Regulatory and Promotion Policies for OFDI

data interchange systems at seaports and land borders, development of ports and inland waterways as well as transnational highways, and improvements in air connectivity.

Enhancing digital infrastructure and associated regulatory frameworks is also vital, given that communication costs that are correlated with distance have an impact on FDI entry (Gumpert 2018; Oldenski 2012). The negative impact of distance on investment, conditional on exporting, implies that communication costs may also be an important factor that reduces investment with distance. This issue will be especially important if a post-COVID-19 environment involves less international travel and greater use of digitization in communications and the conduct of business. Security-consistent trade facilitation mechanisms and procedures would ease the flow of goods and services in the region (Kerswell and Kunaka 2015). In the current context of the pandemic, such mechanisms extend to health security and cyber security.

The pandemic can catalyze further trade facilitation, building on some of the positive steps taken by countries, such as accepting electronic copies of trade documentation and India’s “faceless assessments” program, which eliminates physical interaction between the taxpayer and the tax authority. Despite progress in electronic management of cross-border trade flows, trade often requires physical submission of paper documents to the various government agencies regulating trade. The development of electronic national single windows and working toward interoperability of such systems would boost global and regional trade. Extending digital acceptance of sanitary and phytosanitary documents (given the high share of vegetables and foodstuffs in intraregional trade) will have positive region-specific effects (De and Kunaka 2019; Nora, Sahu, and Peterson 2020). Overall, many of the trade-facilitation efforts, while valid for global trade, will have a significant impact on intraregional trade.

Outward investment is becoming the new frontier of investment policy making for developing economies. As more firms from emerging economies invest abroad, governments need to address both regulatory (the extent of liberalization of capital controls) and promotional (the extent of active support given to these firms) aspects of policy. At one time, these policies were considered a macroeconomic issue, bearing on domestic productive capacity and foreign exchange management. However, a value chain approach to competitiveness provides important new microeconomic considerations in favor of relaxation of controls on OFDI for emerging market firms. In the COVID-19 context, the value chain approach offers firms greater agility and flexibility with which to maneuver in crises and build more resilient international partnerships.

Outward investment offers opportunities for firms to access higher-profit segments along a value chain when the associated activities are located across the border, fulfill buyers’ higher volume and product scope requirements, secure stable access to inputs, and reduce markups originating from suppliers with market power. OFDI also allows firms to buy technology, brands, or other intellectual property when developing them at home

may be capability constrained or take too much time. It provides an opportunity to build stronger relationships with customers and production partners along a value chain.

In this context, it is important to not restrain a country’s vibrant firms and to allow them to compete globally with the same options available to firms from other countries. Restrictions on OFDI could imply that firms at home have difficulty competing with foreign firms that use OFDI to gain competitiveness. Such restrictions could, for example, be constraining ferrosilicon exporters from Bhutan that compete with Japanese and Australian investors based in Malaysia that have made strong inroads into Bhutan’s traditional market of India. These OFDI restrictions may be viewed as creating inequality of opportunity between home firms and foreign firms. Further, even low-value, trade-supporting investments could be important for Bangladeshi apparel manufacturers to improve direct access to global buyers. The high presence of intermediaries in Bangladesh may account for the low profit margins and lack of spillover benefits (such as staff training, short-term work assignments in buyer headquarters, and more crisisresilient relationships) that would arise from close relationships with final retailers in the apparel manufacturing sector.

REGULATORY REFORM AND TRANSPARENCY

Gradually relaxing capital controls or being more open to consideration of OFDI proposals is important. Any relaxation must be pursued in the context of sound macroeconomic management within an integrated policy framework, with a range of available instruments (Gopinath 2019). Policies may be designed in a progressive and flexible manner that allows the government space for action under stress. Appropriate reporting by firms will improve the monitoring of policy impacts and help finesse necessary policy adjustments.

For smaller economies, such as Bhutan and Nepal, with very restrictive OFDI arrangements, helping firms open offices abroad could be a first step. Even if policies are in place to technically allow OFDI, governments will need to signal that this behavior is encouraged, making procedures public, transparent, and administratively inexpensive. Bangladesh, despite significant international reserves and a vibrant private sector, has only cautiously approved overseas investments in apparel manufacturing (in Ethiopia, targeting the US market), reconstituted wood products, pharmaceuticals, steel, and engineering, mostly in East Asia. In Afghanistan and Maldives, where the governments state that they have a neutral stance toward OFDI, the relevant policies and procedures need to be readily available and accessible. A lack of publicly available information is more likely to create a situation in which only large or politically connected firms have access to OFDI.

INSTITUTIONAL STRUCTURE

The institutional structure governing OFDI varies across countries and is fragmented compared with IFDI. Currently, most approvals are handled at a department of the central bank, whereas promotional support is divided across various institutions.