Transcript Document

Intra Regional FDI Flows in South Asia : Current
Status and Future Prospects
Aradhna aggarwal
Associate Professor, University of Delhi
Consultant , ICRIER
March 28-29, 2007
Objectives
• The objectives of the study are to
• examine emerging trends in regional cooperation in South Asia and analyse, in that
context,
•
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 future prospects of FDI flows to the region; and
• challenges faced by these countries in increasing their attractiveness to foreign
investors.
The Presentation
•
•
•
•
•
•
•
Background and scope of the study (Evolution of Regionalism)
Regional Integration and FDI : A Theoretical Approach
Regional Cooperation in South Asia
Investment Flows in South Asia: The Current Status
Prospects for FDI in South Asia : The Role of Regionalism
Challenges
Conclusions
Evolution of Regionalism
•
•
A proliferation of formal economic cooperation and economic arrangements aimed at
facilitating and enhancing economic integration at the regional level.
It is referred to as regionalism
•
The most. prominent form of regionalism remains the regional trade agreement (RTA).
•
•
In 1990, : only about 40 agreements in force
Feb. 2005 : 260 RTAs had been notified to the GATT/WTO of which over 170 RTAs were in
force
•
•
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.
• In addition to SAFTA, there have been 5 intra/inter-regional free trade agreements :
India- Bhutan, India-Sri Lanka (FTA), Pakistan-Sri Lanka and BIMSTEC
(Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka and Thailand) and APTA
(India, Bangladesh, Sri Lanka, Philippines China, Lao PDR and Korea).
• There are 7 partial free trade agreements : India-Nepal, India-Bangladesh, IndiaMaldives, Bangladesh-Nepal, Bangladesh-Pakistan, Pakistan-Nepal and Sri LankaNepal.
• All except BIMSTEC are traditional RTAs
Regionalism in South Asia : Investment Agreements
• A Regional Agreement on Promotion and Protection of Investment within the
SAARC Region has been under consideration for a long time.
• Bilateral Investment Agreements (BITs) are not common. No. of BITs in which
South Asian countries involved: 109, No. of BITs within the region : 4.
•
•
•
•
•
Other forms of co-operations:
The SAARC Chamber of Commerce and Industry (SCCI)
SAARC Trade Fairs
SAARC Finance
SAARC Development Fund ( Under consideration)
• Regional integration can at best be described as “shallow”, representing old
regionalism.
• Does not rule out the possibility of I effects.
Regionalism and FDI : The Theoretical Framework
• A RTA could influence investment flows both between its constituent member
countries, and from outside the RTA, in three ways:
• Trade effects:
• Within its constituent members (intra regional FDI) : Stimulating effect if FDI is
vertically integrated/efficiency seeking /export oriented. Dampening effects if it is
domestic market seeking FDI.
• From outside the RTA: stimulating effects by increasing the size of the potential
markets and by raising the fear for future protection.
• Thus, a positive trade impact of such measures on an extra regional FDI, but an
ambiguous effect on intra regional FDI.
• Additional Arguments for favourable impact of trade liberalisation on intra –regional
I:
•
•
Can shift FDI patterns from horizontal to vertical FDI in member countries, resulting in an
increase in the former at the expense of the latter.
Domestic market seeking investment may not be adversely affected.
• However, the increase in investment may be distributed highly unevenly. Investment
is expected to cluster to those members of RTAs where locational advantages are
favourable.
Contd
• Effects of Investment provisions:
• The lowering of investment barriers may promote intra-regional FDI, offsetting the
negative trade effects of RTAs.
• Effects of other forms of cooperation:
• favourable
• 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 : 19802005 ( less than 1% of world FDI inflows over 2001-05
1990-2000
2003
2004
2005
Bangladesh
190 (2.5)
350 (2.9)
460.43 (3.4)
692 (4.9)
Bhutan
2 (0.1)
1.06 (0.3)
1 (0.1)
1 (0.2)
India
1705(3.0)
4585(3.4)
5474(3.1)
6598(3.5)
Nepal
11(0.6)
14.78(1.3)
..
