Key Constraint: Restrictiveness of South Asian Inward and Outward FDI Policy Arrangements

to expand market sales and capture wholesaler or retailer margins, get better control of their distribution, and build relationships and acquire knowledge about continuously changing consumer preferences. For example, Sri Lanka’s Timex Garments made retail investments to sell its Avirate brand women’s fashionwear, and Bangladesh’s Rahimafrooz Batteries and Sri Lanka’s MAS Brands made distribution investments to increase the efficiency of their distribution systems. Pakistan’s denim manufacturer Soorty Enterprises made a trade-supporting investment in Bangladesh to facilitate sales of its denim textiles and increase connectivity with global buyers. India’s Raymond expanded the markets for its custom suiting services using franchising agreements to reach consumers in Bangladesh, Nepal, Pakistan, and Sri Lanka.

The importance of cost factors, particularly labor costs, provides evidence contradicting assertions that South Asian nations continue to have similar endowments. South Asian firms that were driven by production cost considerations include India’s tire manufacturer CEAT, which invested in tire plants in rubber-producing Sri Lanka, while Sri Lanka’s Brandix invested in an apparel park in Andhra Pradesh, India, where land costs were cheaper. Another example of an Indian vertical investment is Dabur’s investment in nurseries in Nepal to develop plants with high health benefits, which it uses in its division for herbal medicinal products in India.

Based in a small economy, Bhutan Ferro Silicon Alloys has managed to integrate itself into India’s auto value chain, becoming a dominant supplier of ferrosilicon to the Indian steel industry, which produces auto bodies and components. The region also provided opportunities for firms to move into higher-profit-margin segments of the value chain: Sri Lankan apparel manufacturers moved into developing their own brands in India, and Indian and Sri Lankan hoteliers invested in the high-end Maldivian resort hotel industry. Having factories in more than one country has allowed Soorty Enterprises and Brandix to offer a greater range of products to their key clients, and to be able to meet requests to do so.

The region has also served as a platform for coping with difficulties at home. For example, Nepal’s CG Foods invested in factories in the North Eastern Region of India at the height of Nepal’s insurgency, and Sri Lankan retailers invested in Bangladesh in the face of policy uncertainty under a coalition government at home during 2015–19. In addition, regional investors tend to be less risk averse compared with global investors, such as when Nepal’s CG Hospitality invested in India’s Taj hotels in Sri Lanka at the height of Sri Lanka’s civil war in 2008.

The policy arrangements for direct investment exacerbate the low volumes of investment. For outward investors, both the regulations for OFDI at home and IFDI abroad matter. Most IFDI policy arrangements have progressively liberalized but remain challenging by global standards, owing to the time it takes to resolve disputes, restrictions