Académique Documents
Professionnel Documents
Culture Documents
Aradhna aggarwal
Associate Professor, University of Delhi
Consultant , ICRIER
March 28-29, 2007
Objectives
• the magnitude of intra and inter (extra)-regional FDI flows, the main source
countries and the major sectors that have attracted FDI in the region;
• The most. prominent form of regionalism remains the regional trade agreement (RTA).
• Traditionally, RTAs aim at stimulating trade and cover only trade barriers( Old regionalism)
• Now RTAs are more comprehensive. Three components of RTAs. The need to attract
investment is increasingly cited as an impetus to RTAs. ( New regionalism)
• Regionalism also takes the form of International investment agreements : BITs, DTTs and
PTIAs
• Most studies however focus only on trade effects of regionalism. Emerging literature. This
study examines investment flows in the SAARC region comprising south Asian countries.
Regionalism in South Asia: Trade Agreements
• SAPTA : 1995.
• SAFTA : 2006. Under the agreement, all non-LDC members would reduce their
existing tariffs to 20% within a time frame of two years from the date of coming
into force of the Agreement.
• Bilateral Investment Agreements (BITs) are not common. No. of BITs in which
South Asian countries involved: 109, No. of BITs within the region : 4.
• The lowering of investment barriers may promote intra-regional FDI, offsetting the
negative trade effects of RTAs.
• Dynamic effects:
• RTAs may increase the attractiveness of the region by promoting economic growth
and intensifying competition among member countries for attracting investment.
• The presence of FDI may catalyze the growth of the economy and contribute further
to the growth of FDI .
• FDI by some countries in a country motivate the others to enter the country. The
herding effect may also have favourable impact on overall investment.
• Overall effects : The overall effects are more likely to be positive. Empirically, there
seems to be a general agreement that RTAs generate FDI stimulating effects but the
degree of success varies across RTAs.
Net inflows of FDI into SAARC countries in selected years : 1980-
2005 ( less than 1% of world FDI inflows over 2001-05
Bangladesh 4 6 6 10
Bhutan Nil Nil Nil Nil
India 121 1325 2024 1364
Nepal Nil Nil Nil Nil
Pakistan 5 19 56 44
Sri Lanka 7 27 6 38
Maldives 1 Nil Nil Nil
South Asia 124 1378 2092 1456
Share of India in South Asia (%)
87.68 96.22 96.75 93.68
Share of South Asia in Asia (%)
0.37 7.25 2.51 1.74
Share of Asia in Developing countries
66.0 53.4 74.0 71.2
Share of Developing countries in world (%)
6.3 13.9 15.1 11.8
Share of 5 top investors in Individual South Asian Countries (%)
Nepal .0006 - - -
projects)
France 102(4%)
Malaysia 3 (4%)
China 12(9%)
UAE 18(13%)
• Sri Lanka: The principal sectors which have attracted Indian investment are steel,
cement, rubber products, tourism, computer software, IT-training and other
professional services. During the past three years, leading Indian companies such as
Gujarat Ambuja, Asian Paints and Larsen and Toubro have committed substantial
investments, while existing companies -CEAT and Taj Hotels, for example -have
expanded their operations . Of the total equity invested by Indian companies in
regional joint ventures, 54% are located in Sri Lanka.
• There is huge potential not only for large companies but also for SMEs if
investment is facilitated within the region.
Future Prospects
Median Age (yrs) 24.4 21.5 19.9 19.4 29.1 20.2 17.5 21.7
Population growth rate 1.3 1.6 1.8 2.1 1 2.1 2.7 1.8
2004-20
• But the problem in SAARC region seems to be more political than economic .
Taneja shows that there has been a considerable amount of "informal" trade among
member countries of the region. This was not only to evade the high tariffs that
must be paid on official trade, but also to carry out some trade that would not have
been permitted at all. Mohanty identifies more than 1500 products as potential items
for trade in the region and the region is capable of absorbing them. Yet the trade
flows remain low.
Are the prospects insignificant due to similarities in the
structure of the economies
rank basic efficiency innovativ GCI score basic efficiency Innovativ PCY Adult
requ enhan en index requirem enhancers en litera
irem cers ess ent ess cy
ent rate
(%)
India 43 60 41 26 58.6 57.3 52.9 61.9 748.42 61.3
Srilanka 79 80 79 67 41.4 49.2 32.5 32.4 1242.3 97.2
Pakistan 91 93 91 60 35.0 41.8 24.7 34.2 738.7 41.5
Banglades 99 96 108 104 29.0 40.7 16.2 15.0 416.95 41.1
h
Nepal 110 106 117 111 23.0 33.6 11.7 11.8 298.62 44
Bhutan - - - - - - - - 861 47
Maldives - - - - - - - - 2367 92.6
C.V. 30.5 21.5 37.3 54.0 36.6 20.3 58.9 64.2
Textiles 21.5 Textiles 50.6 Textiles 68.9 Textiles 86 Textile 85.8 Anima 55.4
s l
Stone 17.2 metals 10.2 Vegetab 7.3 Vegetables 17 Anima 5.6 Textile 32
les l s
Chemicals 10.6 Fats and 9.3 Leather 5.8 Plastic 6.5 Leathe 3 Foodst 12.3
Oils r uff
Plastics 3.2
Vehicles 3.1
This implies…
• that countries vary widely in the quality and capacity of their scientific and
technical infrastructures and business sophistication. They are pursuing similar
macro economic policies but are differentiated in terms of sophistication of
economic activities and innovativeness.
