3.3 South Asian Outward Investment: A Historical Perspective

BOX 3.3 South Asian Outward Investment: A Historical Perspective Indian overseas investment in the pre-independence era was related to trading and financing opportunities from the mass migrations that resulted from the colonial economic system and famine-related impacts in the late nineteenth century. Earlier, merchant migrant networks had developed along trade routes to establish control over information and credit within communities. With migration came more substantial opportunities to cater to the diaspora, particularly in East Africa, Southeast Asia, and Sri Lanka (then Ceylon). For example, in 1937 a member of the South Indian Chettiar banking community opened branches of the Indian Overseas Bank simultaneously in India, Malaysia, and Myanmar (then Burma) to meet the needs of overseas Indians in Southeast Asia. Similarly, the Bank of Baroda (established in 1908) in Gujarat state opened offices in Kenya and Uganda in 1953. Bank branches expanded along the emigrant trail. Before independence, there was no outward foreign direct investment (OFDI) in manufacturing, but there are indications of Indian ownership of Burmese rice mills and saw and timber mills in 1930. This was not technically OFDI, given that Burma was part of the British Raj (1824–1937) during this period, and likely reflected the successful movement of the Chettiar community from traditional money-lending activities to nontrading activities. In the early 1950s, Jain merchants from Palanpur, Gujarat—a community well known in the gem trade—set up wholesale operations in the diamond business in Antwerp, Belgium. These Indian firms then outsourced the cutting and polishing of rough diamonds from Southern Africa to India, a business that continues to thrive today. In the post-independence period, Indian OFDI in manufacturing developed in response to regulatory barriers (licensing requirements for large firms and reservation of products for small firms).a Indian firms managed overseas investments in the face of the restrictive Foreign Exchange Regulation Act 1973 through joint ventures with host nationals (often of Indian descent), borrowing from foreign banks and the capitalization of exports. (The capitalization of exports refers to equity contribution abroad by exporting machinery and equipment from India.) The first manufacturing OFDI recorded was a joint venture by the family-run Birla Group, which set up a textile mill in Ethiopia in 1959–60. The major traditional merchant communities hailed from Gujarat and Sindh in western India, and Tamil Nadu and Kerala in the south. Muslims included Khojas, Bohras, and Memons; Hindus included Lohanas, Bhatias, Patidars, and Patels. Bhaibands and Bhatias from Sindh navigated the Persian Gulf. Chettiars of south India ventured into Burma, Malaysia, and Sri Lanka, and the Moplah/Mappila Muslims from Kerala and Tamil Nadu operated in Sri Lanka and Burma. Marakkayars ventured to Burma and southeast Asia. The Marwaris who migrated within India from Rajasthan and Bombay to Calcutta in the east had a limited transnational presence that was restricted to Burma.

Sources: Markovits 2008; Tumbe 2017. a. This includes the Monopolies and Restrictive Trade Practices Act of 1969 reservation policy for smallscale industry, which started in 1967 with 47 products but had expanded to 800 products by 1978 and 1,000 products by 1996 (Panagariya 2008).

Most outward investment flows from developing economies go to high-income economies and almost half originate from East Asia and Pacific and 5 percent from South Asia. A few key insights are apparent from figure 3.2, which presents the breakdown by region of the total outward investment stock of US$2.2 trillion from developing

economies as of the end of 2017. First, almost half of developing country outward investments come from East Asia and Pacific, with South Asia responsible for just 5 percent. Second, most OFDI goes to high-income economies (71 percent, as represented by light shaded areas of blue and orange), except for OFDI from Sub-Saharan Africa. Three, the OFDI toward high-income destinations is regionally biased, driven by the high magnitudes from East Asia and Pacific, Latin America and the Caribbean, and Europe and Central Asia. The other developing regions favor extraregional destinations. Four, the high share of OFDI from Sub-Saharan Africa to developing economies in the region and outside the region reflects Mauritius’s role as an investment hub, particularly for Africa and India (see annex 3A for the Mauritius-India connection). Five, OFDI shares from developing economies to their regional partners (both high-income and developing economies) are very high at 75 percent for both East Asia and Pacific and Europe and Central Asia, and 67 percent for Latin America and the Caribbean. Lower shares of 25 percent are registered for both the Middle East and North Africa and Sub-Saharan Africa, and just 2.7 percent for South Asia.

India’s share of South Asia’s total OFDI stocks is greater than 94 percent (2018 data from CDIS). Maldives, however, reports a higher share of OFDI to GDP, of 5 percent. Afghanistan and India report OFDI stocks as a share of GDP of 3.6 percent and 2.8 percent, respectively, with Sri Lanka’s at 1.9 percent of GDP.

South Asia’s share of intraregional investment, at 2.7 percent of total OFDI, is the lowest compared with other developing regions, as well as compared with regions defined to include both high-income and developing economies as sources and destinations of investment (figure 3.3, panels a and b, respectively). Focusing on intraregional investment among developing economies (equivalent to the dark blue spaces in figure 3.2), the highest shares of OFDI are registered in Sub-Saharan Africa, Europe and Central Asia, and Latin America and the Caribbean. Alternatively, when accounting for all OFDI source economies from a region (including high-income economies) to all other economies in a region, the strong regional bias in Europe and Central Asia and East Asia and Pacific is clearly seen in panel b of figure 3.3, where intraregional investment accounts for 66 percent and 56 percent of all outward investment, respectively. These high shares reflect the development of regional value chains in these areas. These computations capture all investments between high-income economies in the region, OFDI from high-income regional economies to regional developing economies, as well as OFDI from regional developing economies to high-income and other developing economies in the region.

Investment from extraregional investors through regional investment hubs inflates the true extent of intraregional investment links. For example, the Netherlands and Luxembourg account for 41 percent of German FDI inflows, but only 16 percent of this amount is from resident investors. Similarly, Singapore has become a hub for global investors investing in the Association of Southeast Asian Nations economies, thus inflating East Asia and Pacific’s true intraregional investment share. The previous overestimation of intraregional FDI is confirmed for Europe and Asia,2 based