Speech of Dr. N. R. Narayana Murthy at Asian Institute of Management

I am pasting here the speech of Mr. N.R.Narayana Murthy that he delivered on the ocassion of Asian business conference held at AIM.

The New Economy and What It Promises for Asia
Asian Business Conference
Asian Institute of Management


Dear members of the Board, faculty, students and guests…

I’m indeed honored by this invitation to be here at the Asian Business Conference. It is
indeed a pleasure and a privilege. I thank the organizers for inviting me.

As the dean said, today I’d like to speak about the Relevance of the New Economy, an
economy that is being shaped by globalization and advances in technology, but
politically in the context of Asia. I will also speak on how the Asian region could
benefit from the changing model and emerging models of the New Economy.

In the span of the last 50 years, the Asian region has indeed emerged as a strategic and
dynamic part of the global economy. We know how, during the 1950s, Japan
transformed itself into an economic power, the second most powerful country
economically in the world, and all of it from the ruins of the Second World War. In the
1970s and early 1980s, countries like Philippines, Indonesia, Malaysia, and Thailand,
contributed to the growth momentum, along of course with the city-states of Singapore
and Hong Kong.

The 1980s saw China opening to the West, which was followed by extraordinary free
market reforms – really bold free market reforms. These reforms spurred China’s
economic growth. During the period 1979 to 2004, China’s average annual GDP
growth rate was 9.9%. I don’t know if there is any other country which has reached that
kind of growth rate.

India opened its market much later in the year 1991. The reforms resulted in an average
GDP growth rate of 6.3% during the 1990s compared to the period between 1950 and
1990, when it grew at a mere 3.5% [annually] – also called the famous Hindu rate of
growth. What is interesting is in the last five years, this economy started to accelerate.
It grew at 7-7.5%, 8%… And in the last quarter, we grew at 9.2%.

Asia is set for a fourth year of strong growth, led by China and India. Real GDP growth
of Asia, excluding Japan, averaged 7% during the period 2003 to 2006 when compared
to the world average of 4.8%.

Growth of Asia is indeed boosting the global economy while facilitating economic
growth of the West. In other words, both the partners in trade – as has been ably proved
by economists – so there need be no fear that opening up borders, enhancing trade will
not be good for any country. It will be good for both countries.

According to BusinessWeek, Asian-owned businesses are the fastest-growing segment
of U.S. small businesses by revenue growth, a statistic that follows the rapid growth of
Asian integration. During the period 2000-2005, permanent resident status in the U.S.
increased on an average by 33%, while in the case of Asians receiving permanent
resident status, it increased by over 50%.

During the period 1990 to 2002, receipts of Asian-owned businesses rose by over 65%
against the overall average of 40% during the same period, according to the US
economic census.

The US Office of Immigration Statistics notes that the Asian students accounted for
over 44% - No. 1 being India, No. 2 being China – and the Asian workers account for
over 32%, again No. 1 being India and other countries – the total foreign workers
granted visas.

Globalization, which has led to falling geographic constraints and technological
advancement, has indeed opened up the world’s markets. The highly competitive new
economy is thus evolving and bringing benefits to the entire world. Globalized
economy, however, challenges some of the old maxims of economics. Textbook
economics says that capital should flow from rich countries with abundant capital such
as the US to countries such as China and India, where capital is relatively scarce so that
the returns are higher. This is basic economics, right?

However, during the globalization of the late 19th century, surplus European savings
financed the development of America. Between 1880 and 1914, Britain ran an average
current account surplus of 5% of GDP in contrast to the US today which runs on an
average of over 7% of GDP. It’s huge at $11 trillion.

I’d like to define New Economy as a knowledge-based economy that has emerged due
to the coming together of globalization and rapid advancements in information
technology. I’ll be using the terms New Economy and knowledge economy
interchangeably during my presentation to you.

The knowledge-driven economy increases per capita income and improves the overall
quality of life. That has been proven. Knowledge-driven businesses contribute less
towards pollution when compared to heavy industries. This is extremely relevant and
important today. According to the World Health Organization report, 16 of the world’s
20 most polluted cities in the world are in China. We all know that. In fact, this
February, Beijing recorded its warmest day since 1840, confirming the incidence of
global warming in the region.

Knowledge economy could help countries like China that heavily depend on
manufacturing, and countries like India, where over 60% of the population rely on less
remunerative agriculture, and therefore, they can move to knowledge services.

I will now talk about two important beneficiaries of the New Economy – offshoring
services and offshoring innovation. I’ll also talk about how Asia stands to gain from
these strengths.

In 2003, the global economy employed approximately 1.6 billion people outside of
agriculture. Of these, over 1.38 billion people were in services. This service sector is
the biggest source of employment in developed countries. We all know that. According
to the International Labor Organization (ILO), the service sector in the G7 countries
employed 66% to 75% of total workforce during the year 2004. In comparison, India
and China employ just 23% and 38% of their workforce in services.

