3.1 Defining Inward and Outward Foreign Direct Investment

BOX 3.1 Defining Inward and Outward Foreign Direct Investment Inward foreign direct investment (IFDI), also called direct investment in the reporting economy, includes all asset and liability transfers between a resident firm and nonresident parent, and also nonresident fellow (related) enterprises if the ultimate controlling parent is nonresident. FDI net inflows are the value of inward direct investment made by nonresident investors in the reporting economy. Made up of equity, reinvested earnings, and intrafirm debt, net inflows can take a positive or negative value. Outward foreign direct investment (OFDI), also called direct investment abroad or “overseas investment” in the reporting country, includes all assets and liabilities transferred between resident parent direct investors and their nonresident direct investment enterprises, and fellow (related) enterprises, if the ultimate controlling parent is resident. FDI net outflows are the value of outward direct investment made by the resident investors of the reporting economy to external economies. Made up of equity, reinvested earnings, and intrafirm debt, net outflows can take a positive or negative value.

Source: IMF 2013. Note: Implementation of the Balance of Payments Manual 6th Edition methodology has brought changes to the definition of direct investment by making it consistent with the Organisation for Economic Co-operation and Development’s benchmark definition of foreign direct investment, notably the recasting in terms of control and influence, treatment of chains of investment, and fellow enterprises, and presentation on a gross asset and liability basis as well as according to the directional principle.

to study emerging market multinationals from a South Asian perspective. These multinationals are expected to perform better than their counterparts from high-income economies in less transparent business environments, given their own experience in low-quality governance environments at home, and by making use of the benefits of potentially existing ethnic and linguistic networks (Dixit 2011). In the framework laid out in chapter 2, emerging market multinationals entering other developing economies would be expected to have lower entry costs and lower variable costs relative to other multinationals. With regard to the frictions along value chains represented in figure 2.1, emerging market multinationals would have lower costs of technology transfer, of product adaptation to markets, and of marketing.

The lack of official bilateral FDI data for developing economies prevented such an analysis from being conducted previously. A similar situation still prevails for bilateral services trade flows. The analysis in this chapter overcomes data limitations in three ways. The chapter uses the International Monetary Fund’s Coordinated Direct Investment Survey (CDIS) data, a relatively recent endeavor that captures both the inward and outward bilateral stock of FDI. The use of the CDIS data overcomes the exclusion of small and fragile South Asian economies from global data sets with

the use of mirror data. Second, given the data issues involved in identifying bilateral movements from aggregate foreign investment flows (see box 3.2), and the need for firm-level data to understand multinational behavior, the South Asia Regional Engagement and Value Chain Survey was implemented across all eight countries in South Asia to capture relevant firm-level information. Third, deep case studies were developed with the cooperation of regional investment pioneers to gain an understanding of the decision-making process of pioneering firms and entrepreneurs. This chapter provides a comprehensive portrait of intraregional investment in South Asia using these sources.

The region exhibits low levels of outward investment and the lowest level of intraregional investment relative to other low- and middle-income economies in other geographic regions. India is the largest intraregional investor, but its investment in other South Asian countries accounts for only 2 percent of total Indian OFDI and amounts to about a fifth of Indian investments in Sub-Saharan Africa. Sri Lanka and Bangladesh are the largest recipients of South Asian investment. Much of South Asian OFDI, both in absolute terms and relative to the global average, goes to investment hubs. Singapore, Mauritius, the United Arab Emirates, and Hong Kong SAR, China, account for 50 percent of OFDI stock from South Asia. When other investment hubs are included, the share rises to 77 percent.

The outward investor perspective also makes possible a rare focus on OFDI policies in South Asia. The usual emphasis on traditional advanced economy multinationals and the consequent neglect of OFDI policies (generally liberal in the home country of traditional multinational enterprises) has led to attention on restrictive IFDI policies in developing economies, a potential destination for these traditional multinational enterprises. This report, on the other hand, highlights the largely restrictive, discretionary, and nontransparent OFDI arrangements in South Asia, apart from India and to a lesser extent Sri Lanka. It also highlights the lingering remnants of region-specific OFDI and IFDI policies in South Asia that are likely to stymie investment in net terms.

The experiences of regional pioneers in South Asia highlight the opportunities that outward investment offers for emerging market firms. The report shows that although small, South Asia has a varied and rich outward investment landscape in the types of investment, sectors of origin, and modes of engagement, with varying initial capital costs. It also highlights the different drivers of OFDI and identifies new value chain–based motivations for emerging market multinationals. For example, OFDI allows firms to achieve higher profit margins along a value chain when the associated activities are located across the border, to cater to buyers’ higher volume and product scope requirements, to increase learning and build relationships with clients and suppliers, and to buy technology, brands, or other intellectual property when developing them at home may be capability constrained or take too much time. These new value chain–based benefits of OFDI heighten the need for policy reform in South Asia.