Outward FDI and Intraregional Investment: Evidence from CDIS and UNCTAD Data

The rest of the chapter is organized as follows: The next section documents the flow of aggregate outward investment from developing economies and benchmarks South Asian outward investment and intraregional investment against other developing regions. The following section analyzes the policy environment investors face both at home (for OFDI) and abroad (for IFDI). OFDI policies are discussed in more detail, given that these policies are rarely spotlighted. As with trade policy, discussed in chapter 1, discriminatory factors against some neighbors are identified in both OFDI and IFDI policies, as are restrictive home policies. The chapter then proceeds to characterize outward investment at the firm level using outward investment survey data collected from an original survey of 1,274 South Asian firms (the South Asian Regional Engagement and Value Chains Survey) and the experiences of pioneering regional entrepreneurs. It highlights the opportunities in the region and outside. It also looks at the varying motivations for OFDI and the many paths firms have taken for the types of investment they have chosen and the sectors in which they operate. This analysis sets up the econometric analysis of firm-level outward investment entry that follows in chapter 4.

Emerging market multinationals have become more important. Multinational firms have traditionally been a phenomenon of the high-income economies of Europe, Japan, the United Kingdom, and the United States, but the number of emerging market multinationals has been growing. Since about 2003, these newcomer multinational firms have led to growth in OFDI from developing economies (figure 3.1).

However, some statements about their importance, rising to 30 percent of world outward investment flows, may be exaggerated or at least need qualification. First, the relative magnitudes differ for FDI stock versus FDI flows data. OFDI flows data (dashed lines in figure 3.1) better capture the recent rising trend of developing country OFDI and tend to result in higher estimates than stock data (solid lines) because they do not incorporate the dominant past performance of advanced economy multinationals as OFDI stock data do. Second, the often-referenced UNCTAD investment data (and UNCTAD’s annual World Investment Reports) use a broad definition of “developing” economy that includes high-income economies of East Asia (for example, the Republic of Korea and Singapore), the Middle East (for example, Saudi Arabia and the United Arab Emirates), Africa (Seychelles), and Latin America (Chile). The United Nations (UN) definition is substantially different from the traditional World Bank (WB) classification of developing economies as middle-income and low-income economies. Comparing the estimates of developing economy OFDI represented by the orange (WB) and blue (UN) lines shows that the UN definition leads to an estimate that is 12–13 percentage points higher.