winds.

In the lead-up to China joining the World Trade Organization (WTO), China reduced tariffs precipitously, with Chinese average tariff rates falling below India’s ever since. In addition, the Chinese bureaucracy extended tariff exemptions to nearly 80% of Joint Ventures (JV), including foreign-owned JVs, which then used their advantageous position to start competing in export markets.

It is all too common to quote “The Art of War” when speaking about Chinese capitalism, but Chinese companies were placed on Death Ground. They had to compete to survive, not just amongst each other and other SOEs, but against foreign JVs that benefitted from advanced technical IP. 

A decade before reforms in China, championing private industry was cause for political imprisonment. The subordination of capital to policymakers forced businesses to work in any situation that they faced. These incentives pushed Chinese companies to invest strongly in domestic technology development, localization of foreign IP, and in some cases even IP theft.

Their Indian counterparts instead operated in a protected local market, where the rentier businesses pressured the government to prioritize domestic companies over capabilities. 

Geopolitical Lemons into Lemonade

Indian businesses have often benefited from the fact that India has few enemies. Outside of the subcontinent, Indian companies were not special targets for unusually hostile regimes.

In fact, this geopolitical sweet spot India found itself boosted foreign investment. Indian businesses have not had to worry about going to war with their major technology partners in the US, Japan, or Europe. Ironically this sweet spot generated complacency among Indian industry.

In 1993, Infosys Chairman N. R. Narayana Murthy wrote in a letter to shareholders that "successful companies… have shifted from selling hardware… to selling solutions." This attitude is utterly alien to companies that fear technology embargos. Even the 1998 post-Pokhran sanctions did not convince Indian industry that foreign technology suppliers could evaporate due to geopolitics, as sanctions had been lifted soon after.

Contrastingly, despite increasingly close economic cooperation between the United States and China, the adversarial potential for the relationship had remained among China’s business elite. At the same time, American, Japanese, and Taiwanese companies were deepening their China plays.

Incidents such as the U.S. bombing of the Chinese embassy in Belgrade, the 3rd Taiwan Straits Crisis, and UN sanctions on Chinese telecom projects in Iraq had instilled a sense that dependence on foreign technology suppliers was a vulnerability.

Huawei CEO Ren Zhengfei has even been quoted as saying that "a country without its own program-controlled switches is like one without an army." This sense of geopolitical sensitivity remained partly due to the integration of CCP representatives into corporate leadership.

Chinese companies never had the luxury of belonging to a geopolitically unthreatening country. The potentially adversarial relationship between China and many of its technology suppliers meant that Chinese firms could not skimp out on the localization of the supply chain.

Interestingly, this tenuous relationship also meant that foreign-Chinese JVs were incentivized to localize supply chains. The JV itself also faced geopolitical pressure to secure local partners in case foreign ones became unavailable.

JVs in India do not need to fear crises between India and partner countries that could put existing supplier networks at risk. Surveys show that geopolitical risk is not among the top 10 concerns for businesses operating in India, while in China political and regional factors are major concerns for business. The safer political environment breeds laxer localization.

How Scrutiny Inculcates an R&D Culture

India’s abysmally low R&D expenditure is no new story; however, a breakdown of India’s largest R&D spenders reveals a positive pattern resulting from consistent regulatory and foreign scrutiny.

Some of India’s highest R&D spenders are pharmaceutical companies. Bucking the trend shown by Indian technology and industrial giants, Indian pharma companies consistently spend more than 5% of revenue on R&D expenditure.

The Indian pharma industry has a long history of reverse engineering due to a multitude of fears such as patent embargoes, negative diplomatic campaigns, and strict foreign standards. The adversities that Indian pharma firms faced have instead forced them to invest in R&D and have resulted in partnerships, even with former litigants in the Indian market.

The example of Indian pharma shows that an industry exposed to global competition and geopolitics can break away from the trend of low R&D and innovation.

Chinese companies are no strangers to being the target of foreign political campaigns, accusations of espionage, or allegations of IP theft. Regardless of how grounded any of them may be, this environment of uncertainty has pushed the leading Chinese firms to focus on technological disruption, diffusion, and frontier R&D.

As early as 2003, China’s premier technology company, Huawei had been the target of IP litigation by Cisco. Facing near bankruptcy due to fines, Huawei instead partnered with other U.S. companies to escape litigation and gain access to their IP portfolios.

Within 5 years, Huawei’s competitive R&D culture had caused it to eclipse its U.S. partner 3com. Nearly 20 years later, after a concerted U.S. campaign against Huawei’s executives and foreign contracts, Huawei has emerged stronger, leading the technological pack in China.

It is important to note that both India and China are highly invested in the success of their industries. This is not a record of India’s failures to support growing business, for those are well documented. Instead, its to recognize that India Inc. is also responsible for having to play catch up in 2025.

The importance of competition and guarding against complacency are valuable lessons for the Indian industry to learn. The Trump administration’s tariff threats against Indian imports and explicit efforts by China to limit the transfer of industrial production are now immense challenges that India Inc. will have to stand up to.

This constrained geopolitical environment will place more scrutiny and expectations on India Inc. It is in this cauldron of adversity, that India will see who its next industrial trailblazers will be. They will not be the ones shying away from competing and self-strengthening.