Intra-regional FDI and Economic Integration in South Asia

Abstract

This article examines trends and patterns of intra-regional foreign direct investment (FDI) in South Asia, with a focus on the potential for integrating production processes among countries in the region through further trade and investment policy reforms. The empirical evidence pieced together from scattered sources suggests that horizontal (market seeking) FDI has continued to dominate South Asian intra-regional FDI, with a significant shift in recent years in favour of services sector activities. Vertical (efficiency seeking) FDI in the region has remained confined to a few product lines, predominately garments, and also a few industries in which the availability of specific natural resources plays an important role in the site selection decisions of firms. In other industries, including electronics and electrical goods in which global production sharing is heavily concentrated, there is no evidence of notable cross-border operations by regional firms. JEL: F21, F23, F53, O33

Stimulating Intra-regional Investment in SAARC

“…Furthermore, Brandix India Apparel City (BIAC) in Vishakapathnam aims to link companies involved in various tiers of the global apparel supply chain including spinning, knitting and weaving, clothing accessories, apparel making and embellishment, store services and logistic suppliers (Athukorala, 2013). Likewise, Indian investment in the Sri Lankan rubber tier industry could be flagged as an efficiency seeking regional investment.…”

The Indian Textile and Clothing Industry

“…(Athukorala 2013) 2 The conventional wisdom based on the standard trade theory holds that there is little room for fostering intraregional trade in the region through collective action given the similarities among these countries in terms of resource endowments. (Athukorala 2013) 2 The conventional wisdom based on the standard trade theory holds that there is little room for fostering intraregional trade in the region through collective action given the similarities among these countries in terms of resource endowments.…”

Economic Integration and Foreign Direct Investment: Review of Main Theoretical Concepts

“…In order to gain insight into the modified FDI theories, it is necessary to define the distinction between vertical and horizontal FDI (Athukorala, 2013). Vertical FDI are efficiency-seeking investments in the form of a geographical fragmentation of the production process aimed at using location-specific ("L" in the OLI framework) advantages.…”

“…In the case of introduced or potentially higher levels of outside protection, horizontal FDI inflows from external countries should increase as a result of greater incentives for MNC to undertake "tariffjumping" FDI and concentrate their production in member countries with the lowest costs (Chen, 2009). The scale of such capital flows depends on the differences between tariffs and other trade barriers applicable to member and non-member countries (Athukorala, 2013). However, a growing number of customs unions combine intraregional and external trade liberalization which may have the opposite effect, increasing vertical FDI and decreasing horizontal FDI attractiveness for external MNCs.…”