Two of the world's fastest growing economies are beginning to outgrow decades of rivalry and mistrust and starting to think of themselves as partners. It is perhaps too shortsighted to see India and China only as competitors. Typically, large neighbouring countries have huge bilateral trade. By that benchmark, India and China have a long way to go. It is not that the two countries should not or will not compete in the future. It is only that the scope of cooperation-so far unexplored and unrealised-is enormous. The scale of interaction among all large neighbours in the world, be it Mexico and the US or Germany and France or South Africa and its neighbours, is much larger than what exists between India and China. And this is when the two are the world's most populous nations.

Sure, India and China developed very differently. If China's growth was fuelled by foreign investment, India's was led by domestic entrepreneurs. If India's strength is its knowledge and software economy, China is marvelled at for its enormous and efficient infrastructure. Fundamental differences between the two countries aren't going to disappear any time soon. For instance, China isn't going to dramatically overhaul its poor intellectual property protection laws and India's bureaucracy or its infrastructure aren't going to become business friendly overnight. The two countries will remain on different trajectories and there is nothing wrong with that. It is this difference between the two economies that creates the potential for complementarity.

To guess what shape the economic cooperation between India and China will take is a fool's game. But some pointers to the potential partnership are already evident. The two countries have taken a common and joint position on most WTO issues. They have also promised to cooperate in their global hunt for energy. In general, China has been savvier in projecting its influence overseas-something India can learn at a time when its economic profile in the world is also rising. China has spread its influence in every continent, including in India's neighbourhood. That's mainly because the Chinese are far more focused on their global political and business agenda than Indians. In my recent work on Chile, Argentina and Brazil I was surprised to see how much ahead China's engagement with these countries was vis-à-vis India's. China's leveraging of FDI is also worth emulating, especially since FDI inflows in India are set to grow very fast. The Chinese government sets clearly what it wants from foreign investors and offers concessions to maximise both the country's and the investors' interests. India needs to also learn from China's success in engaging overseas Chinese.

India-China trade has grown spectacularly in the past 10 years. Though the recent surge in India's exports to China has been driven by the Middle Kingdom's seemingly insatiable import of steel and iron ore, India's export basket will eventually enlarge to include other products. China's demand for Indian steel has helped open eyes in the two countries to the opportunities for mutual business.

Indian companies looking to invest in China will have to be prepared to deal with the local governments in that country in a different way. Local governments play a bigger role in the day-to-day functioning of enterprises in China than they do in India. A legal dispute with a joint venture partner rarely results in a resolution in favour of the foreign investor. There is a learning curve for operating in China and Indian companies will have to follow it just as companies from US, Japan and Germany have done.

Be it trade or investment, for either or both to flourish, the two Asian giants have to first bridge the decades of information vacuum on each other. To me the most heartening aspect of the current bonhomie between India and China is that they have finally begun to understand and engage with each other. That will help fill the knowledge gap that persisted between them. And as that gap narrows, the huge potential-performance gap in the bilateral trade and investment will also shrink.
(As told to Rohit Saran)

Tarun Khanna is Jorge Paulo Lemann Professor at Harvard Business School. He teaches in a HBS-Tsinghua University program for senior executives in Beijing.

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