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Causes fast economic development in India and China

Since 21st century, China’s national economy has maintained a growth rate of about 10%, which is called a miracle in the history of the world economy (Cai, 2007). India’s economy has also made remarkable progress. During 2002 to 2006, the economic growth rate reached 7.8%. Since the year 2003 2004, the Indian economy has shown continuous rapid growth: from 2003 to 2007, India’s average annual economic growth rate reached 7.5%, 8.5%, 9.4% and 9.6% (Mohan, 2008). In order to analysis the causes of such fast economic development in the two countries, this essay will firstly introduce the basic framework of open system proposed by Daniel Katz and Robert L. Kahn and how understanding of this theory can instruct the development of economic development. Subsequently, this essay will analyze the key factors that spelling the increasingly rise of economy in China and India, such as the population change, the investment on fixed assets, the technology development and the institutional improvement, based on the open system theory. Finally, the essay will give a conclusion of the overall analysis.

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The open system theory

Daniel Katz and Robert L. Kahn (1978) proposed a theory structure of open-systems theory including: inputs, transformation, outputs and recycling. Inputs contain capital, raw materials, and employees. Also, some intangible influences, such as personal rewards, satisfaction, recognition, or status. Products or services are created through the transformation process using employee, raw materials by facilities such as machine and computer. These products or services are delivered to customers. Through the recycling, the profit obtained becomes the input again to buy raw materials or pay employees. There are also some subsystems which is critical to the development of organization. Understand the organization is an open system other than a closed system can be a great help for any organization to develop through change the external environment such as improvement of the education level, technology, facilities or structure systems.

Key factors for the economic development in China and India

Rarick, A. C., Nickerson, I. and Olan, M. (2007, pp. 19-22) thought that the emergence of economic in China and India is because the low labor cost, however, there are some key factors spelling the economic booming of China and India. Over the past decade, China and India’s economy has undergone tremendous change, which is mainly determined by enhancement of input and transformation of an open system such as the growth of human capital (labor), basic production capacity (noted as the amount of fixed asset investment) as well as technical and institutional factors.

1. The reduction of the population. Personnel are the most important input of the open system. Wealth of population resources ensures the economic growth of China and India’s huge demand for labor. However, over-population also will burden the economic and social development. To ensure the economic development of China, early in 1978, family planning was taken as a basic national policy of China. Over the past decade, China’s economic growth has been enjoying the dividends of the population, but population growth continues to decline (Zhang, 2008). India has the same concerns in the treatment of population problem, the family planning made population growth rate of India downward.

2. The increased investment in fixed assets. Transformation in the open system plays transfer input to output, through all kinds of tools and equipment. Hence, the fixed assets as the tools and equipment should be placed on a lot emphasis to ensure the normal operation of an organization. Understating this point, China and India increased the investments in fixed asset. Fixed asset investment is the primary means of reproduction of social fixed assets. Through the construction and purchase of fixed assets, the national economy continue to adopt advanced technology and equipment, establish new departments, and further adjust the regional distribution of economic structure and productivity to enhance the economic strength (Chen, 2009). Investment in fixed assets reflects the production capacity progress of a country in large extent, so the investment changes in fixed assets can reflect in the relationship of productivity and economic growth. Over the past decade, total investment in fixed assets in China were 10% increase per year to maintain the state of positive growth, and GDP also showed a positive correlation, about 10% increase per year. India’s economy has maintained a 10% annual growth trend, the changes in total fixed asset investment kept positive growth of about 10% per year.

3. The development of technology. As an important input, technology is a critical factor which decides the competitiveness of an organization. Over the past decade, under the guidance of “science and technology are productive forces”, by taking the introduction idea of combining absorption and independent research and development, technological innovation capability of China’s culture and practical results obtained significant improvement. Popularization of China’s IT technology and products in some aspects and some areas have caught up and even more than developed countries. Technology development strategy transferred from the early introduction of technology to the main goal of the original innovation. Adhering to the ideas of integrated innovation and secondary innovation, many domestic enterprises have taken great progress in innovation, and some companies changed the business model from low-cost, low value-added “Made in China” to the high prices, high value-added “global manufacturing” strategy, and achieved good economic results. As can be seen, technical progress provided a great deal of power for China’s sustained economic growth. For India, each government of India have attached great importance to the technological development, the government has developed a series of policies to promote scientific and technological progress and established comprehensive technology management system. Over the past decade, advances in science and technology achievements in India have attracted worldwide attention. The degree of internationalization of India’s cutting-edge personnel training, software development, international service outsourcing and bio-medicine has improved; the national resources investments focus on in space, nuclear energy and remote sensing. Information technology and biotechnology has become India’s two knowledge-based industries. For example, Indian Central Government formulated a national drug policy, and these drugs policy played an important role in promoting the Indian pharmaceutical industry. Currently, the Indian pharmaceutical industry accounts for 8% share of global production, and the output value of share is 1.8%. India’s economic development in the past decade shows the development of India’s technology strength has played a significant role in promoting economic growth (Pradhan, 2006).

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4. Institutional improvement. Institutions, laws and regulations are proponents in the open system, which possess great impact on the development of an organization. In other words, improving or reforming these items can develop the economic development. In the new century, China put forward the scientific development concept to guide economic development, and took a series of new Institutional innovation around scientific development. China’s economic system, the changing approach to the ongoing adjustment of the world economy and domestic economic situation, successfully promoted the emancipation and development of productive forces. China’s economic system reform is one of the fundamental driving forces of economic growth. India launched a “liberalization, marketization, globalization and privatization” as the characteristics of the new economic policy, that is, relaxing the restrictions on private economic development, accelerating the reform of state-owned economy, changing from a planned to market, implementing market economic development model. India has started a comprehensive economic reform, reform involved foreign trade system, industrial policy, and finance fields. The series of institutional change caused by the implementation of this line became the important promoter to advance India’s economy continues to change for the better.


A good understanding and application of open system can be greatly helpful for the development of economy. Considering the external environment influences and each sector of the open system can markedly affect the whole open system and further exert an impact on the economic development, China and India improved a lot in the input and transformation sectors of an open system. Aside from the labor source, that is, the low cost labor forces mentioned in Rarick, A. C., Nickerson, I. and Olan, M. (2007, pp. 19-22), as supplement of the Rarick’s research, the key factors that make the astonishing economic development of China and India are analyzed and proposed, containing: the reduction of population, the increased investment in fixed assets, the great development of technology and the institutional improvement and reformation. The abovementioned factors as well as the labor source are all critical to ensure the economic development in China and India, making them on the top list of countries with most fast economic growth rate.


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