5 (0.4)
Pakistan
463 (7.2)
534 (4.2)
1118(7.5)
2183(13.0)
Sri Lanka
159 (5.6)
228.72(5.7)
233 (4.7)
272 (5.2)
Maldives
9 (7.6)
14(7.2)
15(5.4)
14(4.8)
South Asia
2539(2.3)
5727.56(3.5)
7301.43(3.4)
9765 (4.3)
Asia
76616(8.0)
110489(7.7)
157328(9.4)
199951(11.1)
Developing countries
134670(8.9)
175138(9.3)
275032(10.7)
334285(12.8)
World
495391(7.6)
557869(7.3)
710755(7.7)
916277(9.4)
Note : Parentheses show the ratio of FDI to gross capital formation
Source : UNCTAD 2006
Table 4: Share of Individual Countries in SAARC FDI Inflows in Selected
Years ( 1990-2005)
1990-2000
2003
2004
2005
7.48
6.11
6.31
7.09
Bhutan
0.08
0.02
0.01
0.01
India
67.15
80.05
74.97
67.57
0.43
0.26
Pakistan
18.24
9.32
15.31
22.36
Sri Lanka
6.26
3.99
3.19
2.79
Maldives
0.35
0.24
0.21
0.14
3.31
5.18
4.64
4.88
1.89
3.27
2.65
2.92
0.51
1.03
1.03
1.07
Share in South Asia’s FDI inflows :
Bangladesh
Nepal
0.05
Share of South Asia in:
Asia
Developing countries
World
Trends in FDI outflows from South Asia
1990-2000
2003
2004
2005
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
87.68
96.22
96.75
93.68
0.37
7.25
2.51
1.74
66.0
53.4
74.0
71.2
6.3
13.9
15.1
11.8
Share of India in South Asia (%)
Share of South Asia in Asia (%)
Share of Asia in Developing countries
Share of Developing countries in world (%)
Share of 5 top investors in Individual South Asian Countries (%)
India
Bangladesh (2004)
Pakistan (2003-5)
Nepal
(upto 2005-06)
US
11.4
9.24
27.78
15.78
EU
22.7
18.0
19.36
UK
7.0
16.26
12.60
Netherlands
5.9
Germany
-
1.25
Norway
26.59
Japan
7.5
UAE
Mauritius
35.6
Singapore
1.8
13.9
1.73
3.71
2.88
-
Sri Lanka
(1979-00)
12.1
12.35
3.91
16.5
South Korea
9.13
11.5
Hong kong
4.92
10
Vir. islands
4.49
China
10.52
India
40.71
114
Total investing countries
30
35 (excl. unspecified
countries)
50
NA
Table 7 : Intra Regional FDI Inflows (% of country total)
Host country
India
(2005-06)
Bangladesh
(2004)
Pakistan (20035)
Nepal
(2005-06)
Bhutan
India
-
1.0
.01
40.71
ONE*
Bangladesh
Neg
-
Pakistan
-
0.68
-
0.47
Nepal
.0006
-
-
-
Sri Lanka
.01
0.77
-
0.13
Bhutan
.0002
0.75
.01
able 9 : Share of top 5 investors in South Asia since 2002 ( No. of
projects)
Sri Lanka
Pakistan
Bangladesh
19 (40%)
9 (6%)
14 (27%)
US
8 (17%)
26(18%)
8 (16%)
1267 (46%)
UK
3(6%)
4 (8%)
300(11%)
Germany
2(6%)
7 (14%)
195(7%)
India
9(6%)
India
Japan
142 (5%)
France
102(4%)
Malaysia
3 (4%)
China
12(9%)
UAE
18(13%)
Total
54
1500
51
3051
Intra-Regional Investment
• In Pakistan: Indian companies are allowed to invest in Pakistan recently. TCS,
Dabur, VSNL, Reliance are some of the companies taking initiatives.
• Indian investment is into :
• Bangladesh: India’ I : Services, Chemicals and Fabricated metals and light eng.
