According to the International Monetary Fund (IMF), World Economic Outlook, advanced economies with deficits will need to compensate for decreases in domestic demand with increases in international exports. Emerging markets such as China and India will compensate by shifting from international markets to their own domestic markets. The IMF has also projected that China will overtake the US economy by 2015 and India is expected to be equal in size to the US economy by 2020 (International Monetary Fund (IMF), 2011). It is clear that the continued expansion of China’s and India’s economies places them as a dominant economic forces that Multinational Enterprises will have to compete with for market share in China, India, emerging markets and domestically. Professor Khanna in his article China + India the Power of Two emphasizes the importance of businesses gaining a competitive advantage by not only looking at China and India as separate countries but by developing business strategies that consider China and India as major trading partners. Professor Khanna supports his position with the following four key points: history, country analysis, cultural relations and successful companies (Khanna, 2007).
After 40 years of hostility China and India are renewing cultural ties, for three reasons. First, before the conflict in 1962, China and India enjoyed centuries of close economic, cultural, and religious ties. Second, research indicates that neighboring countries trade more with each other than non-neighboring countries. Third, China and India have evolved in different ways since their economies opened up, reducing the competitiveness between them and enhancing the complementarities (Khanna, 2007).
With 40 percent of the world population, 2.5 billion people and a combined workforce of 750 million china the second fastest growing economy and India the fifth fastest growing economy in the world will account for around 40 percent of world trade by 2016 (IMF, 2011). China and India need to not only be looked at as separate countries but also in relation to each other as major trading partners (Khanna, 2007).
Most Multinational Enterprises (MNEs) and consultants do not believe that China and India can mend fences due to differences in foreign policies and in competition for raw materials, technologies, capital, and overseas markets and to dominate Asia. However some companies have already developed strategies that make use of the capabilities of both countries. India's Mahindra & Mahindra developed a tractor domestically but manufactures it in China. China's Huawei recruited 1,500 engineers in India to develop software for its telecommunications products and China National Petroleum Corporation (CNPC) and India’s Oil and Natural Gas Corporation (ONGC), have teamed up to negotiate oil contracts (Khanna, 2007).