Is What’s Good for Hindustan Motors Good for India? Corporate Stability vs. Economic Growth

There is a cultural difference between India and China that creates some difficulty in understanding each other’s economy. Indians are very proud of global corporations such as Tata and Birla, and produce extensive analysis comparing them to China’s Haier, Lenovo, and similar firms. One sees this in newspapers, blogs, and academic papers constantly.

But the comparison misses the point. China is an ultra-competitive market in the sense that turnover of industry leaders is very high, and productivity enhancement is not primarily created by a small group of incumbents. Engineers, technicians, workers, and machinery move to a new winner’s plant within weeks. There is no disruption in production. This is capitalism, Chinese style.

Chinese consumers do not feel loyalty to any incumbent brand. If Haier produces good appliances today, consumers buy them. If tomorrow a new competitor offers higher quality at lower price, consumers switch immediately, without sentiment. No one mourns the old champion.

The contrast with India is stark. India’s protectionism policies shelter incumbents like Hindustan Motors and its Ambassador car—a relic of 1950s technology kept alive by regulatory barriers. The only beneficiaries of such policies are the tycoon families, not ordinary Indian consumers or workers.

There is now empirical evidence that corporate stability is bad for the overall economy. Professors Kathy Fogel, Randall Morck, and Bernard Yeung studied corporate stability across countries, measuring turnover in the list of each country’s top ten corporations between 1975 and 1996. Their key finding:

Higher corporate turnover is associated with faster overall economic growth, faster productivity growth, and—in high-income countries—faster capital accumulation. This is consistent with Schumpeter’s theory of creative destruction, in which growth entails creative new firms destroying old stagnant ones.

China still has a long way to go. Its largest corporations are mostly state-owned, granted monopoly rights, and given preferential political treatment. They hold assets not put to their most productive use and wield political power to create barriers against private entrants and foreign investors. These are real frictions slowing China’s productivity growth.

Some Chinese state-owned enterprises argue that China needs giant corporations to compete with India on the Forbes 500 list, and request capital injections from taxpayers to achieve this. The argument is hollow. What matters for citizens is higher income and better products, not corporate rankings. What is good for incumbents is not good for the overall economy. What is good for Hindustan Motors is not necessarily good for India.