The developed nations have already experienced the gradual shift in employment from
agriculture to services that occurs as a country grows its GDP per capita. GDP per
capita at purchasing power parity of countries like US, UK, and Canada are more than
that of countries like India, China, (and) Philippines by a factor of 7 to 10.
During the period 1980 to 2002, world trade grew close to 7% annually both for
services and manufacturing. The offshoring of services to emerging markets grew even
faster. According to McKinsey, offshoring is projected to grow at 30% annually from
2003 to 2008. It is estimated that offshoring will account for 20% of total world
services trade, up from the current sub-4% levels. Technology has increased the pace of
offshoring and improved the predictability of the services offered through offshoring.
Globalization and advances in communication technologies have only increased the
momentum of offshoring, especially post year 2000. Proliferation of communication
technologies presents Asia with the opportunity to increase employment in the services
sector, which I believe to increase per capita GDP and per capita GDI, the global
domestic investment. This is extremely critical to countries like India with over 65% of
population dependent on agriculture. The agriculture trade in India grew by just 0.1%
during the period 1980 to 2002. This is according to the World Trade Organization
trade statistics.

McKinsey estimates that by 2008-09, 160 million jobs or close to 11% of the total 1.46
billion services jobs worldwide could be carried out remotely. In other words, countries
like the Philippines, India, China, all of us can take advantage of this and indeed create
tremendous opportunity because of 160 million jobs which are high- income. They’re
very, very important.

To put this in perspective, the automotive industry employed close to 3.3 million people
worldwide in the year 2004 – just 3.3 million people. And 1.5 million jobs were
performed remotely in 2003 – equal to 0.5% in world services employment.
Engineering jobs showed the highest potential for global resourcing, followed by jobs
in finance and accounting, notes McKinsey.

The New Economy has resulted in manufacturing being globally sourced and several
services being carried out remotely. Over the past couple of years, another important
trend, that is global trend in innovation, is catching up, whereby firms worldwide are
linking up their entire supply chain right from the conception of ideas and innovation to
manufacturing and placing the product in the market. In other words, we are getting to
collaboration in manufacturing.

Asian countries are getting large investments in R and D as they become integral to
multinational companies’ global innovation processes. Asia is now considered a source
of high-status innovation countries. Western countries are engaging in hiring by
outsourcing some of their critical R and D processes to Asian countries, thus improving
their cost competitiveness.

According to a working paper published by this researcher at INSEAD, ST
microelectronics or STM integrates the knowledge from its customers in the US to
technical expertise of its engineers scattered in India, in Milan, Italy, in Singapore, and
in the United States. This then enabled STM to create a stream of innovative cheap
designs that are optimized for the needs of several applications.

According to BusinessWeek, firms like GlaxoSmithKline and Eli Lilly are working with
Asian biotech research companies to reduce cost of developing new drugs. It is
estimated that it costs, on an average, $800 million and 10-12 years to develop a new
molecule. What is important is the success rate of such molecules is just one out of
10,000. In other words, imagine the kind of investment that these corporations will
have to make, which means if they were able to reduce their costs, then they are better
off, we are better off, everybody is better off.

Asian firms which do not have the financial means to launch new blockbusters
collaborate with the new global firms, resulting in significant reduction of costs. Apart
from drug discovery research and development that is being relocated to Asian
countries, business intelligence, market analysis, and cost analysis are also being
outsourced.

Integrated innovation also extends to manufacturing. Firms like Texas Instruments
supply chips… Original design manufacturers (ODMs) do systems integration,
industrial designs, and manufacturing. In fact, these ODMs supply close to 65% of the
world’s notebook PCs and over 70% of PDAs.

Globalization has resulted in an increase in confidence in Asian countries, especially
India and China. Asia currently attracts over 25% of global FDI, compared to 10%
during the year 2000. Investor confidence in India and China is at an all-time high, and
these countries were ranked as the top two destinations as per the FDI confidence index
published in 2006.

Communication technologies have made it possible to recognize production and
services across borders. Several non-tradable services such as accounting can be
profited from afar. It’s already happening here. According to the recent global
index, Asian countries occupy all the top six slots among the 30 countries ranked in
terms of financial structure, people, skills availability, and business environment.
Let me say in conclusion that progress in the region and holistic environment and the
living standards of the large number of people living in poverty depends on creating
more jobs in the New Economy; I’m very convinced. Only this could lift them from
poverty and usher prosperity in the region. This requires unrelenting focus on the
overall development of the education sector. We must leverage these opportunities for
they give us a wonderful platform to collaborate and ensure that the future of Asia is
safe.

Thank you very much.