Sunday, June 7, 2015

Modern India: How Development is not the same as Westernization

Readers who think that India is the opposite of China – democratically developed and economically backward – should be seeing recent news as eye openers. The center of mobile phone making is moving from Korea to China, right? Well, except that Indian mobile phone maker Micromax (and some domestic rivals) are showing the world one more way to compete in the mobile phone market, with new product release times coming significantly less than a month apart. Compare that with the iPhone release schedule, and you see how advanced Micromax is. Naturally they are quickly gaining market share.

Development is also going quickly elsewhere. The Indian auto industry (yes, there are multiple makers) is introducing new models that are competitive with imports, its high tech industry is now so advanced that talk about closer US alliance leading to license manufacturing of arms in India is sounding realistic, and on the political front there is even a sudden (though very late…) resolution of the major border dispute with Bangladesh.

Does this mean that India is becoming fully Westernized? Well, here we have to deal with some myths that people have, most important of which is the idea that economic development is the same as creating some sort of US/European economy. It is not. Guoli Chen, Raveendra Chittoor, and Balagopal Vissa have published a paper in Academy of Management Journal that looks at just one of multiple dimension of difference: connections between firms.

The idea is simple. We often believe that non-western economies have more informal contacts between firms than western ones, and also are more reliant on business groups of firms controlled by owner families. The second of these statements is false, by the way, there is a lot of variation in business group presence across nations, and it does not follow a clean western/nonwestern line. This article looked at the connections part, which we know less about because it is often hidden. But it can be revealed by seeing who has the best information, which the authors did neatly by examining which stock analysts were best able to predict firm performance.

If development means westernization, we should see traditional forms of ties between firms disappear, right? Well, this almost happened. Stock analysts were unusually well informed about firms in which the CEO had the same caste or ancestral language, but only if the CEO started the career before the economic reforms in 1990. They were also unusually well informed about firms in which the CEO came from the same school as them, but only for CEOs starting the career after the reform. That school effect sounds like something that would not exist in western economies, which have rules on information release, but actually it does. Indeed, westernization doesn’t mean that networks don’t matter; it means that different networks matter.

So in what way is India different from a westernized economy then? It is that both types of ties exist at once. The traditional ties are not gone; they are just limited to the “older” CEOs. “Westernized” ties exist in addition. Perhaps the old ties will be gone at some point, but it is hard to guess now that it will happen, and it is incorrect to assume that it has already happened. 



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