MANILA, PHILIPPINES - South Asia could become one of the more attractive foreign direct investment (FDI) destinations in developing Asia, but the region will have to improve its business climate and build investor confidence to reach its full potential, according to the newest edition of the Asian Development Bank's (ADB) South Asia Economic Report.
Liberalization policies, increasing private sector participation, and regional trade agreements have resulted in improved FDI inflows to South Asia. However, the level of FDI inflow into South Asia is still low compared with other Asian sub-regions due to poor infrastructure, restrictive labor policies, weak regulatory systems, and rampant corruption.
"Increased foreign investments in South Asia would promote further regional integration and globalization," said Kunio Senga, Director General, ADB South Asia Department. "FDI has the potential to provide great business opportunities to foreign companies while helping develop domestic economies."
At the country level, macroeconomic and political stability, appropriate regulatory policies, and infrastructure development are needed to increase FDI, according to the report, the third in a series of biannual reports on economic and development issues in South Asia. Regionally, harmonized cross-border regulations, including a unified customs system, would facilitate the flow of people and goods and make investing in the region more attractive.
In developing Asia, inflows of FDI, or the foreign acquisition of at least 10% of a firm's assets, have risen tremendously, largely due to the liberalization of investment policies and the lowering or removal of capital controls and other investment barriers.
In South Asia, FDI has been increasing rapidly since 2004. In fiscal 2006 alone, FDI inflows reached a high of $24.3 billion, a 132.9% increase from 2005 and the highest FDI growth rate in recent years. This is in sharp contrast to the dismal FDI performance in the region during the early 2000s.
India is by far the leading host country for FDI in South Asia. It received around $19.4 billion in fiscal 2006, or about 79.9% of total regional FDI. India's dominance is, in large part, due to the size of its economy, the largest in the region. However, India's policy reforms geared toward liberalization also played an important part.
Other countries in the region that also fared well in attracting more FDI in fiscal 2006 were Pakistan and Sri Lanka, with FDI growth of 136.5% and 92.7%, respectively. Nepal, however, suffered net FDI outflows.
"Pakistan, the second largest economy in the region, has great potential to further improve FDI inflows, and FDI will play an important role in Afghanistan's economic growth," said Juan Miranda, Director General, ADB Central and West Asia Department.
The major source countries of FDI in South Asia are predominantly in developed regions - North America and Western Europe. But other important FDI sources are East Asia and the Middle East.