Regional Investment Cooperation in South Asia

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With the recent surge of regional economic cooperation, all eyes have shifted to South Asia. The overarching theme related to regional cooperation in South Asia is the paradox that while the geographically and historically contiguous countries in the region share social, cultural, linguistic and spiritual practices and are confronted with numerous shared political, economic, environmental, and security issues, the region still remains one of the least integrated in the world.

While several studies have argued that regional cooperation has the potential to promote intra and extra-regional trade and Foreign Direct Investment (FDI) flows and advance economic development in individual countries of the region, the changing world scenario warrants a fresh approach to this topic. Across globe, FDI has become an increasingly important component of international economic linkages and a major driver for a number of successful regional economic integrations. If we look at East Asia, investment linkages are playing an important role in the development of regionally integrated production systems (Petri 1994)[1]. This gives us reasons to believe that intra-regional FDI has the potential to act as a key driver for both fostering economic growth, and deepening economic cooperation in South Asia.

Starting from the point of overall FDI in South Asia, it is important to note that despite liberalizing investment policies and signing investment treaties with major investment sources, FDI in the region has remained at a low level. In 2015, FDI inflow in South Asia was US$ 50,485 million, which was a mere 3 per cent of the global flow of FDI (World Investment Report, 2016)[2]. Except India which received about 87% of total FDI inflows in South Asia, none of the other South Asian Association for Regional Cooperation (SAARC) countries has received substantial FDI inflows[3]. It is thus no surprise that intra-regional FDI inflows have accounted for an even smaller share of total FDI flows. This raises some concerns about the efficacy of policy ensures undertaken by SAARC countries, both individually and as a region. Promotion of FDI has till date not got its due importance even under the regional framework, i.e (SAARC), with FDI being hardly a topic of discussion even in the SAARC summits. We must recognize that an overall integrated regional market could facilitate investment creation at a larger scale, both for intra-regional and extra-regional FDI.

The pace and direction of the South Asian regional investment cooperation depends largely on the extent of measures undertaken by India since it accounts for 90% of the regional FDI flows and is by far the largest regional investor in the region (Jain and Bimal 2014)[4].

If we look at India’s investment in SAARC for the year 2014-15, we find that majority of Indian investment has gone to Sri Lanka, with a share of 80% of India’s total FDI in SAARC for the same year (Table 1).

Table 1: India’s Investment in SAARC
Country FDI Inflows

(in US$ Million)

Afghanistan
Bangladesh 10.02
Bhutan 0.65
Maldives
Nepal 3.15
Pakistan
Sri Lanka 62.94

A sectoral break up of India’s investment in Sri Lanka in 2014-15 shows that 46% has gone into the construction sector, followed by manufacturing (16%) and financial, insurance and business services (15%). These numbers might not look impressive, but are definitely indicative of the large investment potential India has in SAARC.

Regional investment cooperation in South Asia could also lead to greater regional economic integration in South Asia through an integrated approach focusing on creation of value chains. A production/value chain is the “full range of activities that firms and workers do to bring a product from its conception to its end use and beyond” (Gereffi and Fernandez-Stark 2011)[1]. It consists of various activities such as design, production, marketing, distribution and support to the final consumer. Each country can specialize in different stages of production for a particular product. Some studies have identified textile and clothing, leather, food-processing and chemicals as potential sectors where value chains can be built (Das 2015)[2].

There are some stumbling blocks in realizing the full potential of intra-regional investment in South Asia such as structural barriers, institutional bottlenecks, equity restrictions, excluded sectors, political tensions, narrow nationalism and mutual distrust. The governments need to address these challenges and make conducive national and regional investment policies that attract greater extra- and intra-regional investment in South Asia. We can also learn lessons from the ASEAN region. In 1987, ASEAN countries signed an agreement on the promotion and protection of investment. Following this, a framework agreement on the ASEAN Investment Area (AIA) was signed in 1998 with a view to promote ASEAN as an investment area, to strengthen and increase the competitiveness of ASEAN economic sectors, and to work on reduction of investment barriers in order to enhance investment (Commonwealth Secretariat, 2014)[3]. Taking from this, SAARC countries also need to implement a co-ordinated investment promotion program. This needs to be pursued both at inter-government level as well at the private sector level. It is important for the private sector to create multilevel channels of communication which can reduce mistrust, bridge the information gap, and generate a significant change with renewed interest in the business environment of the SAARC countries. There needs to be liberalization and greater transparency of investment policies. This needs to be coupled with efforts to increase awareness of business persons about investment potential of the other market. Each country should make information accessible to investors. There is a need to have an institutional set-up for taking initiatives for enhancing intra-regional investment. Operationalization of the much discussed and awaited SAARC Arbitration Council and SAARC limited multilateral agreement on avoidance of double taxation would give much needed boost to intra-regional investment. All these measures could help in realizing the untapped investment potential in SAARC.

[1] Gereffi, G. and K. Fernandez-Stark. 2011. “Global Value Chain Analysis: A Primer.” Center on Globalization, Governance & Competitiveness (CGGC) Duke University Durham, North Carolina, USA, May 31

[2] Das, R. (2015). Towards ‘Make in South Asia’: Evolving Regional Values Chain. RIS Discussion Paper 199.

[3] Regional Integration in South Asia: Trends, Challenges and Prospects, Commonwealth Secretariat, 2014

[1] Petri, P. (1994). East Asia’s Trade and Investment: Regional and Global Value Chains from Liberalization. World Bank. Washington DC

[2] Investor Nationality: Policy Challenges. World Investment Report 2016. UNCTAD.

[3] SAARC countries comprise of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka

[4] Jain, P and Bimal, S. (2014). Enhancing India-Pakistan Economic Cooperation: Prospects for Indian Investment in Pakistan. ICRIER Working Paper 274, May 2014.

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