Plan of the Report

This report is structured as a single document with the separate chapters to be read sequentially. However, efforts have also been made to make each chapter self-contained.

Chapter 2 develops a flexible conceptual framework for regional and international engagement. It draws from the latest international economics literature on trade and investment, as well as strategic management literature, to gain an understanding of regional economic engagement. It incorporates a value chain approach by considering the separate activities involved in delivering a product or service to the consumer. It facilitates an analysis of catering to external markets as well as global sourcing of goods and services. The framework also allows simple illustrations to be provided for a range of substitutable equity and nonequity strategies with which entrepreneurs can enter foreign markets. These strategies vary in their sunk entry costs, fixed costs of operations, and trade costs. The framework then incorporates information frictions, networks, learning, culture, and behavioral economics to guide the analysis in the study. Variation in the sunk entry costs at the firm level drives the dynamics of this report.

Chapter 3 highlights outward investment from South Asia using aggregate national bilateral data, firm-level survey data, and case studies of regional pioneers. It profiles South Asian total outward investment in the world and within the region using an augmented aggregate bilateral data set that is currently underutilized. Next, it outlines the policy environment faced by outward investors at home (domestic OFDI policy) and abroad (foreign IFDI policy). It then analyzes OFDI using the firm-level data obtained from the South Asia Regional Engagement and Value Chain Survey, which was carried out in all eight economies of South Asia, covering 1,274 firms. Supplemented with case study evidence, the many opportunities and motivations for such regional outward investment are outlined and the variety of paths that pioneering entrepreneurs have selected are highlighted using the framework of chapter 2.

Chapter 4 focuses on information, networks, learning, and relationships. First, through the data-collection process, it estimates the level of bilateral knowledge connectivity, networks, and trust in South Asia. It then incorporates these notions of information, networks, and learning into a standard estimation of the determinants of firm-level outward investment along the lines of the framework developed in chapter 2. This estimation enables the firms that succeed and those that do not to be characterized.

Chapter 5 distills the policy implications from the evidence provided in chapters 3 and 4. It offers policy and other interventions that could enhance regional and global engagement opportunities for South Asian firms. The main recommendations are split into two categories: enhancing connectivity and policy reforms. The former set of recommendations includes knowledge connectivity and network formation as well as physical and digital connectivity. The latter set includes investment policy reform of both outward and inward investment programs. It also suggests that government policies should be updated in line with the latest developments in business practices, and that other unilateral national policy reforms could boost regional engagement. The implications of the COVID-19 pandemic for regional engagement and policy prioritization are also considered.