...the annual expansion in China’s trade has been larger than India’s total annual trade during last several years.
The most important factor that still holds back large [Indian] firms from entering these products is a set of draconian labour laws in India. Under these laws, it is virtually impossible for a firm with 100 or more employees to fire the workers even in the face of bankruptcy. It is equally difficult for the firms to reassign the workers from one task to another. These provisions impose very low worker productivity or a high real cost of labour. Large-scale capital-intensive sectors such as automobiles, where labour costs are a tiny proportion of the total costs, can profitably operate in such an environment. But the same is not true of large-scale labour-intensive sectors labour. Few foreign manufacturers are willing to enter India outside of a small subset of capital- and skilled-labour intensive sectors.
Read the whole thing. To illustrate the difference between the two countries, here is a graph of direct foreign investment (DFI) in China and India:
(HT Tyler Cowen)
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