Investment Landscape: Low Levels of Inward FDI

bilateral indicators of knowledge connectivity, networks, and trust, as well as entrepreneur characteristics, which are vital to the study.

Although the survey was conducted before the COVID-19 (coronavirus) pandemic broke out, the analysis remains valid and relevant. Apart from the public health challenges, the pandemic has only accelerated the developments already being witnessed in the global economy, including a rise in trade protection measures, the potential restructuring of value chains toward greater regionalization and reshoring or nearshoring, and diversification pressure induced by, among other factors, the need to make supply chains more resilient and the trade tensions between the United States and China. Further, just as in the post–global recession period, foreign investment will be an important building block in the recovery from the pandemic and recasting the “next normal.” This report points to innovative approaches to building resilience and gaining from the opportunities that emanate from the evolving paradigm.

Amid the challenges of reengagement within the region, pioneering regional entrepreneurs have chartered innovative paths to regional engagement. What key drivers lead these firms to invest? What are the main constraints? Which firms are successful and which firms are not? What are the implications for policy and for the private sector? These are the central questions addressed in this report, and this overview is structured around these questions. Before exploring these issues, the overview provides an analysis of the South Asian investment landscape relative to other developing regions using aggregate bilateral data on the stocks of inward FDI (IFDI) and outward FDI (OFDI).

South Asia shows weak performance relative to other low- and middle-income economies in other regions in attracting global FDI. The region is home to only 1.3 percent of the global stock of IFDI of US$39.5 trillion as of 2017,1 despite producing more than 4 percent of global gross domestic product (GDP). Globally, most foreign investment flows are between high-income economies. Middle-income and low-income economies receive only 19 percent of all IFDI stock, of which 46 percent is situated in East Asian developing economies. The main sources of IFDI for East Asia and Europe and Central Asia are regional high-income economies, at 64 percent and 71 percent, respectively. South Asia has the highest amount of IFDI from extraregional developing economies, reflecting investments from Mauritius (an investment hub).2

In 2018, India accounted for 87 percent of South Asia’s IFDI stock; in South Asia the relative importance of FDI to domestic output is relatively low; and most FDI is in the services sector. In absolute values, South Asia’s IFDI stock is estimated at US$524 billion. The IFDI stock of Afghanistan, Bhutan, Maldives, and Nepal is valued at less than US$2 billion each. India and Sri Lanka have the highest value of IFDI stock as a share of GDP, at 16.9 percent and 14.4 percent, respectively,