Tarun Khanna - Billions of Entrepreneurs: How China and India Are Reshaping Their Future and Yours, Harvard Business School Press, 2007.

In the last few years, the market has been flooded with books on China and India and their emergence as major economic powers. Their stories have even been lumped together into a phenomenon that BusinessWeek has dubbed "Chindia."

Now along comes Harvard Business School professor Tarun Khanna with a wide-ranging book, providing a socio-political analysis of the very different paths these countries have taken to becoming two of the world's largest economies.

Their individual stories are well-known by now. However, Mr. Khanna's juxtaposition of the two countries on a range of social, economic and political factors provides some interesting insights into the stark differences and little-understood complementarities existing between them.

The billions of entrepreneurs in the title of the book include not just business entrepreneurs, but also social and political entrepreneurs who, in the face of significant constraints, are leading the transformation of these countries. As Mr. Khanna points out, however, the very nature of entrepreneurship in the two countries symbolizes their core differences – entrepreneurship in China is largely driven by the state, using top-down authority to channel it, and the state itself is often the entrepreneur. In India, on the other hand, entrepreneurship occurs largely despite the state.

In China, it is hard to determine where the state ends and the private sector begins. The central government has used executive order to modernize the economy and create a modern infrastructure, attract foreign investment, and drive development. It's taken hundreds of millions of people out of poverty, increased literacy and improved life expectancy.

At the same time, the government interferes in and manipulates financial markets, is responsible for a bankrupt banking system, ignores intellectual property rights and stifles the media. Khanna argues that a major challenge in doing business in China lies in companies developing their own sources of financial information, as no official data can be trusted.

India, on the other hand, is characterized as a dysfunctional democracy in which 25 per cent of legislators have criminal records, and bickering parties and vested interests consistently defeat political reform and coherent government action. This is compounded by a labyrinthine and inept bureaucracy. The country is plagued by crumbling infrastructure, crushing poverty, and the persistence of caste conflict. At the same time it has highly efficient capital markets, an increasingly modern private banking system, reliable financial information, a thriving free press, tens of thousands of well-trained English speaking university graduates, some of the world's best engineering schools and strong pool of managerial talent.

In the face of serious obstacles, private-sector entrepreneurs are flourishing in India and a number of significant global competitors have emerged.

The one trait both countries seem to have in common, unfortunately, is corruption. Although here too, Mr. Khanna see qualitative differences, arguing that in China the corrupt demand a piece of something new while in India, the corrupt often help themselves without any real contribution.

The stark differences between the two countries is illustrated in the way they approach foreign investment, an area where China significantly outperforms India. China provides the "red carpet" treatment for foreign investors, lavishing favours on those who can provide advanced technology. This includes developing its software industry by attracting investment from India, and local governments are often provided incentives to pursue foreign investment. India, conversely, has traditionally been suspicious of or, in some cases, openly hostile to foreign investors.

A similar difference is found in the way the two countries treat their respective diasporas, which in China's case is estimated to be in the 60-million-plus range and in India's 20 million plus, including about 300,000 in Silicon Valley.

China, according to Mr. Khanna, views its diaspora as a resource to be galvanized to aid the country's economic development. Indeed, as much as 80 per cent of China's foreign investment in the early years of reform came from overseas Chinese.

Until very recently, India was completely indifferent to overseas Indians despite their wealth, which is estimated to be $160 billion or almost a third of India's GDP. Even now, India's attempts to woo its diaspora strike Mr. Khanna as half-hearted. He characterizes the country's behaviour in this area as one of the most disastrous decisions made by a nation in modern times.

This is an interesting observation, but I think Mr. Khanna misses an even more relevant point, given his fundamental thesis. Despite the Indian government's behaviour in this area, many segments of the overseas Indian community – motivated by increased pride in the country's recent economic achievements – have self-organized, in typical Indian entrepreneurial fashion, to support the country and its development.

The challenge for western companies, Mr. Khanna argues, lies in understanding key differences between both countries and adapting their business models accordingly. He provides a number of examples of how companies such as Dell, Microsoft and GE have adapted their business models to China, often after painful experiences.

He also notes that while many western companies have succeeded in India and others in China, the big benefits will go to companies who tap their complementary strengths. He recommends companies explore ways of combining China and India by focusing on software in India and hardware in China, and Chinese and Indian companies are already looking at capturing these synergies to build a competitive advantage against their western rivals. For example, the Chinese company Huawei is leveraging India's software infrastructure, via a $100 million Bangalore campus, to seek a global edge against rival Cisco. A western company that has also succeeded in this arena is GE Healthcare, which married Chinese hardware with Indian software in the development of medical diagnostic products.

This book is a very useful resource for anyone interested in understanding the evolution of these two economies, and their business-related operating environments. Its most important contribution, however, is in demonstrating how competitive advantages can be gained by leveraging their complementary strengths.

Micheal J. Kelly is dean of the Telfer School of Management at the University of Ottawa.