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India as an emerging economy

By abanjoko Mar 20, 2014 2346 Words

An Emerging market has no one definition. An Emerging market is a nation with social or business activity in the process of rapid growth and industrialization with the economy of China and India is considered to be the largest (Tom Stoukas 2013). According to the International Monetary Fund estimates an emerging economy is expected to grow two to three times faster than developed nations like the US (Forbes, 2014). Rather than defining emerging markets by a particular size or growth qualification, “the primary exploitable characteristic of these markets is their lack of developed infrastructures and institutions that enable efficient business operations, factors that are taken for granted in advanced economies” (Khana, Feb 2013). India belongs to the BRIC nations a concept coined by Goldman Sachs in 2001 identified emerging economies that would become Global leaders. However many economists have argues tat the BRIC concept (Brazil, Russia, India, China) is out-dated and have proposed alternative definitions with criteria based on absolute growth instead of size, Dynamic concept with a shorter horizon and a clear cut off being the average GDP of the G6 excluding the US. Drawing on criteria for picking an emerging economy from the various ideas I searched for the following characteristics in a country to make my choice paying special attention to entrepreneurship and innovation in the country; these characteristics include Relative poverty: low – middle income/GDP, low average living standards; often great inequality; not industrialized Growth potential: economic liberalization, open to foreign investment, recent economic growth (Hoskisson, Eden, Lau & Wright. 2000) Poorly developed capital markets, generally poorly developed property rights, Corruption – (Khanna & Palepu. 2010)

Highly Uncertain, less developed rule of law
Human capital: population growth, level of education
Growth rate greater than twice the developed countries growth rate

With India having a GDP average growth rate (annual percentage) from 2009 to 2013 of 7.13% it is over double the growth rate of the developed countries with the average for the United States (US) being 1.2% over the same period, poorly developed property rights at 50 compared to 80 in the US (developed country) as shown in Fig 1.1 and 1.2, government effectiveness of -0.2 compared to 1.5in the US, regulatory quality 40.7% compared to 88.3% (fig 9) in the US, rule of law 45% compared to 90.2% in the US (fig 9), population growth 1.26% compared to 0.7% in the US (World statistics. 2014) and level of education 27.6% compared to 65.6% in the US (fig 9), Tertiary education 6.5% compared to 36.7% in the US(fig 9), political stability and absence of violence and terrorism 36.7% compared to 79.3% in the US (fig 9). Corruption rating is also high as India score 36 in a range from 0-100 with 100 being the least corrupt and 0 being highly corrupt (Corruption Perception Index. 2013). India also showed a high rate of new business and Business owners after at least 3.5 years after start up with above 4% of population and just fewer than 10% of the population respectively posting statistical data higher than the US. Although the Global Innovation statistics show India at 36.2 compared to 60.3 in the US (Fig 9) it only shows that the technological advancement is inadequate further solidifying its position as an emerging economy instead of a developed economy, the statistical data above indicate India is an ideal nation for critiquing issues preventing or hindering economic growth and transition into a developed economy.

Entrepreneurship itself is “a process by which individuals - either on their own or inside organisations- pursue opportunities without regard to the resources they currently control (Stevenson & Jarillo, 1990, p23) with the rates of new business owners in India relative to the adult population being about 5% (Global entrepreneurship monitor. 2013). Entrepreneurs in India face a broad set of challenges in setting up and growing businesses but this doesn’t deter them, as the prospects are very lucrative in one of the world’s key rapid growth economies. There are a number of areas where advancement could be made to enable seamless entrepreneurship such as regulations governing the export of goods, which are very choking presently, the tax system is slightly onerous and could be simplified also. These issues listed above are generally subdivisions categories listed below which affect transition to developed economies Lack of or weak Institutions & Institutional voids