While Pakistan Co. invested in non metallic sector and food and beverages.
• Nepal : Indian joint ventures are in practically every sector, including tourism,
infrastructure, consumer durables & non-durables and export oriented industries like
garments and carpets. A number of Indian companies, including Dabur, Hindustan
Lever, Colgate, etc., have established their manufacturing base in Nepal
• 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
• Macro dynamism : High growth prospects,Industrial dynamism and
emergence of the service sector
• Regional cooperation : SAFTA replaced SAPA, New RTAs
proposed.
• Multilateral liberalisation
Macro economic dynamics of South Asian Economies
India
Bangladesh
Nepal
Pakistan
Sri
Bhutan
Maldives
Total
L
a
n
k
a
PPP GDP (2005-6)
3787
296
42
366
89
2.9
1.25
4580
GDP $ mn (2005-6)
785
60
7.3
107.3
23.48
.84
.82
983.1
Population
1049.5
143.8
24.6
149.9
18.9
2.2
0.339
1389.2
Median Age (yrs)
24.4
21.5
19.9
19.4
29.1
20.2
17.5
21.7
1.3
1.6
1.8
2.1
1
2.1
2.7
1.8
GDP growth rate
8.1
6.2
2.8
7.6
5.8
7
9
6.6
Export
25
17.2
10.3
14.7
10.3
39.3
17
19.1
Imports
34.4
15.3
15.7
30
13.3
28.8
24
23.1
Population growth
2004-20
rate
Regionalism: How can deeper forms of regionalism promote
FDI inflows?
• SAFTA replaced SAPA, New RTAs proposed.
•
•
•
•
Lowering of tariff and non tariff barriers
Inclusion of Services
Inclusion of investment provisions
Other forms of cooperation
Lowering of trade and non trade barriers:Intra regional I
• There is general pessimism regarding the effects of SAFTA on trade and investment.
Many argue that intra-regional trade a small fraction (4.5%) of total trade of the
region even after considerable liberalisation (The intra-EU trade is 55 percent, intraNAFTA trade stands at 61 percent and intra-ASEAN trade is 25 percent of its total
trade) because these countries share some basic similarities which reduce the
potential for comparative advantage driven trade. These similarities will discourage
trade generated FDI effects as well.
• 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
Competitiveness index
basic
rank
requ
irem
ent
efficiency
enhan
cers
innovativ
en
ess
GCI score
index
basic
requirem
ent
efficiency
enhancers
Innovativ
en
ess
Adult
PCY
litera
cy
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
h
99
96
108
104
29.0
40.7
16.2
15.0
416.95
41.1
110
106
117
111
23.0
33.6
11.7
11.8
298.62
44
Nepal
Bhutan
-
-
-
-
-
-
-
-
861
47
Maldives
-
-
-
-
-
-
-
-
2367
92.6
36.6
20.3
58.9
64.2
C.V.
30.5
21.5
37.3
Source: GCR, 2006 and WDI
54.0
Composition of Export baskets of South Asian
Countries at two digit level: 2004
India
Nepal
Pakistan
Sri Lanka
Bangladesh
Maldives
Textiles
21.5
Textiles
50.6
Textiles
68.9
Textiles
86
Textile
s
85.8
Anima
l
55.4
Stone
17.2
metals
10.2
Vegetab
les
7.3
Vegetables
17
Anima
l
5.6
Textile
s
32
Chemicals
10.6
Fats
Oils
9.3
Leather
5.8
Plastic
6.5
Leathe
r
3
Foodst
uff
12.3
Minerals
9.1
Chemicals
6.6
Vehicles
3
stone
4.7
Metals
9
Vegetables
6
Furnitur
e
2.8
Mechanical
3.2
Mechanical
7
foodstuffs
5.5
Mineral
s
2.8
Metal
3
Vegetables
6.4
Plastics
2.9
Plastics
3.2
Vehicles
3.1
and
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.
• This in turn means
• 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.
• Since domestic market seeking I is negligible, replacement effect is almost nil.
