OVERVIEW l 5
trade facilitation, and extension of tariff preferences unilaterally and through free trade agreements have, however, produced less-than-anticipated trade responses. This report explores two understudied factors that may be key to unlocking the potential of regional trade: intraregional investment and knowledge connectivity. The importance of foreign direct investment (FDI) flows has been evidenced in the rise of multinational enterprises from advanced economies that coordinate global value chains through a web of equity and nonequity relationships across the globe. More recently, there has been a rise of multinational firms from emerging economies. Their experience points to important benefits of outward investment from a firm and value chain perspective. Recognition of the importance of information and network frictions for trade is growing, and they may be even more important than typical trade frictions for developing economies. Frictions in knowledge connectivity reflect the high costs of search and matching across borders and high costs or market failures in the provision of channels to alleviate these frictions. How these frictions work, how to quantify the power of information, and what remedial actions may be needed to address these frictions are only now beginning to be understood. This report is framed within the same context as its predecessor, A Glass Half Full: The Promise of Regional Trade in South Asia (Kathuria 2018), namely, the suboptimal level of economic engagement within South Asia. It focuses on intraregional investment from an outward investment lens using a unifying framework of international engagement strategies (trade, investment, and other nonequity modes such as licensing). The current report is relevant to South Asia’s development for several reasons, from both a regional and a global perspective. One, it brings the role of knowledge connectivity and information barriers, a much-neglected issue, into the decision to export or invest. This has powerful policy implications. Two, it draws attention to the distortionary outward investment arrangements in South Asia that restrain countries’ dynamic firms and restrict regional value chains. Three, given trade-investment links, improving regional FDI will also improve regional trade. Improvements in trade also come through FDI’s role in developing regional value chains in low-trust environments and its scope for trust building in the longer term. Finally, regional engagement can provide a springboard for a more global push in both trade and investment. To investigate the relationship between investment and information barriers, this report embarked on an extensive data-collection exercise that provided detailed information on 1,274 firms and entrepreneurs across all eight countries in the region. This firm-level survey enabled rich diagnostic and econometric exercises, which are combined with aggregate national data analysis and distillation of case studies of regional pioneers. A framework of heterogeneous firms for which productivity drives selfselection of firms into export and investment is used to provide an analytical lens for case studies and to discipline the empirical analysis. The survey instrument was informed and enhanced by intensive case studies of pioneer South Asian firms. Thus, the analysis attempts to provide a holistic view of the main factors that determine global engagement by South Asian firms. The survey facilitated the compilation of original
