China and India, the world’s two largest countries by population, share a border and the distinction of being the key forces in Asia’s economic resurgence. Both have long been viewed as playing a supporting role for the U.S. economy — China in manufacturing and India in back-office technology support. But while Indian and Chinese companies today are increasingly challenging U.S. corporations more directly, the two Asian giants remain “woefully ignorant” of each other and share few business ties, according to Tarun Khanna, a Harvard Business School professor and author of “Billions of Entrepreneurs: How China and India Are Reshaping Their Futures — and Yours”. That is beginning to change, if slowly. In an interview with Ravi Aron, senior fellow at Wharton’s Mack Center for Technological Innovation, Khanna discusses where India and China have been, and where they are headed in their economic relations with the United States — and with each other. An edited excerpt of the conversation follows. (A PDF of the entire interview with Khanna is available here.)

Ravi Aron: In your book, you point out that one of your Chinese acquaintances told the president of Yale University, “Our students know so much about American history, while Americans have been woefully uninformed about Chinese history or its geography, or its culture in a business context.”

What led to Americans’ and Europeans’ big blind spot about India and China?

Tarun Khanna: The short answer is that China and India, until very recent times, have been almost utterly irrelevant to America. And I don’t think this is a commentary on America or Americans. It’s a commentary on social and economic dominance and the world order. It’s an analogue to “All roads lead to Rome.” You sort of had, under Pax Americana, all roads leading to New York. There really was very little economic imperative to think about things outside.

Aron: An even greater blind spot is the lack of interest in India and China about each other. If there is a major country that knows less about China than the United States, that would be India.

Khanna: Both China and India have been woefully ignorant about each other. I think it’s fair to say that, for your contemporaries and mine growing up in China, India would be utterly irrelevant. And I think that would still have been the case as recently as three or four years ago. It’s only in the last … I want to say, two, three years that India begins to show up in the editorial pages, or the equivalent of the editorial pages, in China’s People’s Daily, even occasionally creeping onto the front page.

But that’s a very recent phenomenon, and it has to do more with the rise of certain kinds of Indian companies that are supplying the Chinese and buying their products. I suppose I would say that my own mental image, correct or not, of China, as a child growing up in India, was that of the big guy to the north, and perhaps the big, bad guy to the north, because, after all, there had been a border conflict in 1962 after which relations went into a deep freeze.

Aron: One of the questions that you ask right in the introduction of the book is: Why are Chinese much more likely to be open to India than the other way around?

Khanna: I think there are multiple parts to it. The first has to do with the relatively open attitude that China took post-1978, post mid‑1980s, which has to do with initially opening up to overseas trade and asking for reengagement with the post-Cultural Revolution Chinese economy, in an attempt to sort of resuscitate economic activity. In other words, the Cultural Revolution wipes things [market activity] off [the map] so comprehensively that the Chinese administration had to look outside. The most natural people to look to were the ethnic Chinese [living overseas]. What that has done over time is legitimized foreign growth investments, making it easier and easier for even non‑ethnic Chinese, non‑Asian businesspeople to invest in China.

In [China’s] very practical worldview, any money coming from India is just more money, more foreign growth investment. Some [companies] have been operating in China for quite some time. Plenty have set up shop and are busy operating as if there is no obvious value to their operation. India, in contrast, pursued a much more indigenous-centered — even autocratic — model historically, to its detriment.

That general lack of openness to foreign direct investment (FDI) — open in different ways to different things, but on foreign direct investment I would still say rather closed — has been extended to the Chinese. India is particularly sensitive to the Chinese because there is this intrinsic appeal to security concerns as a hangover from the 1960s. So I think that’s the economic reason why China is more open to outsiders, including India, and India is less open to outsiders, particularly the Chinese.

Aron: Let’s shift to China and the United States, and to India and the United States. First, we will look at China. Do you see Chinese businesses at some point becoming strategic adversaries to the United States rather than principally playing the role of a supply-chain partner?

Khanna: I think there is absolutely no question that at some point Chinese companies will break out of the straitjacket of being cogs in a global supply chain and aspire to playing a greater role in the economic system in the world. A lot of that will be manifest as competition for currently incumbent companies in the world economic order, many of which are American. However, I would not agree with the version of the proposition that says that all forms of ascending Chinese companies would be strategic competitors of American companies.

Many of them may very well offer a strong complementing role. I think it depends obviously on individual companies and individual sectors, but it also depends on the attitude that the American political and economic system takes toward China. In other words, I think it would be a mistake to think in terms of containment of China, if you will, or anything like that. That would not be constructive, nor would it likely work.

Aron: Let’s come to India and the United States. In what kinds of firms and industrial sectors is India likely to become something more than a supply-chain component to companies in the United States?

Khanna: I don’t know that it is at all clear that there will not be competition between, say, Indian car companies and American car companies in the fullness of time. I think what’s interesting to speculate about a little bit is, what are the contours, if you will, the radiation of good business practices that have taken root in India in the last 10 years? What are the contours that would follow in the future? If you think of good business practices as a [positive] virus in the Indian bloodstream, how could this virus spread?