• that there are possibilities of vertically integrated intra regional FDI. Theoretically,
vertical FDI can also occur in South-South RTAs if there are sufficiently large
differences between the members in incomes and other determinants of factor
prices.
• Though the theoretical literature has not considered the impact of lowering
of trade barriers on inter-regional FDI inflows, one can argue that due to
proximity, outsiders can also exploit the locational advantages by setting
up different processes across different countries within the region.
• This will promote efficiency seeking investment from outside the RTA
also.
Inclusion of Investment provisions
• Lowering of I barriers for firms from member countries may have positive impact
not only on efficiency seeking intra regional FDI but also on intra regional domestic
market seeking FDI flows.
• There are many SMEs or even large enterprises from developing countries that
look for investment opportunities in not so sophisticated markets in small
neighbouring countries. Lowering of investment barriers can provide an impetus to
such investment.
• Until mid-April 2002, around 50% of foreign enterprises have been registered as
SME enterprises. A large number of such companies were from India.
• There are larger benefits from FDI from developing countries in terms of
employment, technology spillovers and learning due to the use of labour intensive
medium technologies as in Nepal.
• This will also upgrade the capabilities of Regional firms (Investment Development
Path : Dunning
Inclusion of Services
• Rapid expansion of services in all these economies.
• While Pakistan and Sri Lanka have advantages in transport and tourism, Maldives
has advantage in Travel and tourism. India has advantage in IT and IT enabled
services. Thus there is a scope for regional cooperation and FDI in services.
• Most services are non tradables and require commercial presence of the service
providers. Inclusion of services therefore is expected to promote FDI in services.
• Inclusion of services in RTAs will also facilitate the cross border movement of
people.
• FDI: Pre-entry policy space in all the countries but post entry national treatment.
• Wall Street index of barriers in 2000 for South was 3 on the scale of 1-5 which was
the same as the raking for other developing countries. Since then, the FDI regimes
have further liberalised.
• Of all the South Asian Countries, Pakistan follows the most liberal FDI policies
followed by Bangladesh, Nepal, India, Sri Lanka, Maldives and Bhutan in that
order.
Future Prospects of FDI Flows
• Most South Asian initiated economic reforms in the 1990s and liberalised FDI
policies substantially.
• Although their share in global FDI inflows increased gradually, it still remains very
low.
• Apparently, macro economic reforms and liberalisation of FDI alone did not yield
substantial benefits.
• And, the countries could not exploit the potential of regionalism in promoting inter
and intra- regional FDI inflows due to shallow integration.
• We propose that if the regional initiatives allow for "deeper" forms of integration,
synergies generated will promote FDI inflows into the region.
• Bhutan : Agro Based processing, finance, Travel and tourism, hydro electrical power, IT
• Nepal : travel and tourism, Hotels and restaurants, IT. Keen on investment in infrastructure,
hydropower and roads.
• Pakistan : Financial, IT, Gas and oil explorations, trade construction and power.
• Sri Lanka : Textiles, Pharmaceuticals, Auto, Software, Gems and Jewellery, light
engineering, electronics.
Requirement of less advanced technologies/ more labour intensive technologies, cultural affinity
may be vital in determining FDI flows.
Challenges
• The major challenge is to improve investment climate in the region. This will
promote not only intra-regional I but also inter-regional I. Further, intra regional I
will itself result into investment from outsiders due to herding effects and efficiency
effects.
• The following bottlenecks need to be addressed”
• Political factors:
• Political mistrust
• Psyche to look to the west
• Domestic barriers:
• Administrative barriers
• Complex trade and custom rules
• Corruption
• Poor trade and production infrastructure
• Poor connectivity between countries
Cluster and SEZ approach can play a vital role.
Governance (IFC surveys)
East Asia & Pacific 4.91 7.25 51.86 1.81 33.59 1.82
Europe & Central Asia 2.82 5.4 45.13 1.04 44.79 1.57
Latin America & Caribbean 2.75 10.39 40.11 1.52 6.83 2.94
Middle East & North Africa 3.52 9.94 50.87 2.72 40.09 1.3
Delays in electrical No.of electrical outage Value lost due to No. of water Delays in telephone
connection electrical supply connections
outage failure
Middle East & North Africa 43.84 44.27 4.69 34.54 51.46
Average export clearance Longest export Average time to claim imports Longest time to claim imports from
time clear time from customs customs