Access to finance
Resources for entrepreneurship and starting up a business

Institutions are “the humanly devised constraints that structure human interaction” (North, 1990, p3) and include formal rules and laws as well as informal influences like cultural norms. Scott (1995, 2008) classified North’s formal and informal aspects of institution into three pillars: regulative, normative and cultural cognitive. The regulative pillar consists of formal rule systems like laws and regulations as well as enforcement mechanisms that are sanctioned by the state (North; Scott, 1995) The normative pillar refers to institutions like professional societies that delineate roles and expectations for specific target groups while the cultural-cognitive pillar includes accepted beliefs and values shared among individuals through social interactions that guide behaviour. ‘Institutional voids’ a phrase coined by Khanna in Winning in Emerging Markets, is the absence or weak formal institutional arrangements and intermediaries such as Market research firms and credit card systems to efficiently connect buyers and sellers. This generally creates challenging obstacles for companies trying to operate in emerging markets and understanding this void(s) is key to success in such markets. (Winning in Emerging markets, Tarun Khanna, p1). The growth model and choice of dealing with institutional voids differ as can be seen with China and India; China favour multinationals over indigenous companies while India favours its locals and shuns foreigners. However, they do share a commonality: both have institutional voids. One of these is access to information. In China information is ‘noise-free’ which is to say it is biased, with few people going against the mainstream thinking. In India, everyone is free to express this point on view in a “loudly and noisily” fashion and it is up to the individual to decide which view is better.

Formal Institutional voids including stalled reforms, huge corruption scandals and bureaucratic inaction, currency depreciation, current-account deficit looms and souring inflation. India restored micro-economical and financial stability, but structural impediments to growth and persistently high inflation remain key concerns, the IMF says in its annual report. The central bank refuses to cut interest rates and public debt is high which has allowed Foreign direct investment to slow down by 67% although these issues are currently being tackled include narrowing external and fiscal imbalances, tightening monetary policies, taking positive steps on structural reforms and addressing market volatility, cutting subsidies on diesel and gas, easing conditions for foreign investors in domestic aviation, broadcasting, electricity trading. High degree of bureaucracy also impacts start-ups despite shareholder and creditor rights formally been well set up, there are issues in terms of how effectively these rights are enforced. This is in part a regional issue, with some states having effective legal rights and in others (such as Bihar) the rule of law not being well established. Overall in terms of effectiveness, India fares poorly on the rule of law and corruption indices compared with the average in the sample, as seen in Fig 1.1 although the efficiency of the judiciary is good and the risk of expropriation is low. Heugens et al (2009) supports this finding – that when there is less than perfect legal protection of minority shareholders, ownership concentration is an efficient corporate governance strategy. But they also find that a certain threshold level of institutional development is necessary to make concentrated ownership effective. Where owners can extract private benefits from the corporations they control, then such concentration is not beneficial to firm performance highlighting Independence motivated entrepreneurship as this actions are detrimental to firm performance. Li et al (2006) argue that the business group structure is a horizontal strategy of diversification that is particularly suited for dealing with the market failures associated with failures in capital markets and in the managerial labor market. Capital markets in India fail because they are weak and shallow and limit any company’s potential to obtain money to fuel expansion and growth (Khanna et al 2005). In most emerging economies, equity is a small part of capital raised and access to debt capital is controlled by a handful of banks which act according to government priorities in the industrial sector. Usually access to foreign capital is relatively limited as well, due to weak governance norms (Li et al 2006).

Informal institutions (also termed social embeddedness) include culture, corruption. Talking in terms of its relationship to and relative levels of Entrepreneurship and innovation in India, corruption is an issue according to 86% of the surveys respondents felts India’s political parties were corrupt, 65% or the parliament, 41% of the media and 50% of businesses were corrupt or extremely corrupt. Control of corruption is 36% in India while in US it is 86%. Public spending on education is also low, enrolment rates in secondary and tertiary education is low compared with its peers, Infrastructure is weak and this adds to the cost of doing business in India. The informal institutions that can bolster on the one hand or undermine formal institutions associated with corporate business groups. I am of the opinion that Informal institutions of corporate governance are substitutive and although presently they replace the ineffective formal legal framework and capital markets they have the capacity to me integrated with formal institutions to further increase sustainability and growth in the economy with reforms to rule of law, crime and corruption so goals can be achieved across the business groups and the formal legal framework.