I remember attending analyst meetings in Bombay, and the conventional industrialists would say things like, “In India, we don’t do it this way.” And then, suddenly, the media and the analysts had an example to point to, to say, “Wait a second. If [Infosys] can do it, then why can’t you?”

But my point was that, as in the Chinese case, I wouldn’t rule out saying that there are sectors where we currently don’t think of Indian and Chinese companies as competing [against each other], but where nonetheless, you will see that competition in the future. And I think this competition, as well as the possibility of cooperation, or symbiosis, is more likely to come from India than it is from China, because I think India has better DNA at generating new enterprises than China does.

Aron: Let’s talk about the difference between Chinese and Indian corporations. India seems to be able to build world-class corporations, starting from governance and on to productivity, and making sure they get compliance right. Their strategic thinking has proved successful, whereas China is really struggling with building great domestic companies. Why, and what are your insights? What are your takeaways from your research?

Khanna: Some of the factors are historical. The fact is that China eviscerated its own [commercial] system in the Cultural Revolution by wiping clean most of the soft-institution infrastructure that you would need to run a well-functioning market economy.

What I mean by that is individual property rights were violated by confiscations and so on. And free transmission of information and ideas was compromised by moving people away from their homes, and by prohibiting so much market-oriented activity. So, at the end of the Cultural Revolution, the Chinese are faced with the task of: “How do we basically feed hundreds of millions of people? We don’t have any indigenous economic activity going on.” And so they turned to the outside world for help.

And in the outside world they turned to primarily overseas [ethnic] Chinese, who had the most emotional connection [with the mainland] and the most wherewithal to get around the tough environment. Over time, that, in turn, legitimized foreign direct investment. And non‑Chinese began to invest also. But that created a path towards dependence, which is that the more China began to rely on outside investment — and the more that succeeded in the sense of bringing a lot of money into Chinese coffers, providing goods and services — the less there was a need to do things like fix the underpinnings of the financial systems within China, think about enshrining private property rights (which has been done only very recently after a very long delay), or do things that would restore the infrastructure for private commerce.

India never had a Cultural Revolution. So it never wiped the [free market] slate clean. Indigenous entrepreneurs stuck around. Some of them did good jobs. Some did poorly. But they were never wiped out. And the infrastructure was always there for them to basically operate in a private-sector economy, even though it was heavily interventionist and regulated and so on. But when the country opened up in 1991 and thereafter, the nuclei were in place, around which good companies could be built.

Aron: In China, India and the United States, there is a strong view, espoused in certain quarters, that over time, China would become the strategic, competitive, opposing pole to the United States, while India may become a strategic ally. There are a lot of influential political scientists that advance various flavors of this view. What are your thoughts?

Khanna: What the United States wishes, wants and aspires to, vis-à-vis China and/or India, is, in the grand scheme of things, somewhat inconsequential. And that’s kind of an extreme thing to say, but the reason I say that is that these countries are being fueled by their internal dynamics.

And in some cases they may be leveraging the West to get a leg up, for instance, using the institutions of the West to compensate for their own deficiencies, or selling to the West as a way of earning resources, etc. But primarily they are engaged in solitary development in their own countries, and that’s going to happen regardless of U.S. preferences, one way or another. So that’s the first thing to address anytime somebody brings up this triangle issue.

The second thing is that, in some sense, to me, the most interesting leg of that triangle is the China-India leg. And I think, here, the conventional wisdom is that China and India are competitors. They have border disputes — they’ve had them since 1962, if not before — and the border disputes are unresolved, and they continue to sprout up inconveniently. China is building a blue-water navy. India has nuclear weapons. And so on and so forth.

My own view is that all this overlooks the potential power of a possible economic symbiosis, which is a much more positive-sum story. The border disputes are inherently zero sums.

I think that, at a minimum, a scenario that should be on the table is massive economic engagement, because after all, it’s unusual to have two large, populous countries, cheek to  jowl, not engaging in economic intercourse. If that [economic engagement] comes to pass, then I don’t think it’s going to solve the political issues, but it will relegate them to a smaller part of the conversation between the two. I think that’s the most interesting leg of the triangle.

Aron: So let us take the China-India leg. In many aspects of commerce, they are on the same side of the transaction. It is not a buyer-supplier, but two suppliers, and for many, many aspects, two suppliers competing for the attentions and dollars of one common set of buyers. It manifests itself in many ways: the competition for commodities, the competition for minerals and metals, the competition for energy resources — and the competition for influence, in an indirect way.

Do you really see, then, bilateral trade being a force [strong] enough to overcome the geographical and historical rivalry between these two countries, which has largely gone China’s way?

