Relevance of the Report

India, Nepal, Pakistan, and Sri Lanka. The host economies are Bangladesh, India, Nepal, and Sri Lanka.

The apparel sector includes two Sri Lankan pioneers that built brands to capture higher profit margins in the face of the phasing out of global apparel quotas in 2005. One is a brand developer and the other is a retailer selling its brand in its own stores. A third pioneer, from India, opted to provide volume and short lead times by creating an apparel park with value chain partners located in the same vicinity. The fourth is a Pakistani pioneer that set up a marketing office to sell denim cloth to Bangladeshi apparel manufacturers but wound up building its own apparel factory. The fifth is an Indian entrepreneur that has the widest reach in South Asia through the franchising of the company’s custom suiting retail store, backed by the production of high-quality suiting material.

The cases from the auto value chain consist of the largest Bhutan ferrosilicon producer, whose output is vital for steel making in India, which goes into the production of auto bodies and auto parts. The firm’s competitiveness is based on Bhutan’s comparative advantage in energy-intensive manufacturing and availability of mineral deposits. Another Indian pioneer is the owner of a tire company that invests in rubber-producing Sri Lanka. The third pioneer is a Bangladeshi auto battery maker that produces for the Indian aftermarket.

The agri-food industry cases consist of a Nepali pioneer in instant noodles that invested in factories in the North Eastern Region of India and eventually expanded into a retail chain across all of India. The sector also includes an Indian firm that set up a juice-making factory in Nepal to serve the local market and its home market.

The hotel industry covers the story of a premier Indian hotel chain that invested in Sri Lanka and received a capital injection from a Nepali pioneer at the height of Sri Lanka’s civil war in 2008.

This report is relevant to South Asia’s development for several reasons, from both a regional and a global perspective. First, it brings the role of knowledge connectivity and information barriers, a much-neglected issue, into the decision to export or invest. This issue has powerful policy implications. Second, it highlights the varieties of outward investment strategies and the benefits of outward investment for emerging market multinationals and draws attention to the distortions in outward investment programs. The restrictions on OFDI in many countries in South Asia restrain their dynamic firms, restrict regional value chains, and are an increasing anomaly in an era of globalization, recent setbacks notwithstanding. Third, given the trade-investment links, improving regional FDI will also improve regional trade. Improvements in trade also result from FDI’s role in developing regional value chains in low-trust environments and its scope for trust-building in the longer term.

Do COVID-19 and its impact change the relevance of the report? Trade and FDI will continue to be critical for growth and development in a post-COVID-19 world. Moreover, it is possible that regional value chains will become relatively more important in the post-COVID-19 environment, boosting the significance of reforms and investments that would unlock regional trade and investment. Whichever direction the post-COVID-19 world takes, the report’s messages on trade and investment remain valid and the associated policy reforms merit consideration.

CRITICAL ROLE OF KNOWLEDGE, INFORMATION, AND RELATIONSHIPS

The report incorporates knowledge connectivity and the role of information barriers into an analysis of intraregional trade and investment. Through data collected for this report, it generates its own indicators of bilateral knowledge connectivity and networks. These indicators highlight the diversity of knowledge connectivity across bilateral pairs of countries and justify the investigation into their importance for investment decisionmaking. Much work has been done on the roles of tariffs, paratariffs, nontariff measures, trade facilitation, and transport infrastructure as barriers to intraregional trade. Much less has been done to establish the importance of information barriers, although the existence of trade and investment promotion agencies appears to signal some appreciation of the role of information. In seeking new markets or investment destinations, firms face significant initial sunk costs, given that they do not know the market they are seeking to enter. They need to invest time and effort in gathering information about their potential markets, regulations, and partners. Understanding the role of such information costs is important because the policy remedies to address traditional trade barriers are very different from those that address informational barriers. Further, differences in knowledge connectivity across entrepreneurs effectively become a source of firm-level comparative advantage and inclusivity: smaller firms with more knowledge connectivity become more likely to be involved in multinational activity than larger firms without such connections.

Figure 1.4 presents a measure of bilateral knowledge connectivity across the 56 country pairs in the region. The measure is based on responses to questions about how well-informed South Asian entrepreneurs were of opportunities in regional economies, on a scale of 1 (lowest) to 4 (highest). An average bilateral score of 1.9 (between “not at all” and “not very well” informed) indicates low overall knowledge connectivity. These opportunities refer to both markets and firms. Figure 1.4 presents the average bilateral score by the home countries of the investors.8 India is the most knowledgeable (higher bars in the India panel) about regional business opportunities, followed very closely by Bangladesh and Sri Lanka. India is also the most well-known (as reflected by the height of the “IND” bar in each of the other country panels). The results also indicate polarization of knowledge; that is, entrepreneurs are familiar with India and one or two nearby countries but know little about the rest of the region. For example, Bhutan’s entrepreneurs know about opportunities in India and to a lesser extent in Nepal and