KNOWLEDGE CONNECTIVITY IN SOUTH ASIA l 175
for information from clients and suppliers in GVCs for investing in Sri Lanka, paid industry reports for investing in Bangladesh and the NER, and business group entry for investment destined for Maldives. DOES SOUTH ASIA HAVE ENOUGH INVESTMENT INTERMEDIARIES? Being informed and being able to investigate investment options relatively cheaply are vital for fostering investment. Investment intermediaries reduce the sunk fixed costs of investing. Globally, investment intermediaries play an important role in uncovering the most suitable options for firms. Intermediaries may be site location consultancy firms that reduce search costs and provide cross-cultural knowledge and expertise that would facilitate specification, negotiation, and enforcement of contracts. If there are no intermediaries, the work is done in house within large conglomerates that can afford to allocate workers to this task. It is important to have consultancy firms that can provide market research and perform due diligence at reasonable prices so that medium firms would also be able to afford them. The evidence from South Asia is sparse and uncertain. The clearest message is that most managers do not know. Asked to comment on the statement that there were competent intermediaries or consultancy firms to investigate opportunities in each of the South Asian economies, the blue bars in figure 4.12 dominate, reflecting lack of knowledge, followed by the orange bars, which reflect disagreement with the statement. It is not clear whether the issue is one of the actual existence of knowledge intermediaries (a missing market), lack of information about their existence, or a pricing structure that makes them accessible only to a few elite large firms. This issue deserves further exploration.
Concluding Remarks This chapter documents the knowledge and networking frictions in South Asia and their variation across bilateral pairs of countries. It then estimates the importance of knowledge connectivity in the investment entry decision. From these results, the constraints facing potential outward investors may be discerned. First are investment policy constraints—outward investment policies at home, inward FDI policies abroad—and other factors, such as investment climate, that are captured in the fixed effects of the model. The main knowledge frictions are lack of information about markets, potential partner firms, and regulations; lack of networks; lack of trust; potential lack of knowledge intermediaries; low productivity; low number of exporters; high trade costs; high communication costs; low access to finance; and need for risk appetite among potential investors. The findings here have several policy implications that are addressed in the next chapter.
