Implications for Inward FDI Policy and Promotion

PROMOTIONAL SUPPORT FOR OUTWARD INVESTORS

Whereas this report argues for regulatory liberalization of OFDI, it suggests that South Asian countries could at least take a neutral stance on OFDI promotion. This stance is sensitive to the fiscal demands brought on by the pandemic. A more forward-looking approach would encompass certain limited promotional activities, based on a range of criteria, keeping in mind global experience and the marginal cost of provision of support services. Information and networking support could be provided at a low marginal cost by focused trade promotion agencies and inward investment promotion agencies without the need to create new institutions. This method also allows an integrated approach to trade, inward investment, and outward investment.

Some governments have set up formal organizations in foreign countries to support their trade and investments abroad that not only fill information gaps but also facilitate entry support. For example, the Japanese External Trade Organization facilitates Japanese trade and outward investments, and has recently begun to promote IFDI to Japan. The organization has close to 80 offices in 55 countries. It has five offices in India and one each in Bangladesh, Pakistan, and Sri Lanka. Support of this nature may be appropriate for India, given that Indian firms have a large number of investments abroad. Other countries may house effective OFDI support within their embassies abroad.

Potential investors identified legal and management consultancy services and technical assistance for project development and start-up as important sources of support. Given that risk appetite was an important variable in investment entry, an education system that provides entrepreneurship education and encourages links between academia and business could foster more outward investors. Because outward investment is a relatively new concept, cross-border management studies would also be helpful.

Other areas identified by potential investors include access to finance, investment insurance, and financial guarantees (figure 5A.2 in the annex). Financial support for pre-investment activities and start-up costs was the most requested type of OFDI assistance among survey respondents, consistent with the empirical results that investors are often forced to rely on internal funds and intraconglomerate loans for making all types of investments. The demand for investment insurance may reflect the need for trustcompensating mechanisms in the presence of trust deficits, lack of confidence in foreign regulatory institutions, and underdeveloped bilateral relationships. Sensitization of financial institutions to potentially profitable new activities and the development of angel investors and venture capitalists could somewhat address these issues.

A more symmetric view of IFDI and OFDI may be an innovative and more useful approach to foreign investment policy making. Although this study focuses on OFDI, its approach, including the focus on knowledge connectivity, has important implications for policies to attract inward foreign investment.

RECOGNIZING TRADERS AND NONEQUITY PARTNERS AS POTENTIAL INVESTORS

Given that many firms may follow a gradual approach to investment, governments should be aware that “low-capital” or nonequity modes of engagement may be a first step toward greater commitment. Thus, these initiatives should be supported and given appropriate attention. Focus should not be solely on trying to secure large investments. Governments that require minimum equity capital thresholds for investors to qualify for investment incentives should have a more sophisticated policy design to accommodate this behavior if they seek to attract a critical mass of investors. Some South Asian countries have a disappointing track record for attracting new entrants and often rely on the expansion plans of existing investors.1

TARGETING REGIONAL AFFILIATES OF INTERNATIONAL INVESTORS

Smaller South Asian nations may generate more positive results by courting investors that already have regional affiliates in, say, India. The existence of these regional affiliates means extraregional international firms have already incurred the fixed entry costs for South Asia. The entry costs for another South Asian country are likely to be lower relative to those of an international firm with no presence in South Asia, reflecting learning through previous investments in a regional neighbor. This strategy would likely be cheaper and lead to greater success than roadshows to distant advanced economies.

WIDENING THE SCOPE OF INVESTOR TARGETING TO INCLUDE EMERGING MARKET MULTINATIONALS

The growth of globally competitive emerging market multinational enterprises can be seen in the case studies, the survey, and other cited work (for example, Gomez-Mera et al. 2015). These multinationals may have more appropriate technology and, in general, be better suited to navigating emerging market economies. Thus, developing knowledge of high-performing firms in emerging economies, including neighbors, could have significant payoffs. This concept applies equally to the almost-landlocked North Eastern Region of India.

APPROACHING INTERNATIONAL SITE SELECTION AND MANAGEMENT CONSULTANCIES

The exact role and dynamics of international consultancy firms that provide international location selection and management services for large corporations are not well documented (Phelps and Wood 2018).2 As intermediaries, they are primarily information brokers, but they also add value by getting involved in incentive negotiations and even enforcement. Investment promotion agencies could target such firms to increase national visibility. Besides site selection for corporate clients, some firms have divisions