South Asia regions low levels of intraregional economic engagement, which is only 5-6% of the total trade, has badly hit the consumers, workers, firms and the overall economic growth of the region, said a new World Bank report.
The report, Regional Investment Pioneers in South Asia – The Payoff of Knowing pour Neighbors, noted that Intraregional investments are even lower at barely 0.6 per cent of the total inward FDI from the world and 2.7 per cent of the total outward FDI to the world.
The World Bank report explores the potential of intraregional investments and some understudied constraints to such investments. It also emphasises the role of knowledge connectivity, which means economic and investment environment in another country.
In the report, the authors mention that South Asia showed weak performance in attracting global Foreign Direct Investment with respect to other low and middle-income economies in other regions. The region is home to only 1.3 percent of global stock of Inward FDI of 39.5 trillion dollars as of 2017, despite producing more than four percent of global gross domestic product (GDP).
The report said that middle and low income countries receive only 19 percent of all IFDI stock, of which 46 percent is situated in East Asian countries. South Asia has the highest amount of IFDI from extra-regional developing economies, reflecting investments from Mauritius. In 2018, India accounted for 87 percent of South Asia’s IFDI stock. The World Bank said that the relative importance of FDI to domestic output is relatively low in South Asia and most of the FDI is in the services sector.
In the Outward FD, the report said that South Asia has a low share of world stock (0.3 percent) compared with other developing regions. Among developing economies, East Asia has the largest share of global OFDI (2.4 percent), followed by Latin America and the Caribbean (1.1 percent). South Asia OFDI exceeds only that of the developing economies of the Middle East and North Africa (0.1 percent).
Of the OFDI in South Asia, India dominates with a total stock more then 90 per cent. However, Maldives has higher OFDI as a share of GDP. When Maldives reports a higher OFDI share of five percent of GDP, Afghanistan and India report OFDI stocks of 3.6 percent and 2.8 percent of GDP.
The region witnesses a low intraregional investment at three billion dollars. With respect to the flow of intraregional investment funds, almost 75 percent comes from India. However, this only forms just two percent of India’s total outward investment and is at least six times lower than Indian investments in Sub-Saharan Africa. Bhutan and Nepal has the lowest amount of outward investment.
Sri Lanka and Bangladesh are the top regional investments recipients. Pakistan and Bhutan receive the lowest amounts. Investment hubs—particularly Hong Kong SAR, China; Mauritius; Singapore; and the United Arab Emirates—play an important role in facilitating both inward and outward FDI. About 50 percent of all South Asian OFDI is destined for these four locations,
Constraints to Intraregional Investments
Most OFDI policies in South Asia are restrictive, non- transparent, and discretionary.
IFDI regimes are more liberalizing, but they have their own challenges by global standards, like arduous dispute resolving mechanisms, restrictions on land ownerships, and sector-specific restrictions.
South Asian firms have low and polarized knowledge about the economic and investment environment in neighboring countries. This increases information friction and costs of searching for trustworthy partners. For FDI in services, knowledge-embedded networks are even more important for investment decisions.
Bilateral mistrust increases transactional and contracting costs of economic engagement.
To tap the potential of intraregional investments, the report recommends four policy actions that do not entail large fiscal outlays:
Relax OFDI regimes, even for smaller economies. This will enhance the competitive investment landscape and the ability of economies to respond to crisis situations like COVID-19.
Promote smart IFDI promotion techniques and investment facilitation. These policies can target high-quality and high-visibility global firms, while smaller countries can target their affiliates that have already incurred the high entry costs.
Support cross-border information-enhancing and network-development activities. These include industry-specific information web portals, intraregional networking events like industry meetings, investment missions abroad, cross-border women’s networks, and support to regional business associations.
Accelerate digital connectivity and digitization to reduce trade costs. This includes building on initiatives like electronic trade documentation, automation of border management processes, and expanding electronic national single windows to regional trading partners.