Finance is also important to entrepreneurs as studies show that 80-90% of entrepreneurs start up businesses with private funding. 53% of Venture capitalist operates in the US with 7.9% operating in the UK the next largest statistic. However, Venture capital and private equity have emerged as funding sources for Indian entrepreneurs in recent years with steady improvement. Due to economic slowdown and Inflation Venture capitalists and private equity firms have reduced their activity with IPOs also weak but with present and further reforms and changes they would continue to operate and increase activity as the GDP rate climbs steadily again. The Rupee has also depreciated over 20% against all the major currencies; this is another major issue as currency stability is important for entrepreneurs who trade globally. Inflation is also a threat as the steep increase in food & Oil costs imply the reluctance in the Central bank to introduce rate cuts, resulting in higher cost of lending for entrepreneurs. Despite the successful promotion of venture capital funds with 63% entrepreneurs acknowledging access to venture capital has improved in recent years, Entrepreneurs in India still struggle to access commercial sources of financing. This highlights the need for government to provide more credit guaranteed and support lending mechanisms to encourage lending. According to the World Bank the ratio of domestic credit to GDP in India was 48.2% compared to an average of 99.0% across the G20 countries in the period of 2008-2010. India’s Credit Guarantee Fund for small and micro enterprises has invested US$8.8 billion in small ventures that would otherwise have lacked the collateral required to secure a bank loan (EY: The Power of three - India. 2013). The use of IPO to raise equity was recently changed as the Finance ministry now allows Start-ups to be listed on the SME without being required to make an IPO; this makes it easier for firms to raise equity at the growth stage (Union Budget 2013-14).

Amidst all the various challenges facing the nation Entrepreneurship enthusiasm however has not depreciated or diminished however it is waiting to be harnessed as shown in Fig 13 with programs such as the National Entrepreneurship network doing significant work in promoting entrepreneurship in the country through awareness campaigns and competition for start up entrepreneurs. A cultural attitude also helps alongside the government taking steps to boost entrepreneurship such as allocation of about $400miliion to set up 15 technology development centres in India (India budget highlights. 2013). It also set aside a sum of around US$36miliion to fund organizations that scale up science and technology innovations, commercialize R&D and make products available to people. However, a critical problem in India however is the cost of starting up a business as a percentage of income per capita which was 47.3% as shown in Fig 5 while at 3.5years (relative to population)

Fig 20: last assessed 20th feb 2014, global innovative

Fig 21

Academy of Management Journal, 43, 249–267.World Statistics. Available: ( - last assessed 4th Feb 2014) Budget Highlights key features. Government of India: Ministry of Finance website, Accessed 21 June 2013 Corruption perception index 2013. Available: ( - last assessed 18th Feb 2014). Forbes. 2014. What makes Emerging markets great investments? Available: (, Last accessed 18th Feb 2014) Global Entrepreneural Monitor (, last assessed 14th Feb 2014). Heugens, P. P. M. A. R., & Lander, M. W. (2009). Structure! Agency! (and other quarrels): Meta-analyzing institutional theories of organization. Academy of Management Journal, Hoskisson, R. E., Eden, L., Lau, C. M. and Wright, M. (2000). ‘Strategy in emerging economies’ 2000. Khanna, T., K.G. Palepu, and J. Sinha (2005). “Strategies that fit emerging markets”. Harvard Business Review. Krishna Palepu, Tarun Khanna (2010). Winning in Emerging Markets: A Road Map for Strategy and Execution. Harvard Business Press. Li, Y,Liu,Y & Zhao,Y.B. (2006) The role of market and entrepreneurship orientation and internal control in the new product development activities of Chinese firms. Industrial Marketing Management. North, Douglass C. 1990. Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. Scott, W. R. (1995), Institutions and Organizations, Thousand Oaks, CA: Sage Publications, Thousand Oaks, CA. Scott, W. R. (2008), Institutions and Organizations: Ideas and Interests, 3rd edition, Sage Publications, Thousand Oaks, CA. Speaking to Perspectives@SMU, Khana, Feb 2013

Stevenson, H.H and Jarillo (1990). ‘A paradigm of entrepreneurship: Entrepreneurial management’ The Power of three: EY-G20- Country- report-2013-India
Tom Stoukas. (2013). Greece First Developed Market Cut to Emerging at MSCI. Available: ( Last accessed 20th Feb 2014. “Union Budget 2013-14: Full text of Chidambaram’s budget speech,” India Today website,, last accessed 3 July 2013.


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