1. China and India’s
Innovative Potential
The Dragon and the Elephant
National Academy of Sciences
Washington, DC
September 24-25, 2007
Sean Dougherty, Senior Economist
OECD Economics Department

2. 2
Overview
• Growth
– Potential and sources
– R&D capacity
• Productivity
– Drivers
• Regulatory reforms
– Product markets
– Labour markets
– The future

3. 3
India’s growth breakdown
Per capita GDP growth
(per cent / annum)
+6.0
+5.0 3.9 4.8
+4.0 +1.8
2.7
+3.0 +2.4
+1.8
+2.0 +2.0
1.3
+1.0 +0.5 +1.0 +1.9
+0.8 +0.8
+0.0 +0.1 +0.6 +0.1
-0.1 -0.6 +0.2
-0.7
-1.0
1950-1979 1980-1989 1990-1999 2000-2005
-2.0
Participation Demographics Capital intensity TFP

4. 4
China’s growth breakdown
Per capita GDP growth
(per cent / annum)
+10.0
9.1 8.7 8.1
+8.0
+4.4 +2.5
+3.7
+6.0
+4.0 3.5
+0.3 +3.0 +5.1
+4.8
+2.0 +2.6
+0.0 +1.8 +0.1
+0.5 +0.9
+0.0 -0.3 -0.1 -0.5
-2.0 1950-1979 1980-1989 1990-1999 2000-2005
Participation Demographics Capital intensity TFP

5. 5
Growth in China vs. India (2000-05)
Per capita GDP growth
(per cent / annum)
+10.0
8.1
+8.0
+2.5
+6.0
4.8
+4.0 +1.8
+5.1
+2.0 +2.0
+0.9 +0.8
+0.0 -0.5 +0.2
China India
-2.0
Participation Demographics Capital intensity TFP

6. 6
R&D expenditure rising
Annual growth 1995-2004
Expenditure Researchers
20
15
10
5
0
-5
R&D intensity: 2.3% <1.0% 1.4%
-10

7. 7
Research outputs growing
Science articles Articles published in
(per million people) High-impact journals
450
India China India
400
350
China
300
250
Brazil
200
150
Chinese
Taipei 100
50
Korea
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0 200 400 600 800

8. 8
Rising productivity allows
Unit labour costs to remain low
Year 2002 Index (Germany=100)
100
90
80
70
60
50
40
30
20
10
0
INDIA CHINA Turkey Hungary Korea Poland Mexico Germany

9. 9
…but India needs larger scale firms
Level of productivity
120%
100%
80%
60%
40%
20%
0%
1-10 10-20 20-50 50-100 100-250 250+
Size of employment

10. 10
…and China more private control
Level of productivity
140%
121%
116%
Relative level of productivity
120% 108%
100%
100% 92%
80% 70%
60%
46%
40%
20%
0.0%
0%
Direct Indirect Indirect Collective Private, Private, Private, Private,
state state, LP state, control LP individual non- other
control other mainland

11. 11
China is restructuring rapidly
Increasing regional specialization
0.39
0.37
India
0.35
China
0.33
0.31
0.29
0.27
1999 2000 2001 2002 2003 2004

12. 12
India’s product markets …
Increasing product market regulation (restrictiveness)
UK
US OECD
Ireland
New … average
Canada
Japan
Germany
Korea
Spain
France
Czech R.
Greece
Italy
Brazil
Hungary
Mexico
Chile
Turkey
Poland
INDIA
0 1 2 3

13. 13
…and labour markets are restrictive
Increasing employment protection (Regular contracts)
US
UK
Canada
Brazil OECD
Denmark
Ireland average
Italy
Hungary
Poland
CHINA
Mexico
Chile
EU 15
Korea
Greece
Japan
France
Slovak Republic
Turkey
Germany
Sweden
Spain
INDIA
Czech Republic
Portugal
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

14. 14
Deregulation in Indian states is making
labour markets more flexible
60
Madhya Pradesh
55
Orissa R² = 0.37
50
Gross job turnover
Himachal Gujarat
45 Pradesh Rajasthan
Uttar Pradesh
40 Uttaranchal Haryana
Maharashtra Punjab
Bihar Andhra Pradesh
35 Kerala
Karnataka
30 Jharkhand Delhi
Chattisgarh Tamil Nadu
25 West Bengal
Assam
20
20 25 30 35 40 45 50 55 60
Labour rule reform index

15. 15
Financial markets are more
Developed in India
Stock market valuation as a share of GDP
China - freely tradable
China
Indonesia
Philippines
Germany
Korea
Thailand
Japan
India
U.K.
United States
Chinese Taipei
Malaysia
Singapore
0 50 100 150 200 250

16. 16
Educational outcomes are now
improving in India, approaching China’s
Literacy rate by age group
100
90
80
70
60
50
40
30
20
10
0
10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60 +
National Urban Male Rural Female

17. 17
The future looks bright for both
economies
Estimated GDP growth rates
11
10.5
10
9.5
9
8.5
8
7.5
7
6.5
6
06
07
08
09
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
India (+5%) China (45%)
India (+10%) China (35%)
Note: Investment rate or change shown in parenthesis. See Herd and
Dougherty (2007) in the European Journal of Comparative Economics.

18. 18
Forthcoming OECD Publications
• OECD Economic Survey of India (Oct ’07)
• OECD Innovation Review of China (end-07)
Also available:
OECD Economic Survey of China (2005)
OECD Science & Technology Outlook (2007)