• India-Sri Lanka FTA and Investment
Extra-regional: Size advantage of combined markets
India
Bangladesh
Nepal
Pakistan
Sri
Bhutan
Maldives
Total
La
nk
a
GNI ($ bn)
66.2
7.3
107.3
22.8
PPP GNI
3787
296
42
366
89
4580
GDP $bn
785,468
59,958
7346
110732
23479
986.9
8.5
5.4
-
7.8
5.3
1049.5
143.8
24.6
149.9
18.9
1.3
1.6
1.8
GDP growth
rate
Population
Population
growth
rate (%)
2004-20
2.1
1.0
0.799
998.186
793
2.2
0.787
.339
1470
Extra-regional Efficiency seeking FDI
• 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.
• A substantial portion of Indian FDI in neighbouring countries has been in the service
sector .
Promoting other forms of Cooperation
• Trade facilitation : harmonisation of trade documentation and rules; unhindered
movement of goods, better connectivity, mutual recognition of standards through
accredited testing laboratories.
• Joint project for the development of infrastructure and power.
• Freer movement of natural persons across borders
• Deeper cooperation between business chambers.
Multilateral liberalisation
• Economic Reforms since 1990s.
• 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.
• Further, intra regional flows have been abysmally small.
• 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.
• Future prospects are directly related with regional cooperation.
Priority sectors
•
These are emerging economies. The process of industrial diversification is at different stages
in different countries. Thus there are several sectors which are identified as priority sectors
and where FDI can be promoted.
•
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.
•
Bangladesh: Textile, services, agro based, chemicals, glass& ceramic
•
India : Infrastructure, Power, telecommunication, Engineering, services (IT), electronics and
electrical equipment and computers.
•
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)
Average time
spent
with
tax
official
s
Time
East Asia & Pacific
4.91
Europe & Central Asia
spent
in
government
regulations
Official
predictability
Unofficial
payments
Bribes to Tax
official
s
Bribes
7.25
51.86
1.81
33.59
1.82
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
OECD
1.65
2.97
57.52
0.13
28.26
0.55
South Asia
3.19
7.1
61.52
2.02
46.94
3.32
Sub-Saharan Africa
4.41
8.55
48.97
1.94
20.74
4.04
to
secure
contrac
t
Infrastructure
Delays in electrical
connection
No.of electrical outage
Value lost due to
electrical
outage
No.
of
water
supply
failure
Delays
in
telephone
connections
East Asia & Pacific
12.02
7.04
2.39
1.86
9.32
Europe & Central Asia
7.4
11.65
3
5
10.33
Latin America & Caribbean
26.49
14.91
3.26
9.06
37.47
Middle East & North Africa
43.84
44.27
4.69
34.54
51.46
OECD
8.32
1.14
2.25
0.18
7.91
South Asia
48.18
109.2
5.56
7.57
53.85
Sub-Saharan Africa
38.12
51.96
4.78
29.82
51.39
Trade Rules
Average export clearance
time
Longest
export
clear time
Average time to claim imports
from customs
Longest time to claim imports from
customs
East Asia & Pacific
3.71
5.98
4.89
8.98
Europe & Central Asia
2.91
5.4
3.51
25
Latin America & Caribbean
4.79
9.16
7.22
14.72
Middle East & North Africa
5.14
9.43
10.3
21.29
OECD
4.63
8.33
5.28
9.4
South Asia
7.72
12.66
10.08
17.54
Sub-Saharan Africa
4.45
8.69
7.37
14.55
Legal system
Confidence level in the legal
system
East Asia & Pacific
65.83
8.66
56.63
Europe & Central Asia
55.18
12.59
30.92
Latin America & Caribbean
55.48
7.66
78.06
Middle East & North Africa
66.63
31.59
76.94
OECD
73.6
14.82
60.49
South Asia
53.72
12.29
93.06
Sub-Saharan Africa
60.42
10.33
83.43
Other factors
• Political instability, Law and order, Visa
rules, trade unionism (affiliation with
political parties)