The Better Investment? China or India

The always insightful knowledge @ Wharton site of the renowned Wharton School of Business at the University of Pennsylvania recently posted an article, entitled, "China or India, Which is the Better Long-term Investment for Private Equity Firms" and concluded -- drum roll, please -- the two countries were essentially tied:

At first glance, India might not seem the safer bet, with its pitted roadways, tainted water and visible, widespread poverty. Yet those outward signs obscure solid underpinnings for economic growth, including a democratic government, a strong education system, widespread knowledge of English and a deep pool of expatriates experienced in Western businesses, according to Wharton faculty and experts in emerging market private equity.

Cheap labor and foreign direct investment have made China the world's manufacturing powerhouse under a government that has embraced Western-style capitalism. China has provided spectacular private-equity returns in recent years, but, the experts note, weaknesses in China's legal system and the possibility of political instability remain concerns for investors.

"Clearly there's enormous private-equity opportunities in both countries," says Wharton finance professor Jeremy Siegel.

The article does a very good job of distilling the views of various India and China experts and enunciating the differences in the investment climates of the two cities.  I found the discussion on the two countries' legal system particularly interesting:

One stumbling block has been property rights. While the Indian legal system offers more protection of property rights than China, it does not do so with great speed, said Krishnaswami. "India has exceptional property laws," he said, "but if you have to enforce them you're dead." [Mukund] Krishnaswami, managing director of Krilacon Group, an investment firm based in New York and Philadelphia] said a court case takes seven to 10 years to complete. Bankruptcies can take three to four years.

Freeman said in this environment local partnerships are crucial. "You really have to know who you are getting into business with. If the locals don't have confidence in the local legal system, it's crazy to think that foreigners will," he said. "Local market expertise is critical. To be successful you can't overlay your U.S. or Western European private equity experience in these markets."

The same holds true in China.  Though there is tremendous value in having a good contract, even in China, and though I have often stated that China's courts are fairer (particularly at the higher levels) than widely credited, the courts are still to be avoided if at all possible. 

Mr. Krishnaswami's advice for avoiding India's courts by doing business with the right people holds true with equal force for those doing business in China.  I would add to his advice, however, by suggesting that even if you know with whom you are doing business, you should still have a written agreement to arbitrate to ensure that if something does go wrong, your case will be heard by a London, Stockholm, Singapore, (or wherever) arbitrator, rather than by a local judge in Chengdu.