Khanna: Let me take issue with the very first premise of the question, which was that, in most cases, China and India are on the same side of the transaction. I think that’s true, descriptively, today. But if you also look at the so-called small signals, from the ground up, there are lots of companies, primarily in India but also in China, realizing that what they are providing within China and India — that has nothing to do with cross-border trade — are also things that could find a market in other large, populous, low-income countries. So [this could mean] Indians finding markets in China, Chinese finding markets in India — for instance, the low-horsepower tractors that I talk about in the book from the Hindus [and] the  microfinance that is burgeoning in India and nonexistent in China. Some of the Indian microfinance firms are now wandering around in China at the invitation of the Chinese government asking for ways of leveraging that in China.

In the life sciences, for instance, there are a number of companies trying out products in China that started in India. Things like that. And so these are small signals. They’re small right now, but they could amplify, and they would not be picked up in the bilateral trade statistics, by the way. They would be picked up more in mutual investments and so on. So there’s potential.

Aron: Let’s take the markets of these two countries. By and large, the financial services market, the service market, is more open in India. In many ways India is more open to financial services, especially retail financial services, than China.

On the other hand, in manufacturing, in retailing, China welcomes Wal-Mart, whereas India pushes them away and is very uneasy with large retail chains coming in. Do you see that these two countries are likely to liberalize and open their markets even more, or do you think one of them is more likely to be able to go further than the other in the near future?

Khanna: I think, generically, India will go slower, for the simple reason that it has indigenous competitors to the outsiders. Some of them are efficient, so it is legitimate for them to say that the foreigners are not necessary since we can compete with them. Some of that opposition is illegitimate in the sense that it’s purely seeking protectionism. Either way, there are indigenous companies that will slow down India’s move to embracing FDI.

Aron: Do you see China likely to open deeper and faster in the near future?

Khanna: No, I think that China will open slower, actually. The reason is that the Chinese are now facing their own mini-backlash, in the sense that there are a lot of companies within China saying, “Haven’t we favored outsiders for a long time and can we not rethink this?” Case in point is in the agribusiness sector, where there is so much food price inflation going on, China now thinks that, “Well, gee, if we were not subject to the whims of American grain companies, maybe we would have more degrees of freedom with controlling food price inflation.” They would rather have local companies doing this, so they are trying to put a lid on foreign investment into agribusiness-type products.

I think you will see more of this — that China will not be able to maintain its current speed of opening up, but it will generally be predisposed to keeping things open more than India.

Aron: One last question. The idea of regional hubs is emerging. If you look, for a moment, at when Ye Jianying opened up China in 1978 — for four to six years, essentially, most of the investment that came into China was from overseas Chinese.

Khanna: Yes. That’s right.

Aron: And then they realized that one way of getting massive manufacturing capacity was to use Hong Kong, which had a rule of law and English dominion and a charming British governor. They said, look, Hong Kong can be this interesting proposition that says you can locate your headquarters and monitoring offices here. We are connected to the world’s largest labor market, and you can put the factories there. We speak Chinese and we’ll manage them. It’s a long tradition of people from Guangzhou, the Canton province, settling in the northeastern region entrepreneurially.

Khanna: Yes.

Aron: Now, in some sense, for some years I’ve been working with the Infocomm Development Authority and some of those places in Singapore. Interestingly, Singapore sees itself as being able to do for services what Hong Kong did for manufacturing. It’s making investments in broadband connectivity between India and Singapore, and China and Singapore. It has been increasingly making capital market investments in financial institutions. Temasek has actually been very active, as you know.

Do you see Singapore as playing a role as central HQ, as a very Western country in an Eastern region, providing all the Western ways of life and a squeaky clean government and the rule of law? For instance, a lot of India’s software contracts that are written with an arbitration clause [require] that arbitration be done in Singapore. Do you see Singapore playing the role of a regional hub for the internationalization of services?

Khanna: First of all, I hope so. I wish the Singaporeans enormous success in this venture, because, ultimately, it’s for the good of all of us. My answer, I guess my philosophical bent of mind on this issue, is that, again, it’s not a fearsome thing. I think that Singapore can catalyze enormously investment in China and India, and in turn, those will catalyze further developments in the Bombay Stock Exchange and in the Shanghai exchange, and so on. At the end of the day, whether Singapore emerges the financial center of the region or not is, frankly, immaterial.

At the end of the day, what matters is improvement in per capita GDP and some encompassing measure of human welfare. If Singapore can be the catalyst for the region to do that, it’s wonderful. One of the things that I find most heartening about Singapore’s recent story is that it has recognized it is far more useful to the system by being a bridge between China and India, or a bridge to China and India, and not just playing a role as an adjunct of China.

And indeed, if you look at Singapore’s own role in the development of China, it has been an enormous catalyst. After all, [the Chinese government’s] open-door policy was stimulated by an encounter with (Singaporean statesman) Lee Kuan Yew. He very famously got a little bit of a sermon from Lee Kuan Yew, saying that we are, after all, the less educated descendants of the Chinese Mandarin, who settled in Singapore. And if we can do it, so can you. That has, of course, gone down in lore. The point is that Singapore has played a catalyzing role already in China. And if it does the same for the region, I think, we should all stand up and applaud.