3.6 Global Trends in Inward FDI Policies, 2003–18

FIGURE 3.6 Global Trends in Inward FDI Policies, 2003–18

Share of liberalizing and restrictive new investment policies (%) 100 90 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Liberalization or promotion Restriction or regulation

Source: UNCTAD, Investment Policy Hub, 2019 (https://investmentpolicy.unctad.org/). Note: The sum of liberalizing and restrictive measures does not add up to 100 because the figure does not include neutral or indeterminate measures. FDI = foreign direct investment.

It is difficult to objectively benchmark the current openness of the FDI regulatory arrangements in South Asia relative to other regions because of the lack of data. In South Asia, foreign investment liberalization started in the late 1980s and early 1990s for most countries, with Sri Lanka having an earlier start (1978) and India gradually liberalizing in the early 1980s.6 Since then, South Asian economies have taken a generally cautious investment liberalizing path, involving increasing foreign equity caps (above 49–50 percent, and subsequently eliminating caps), increasing the coverage of sectors open to FDI, establishing special economic zones, and facilitating investment through single-window approval processes or even automatic approvals. However, relative to other countries, the region does not compare highly in FDI liberalization. The only comparative measure recently reported that includes all South Asian economies is the 2021 investment freedom subindex of the Heritage Foundations’ Index of Economic Freedom, which places all South Asian economies in the bottom half of the 184-country sample. The index incorporates security aspects of investing, and so is not a strict indicator of policy measures.7

The OECD’s FDI Regulatory Restrictiveness Index is based solely on policies such as discriminatory screening or approval mechanisms, restrictions on foreign personnel and operations, and foreign equity restrictions. However, data collection is limited to 69 countries and, for South Asia, includes only India. The 2019 index measures India’s FDI arrangements as being about three times as restrictive as the OECD average.8 A similar regulatory FDI index (excluding security issues) with wider developing economy coverage, with data collected over 2010–12, was the World Bank’s Investing

Across Borders index for 87 countries (and expanded to 103 countries in 2012) (IFC, MIGA, and World Bank 2010). South Asia (as represented by its six largest economies) placed below average in the ease of starting a foreign business, accessing industrial land, and arbitrating industrial disputes—substantially so in the latter two cases. The region’s score was similar to the average for investing across sectors, based on equity ownership caps in different sectors, driven by liberalization in the telecom and electricity sectors (see figure A.3 in appendix A).

The index and its 2012 update provide some information on regulatory variation within the region across the six larger nations, including regulations on currency conversion and transfer of foreign currency and the ease of hiring foreign personnel. The region does poorly on conversion and transfer of foreign currency, with Bangladesh and Nepal receiving particularly low scores with respect to capital outflows. Delays in conflict resolution continued to be a problem, with length of time for arbitration and enforcement being particularly long in India and Pakistan. Nepal was a restrictive outlier in the number of days to open a foreign subsidiary, as was Afghanistan for its lack of information on land ownership. Foreigners are not allowed to own land in Afghanistan, but they are able to lease land for up to 50 years.

On the positive side, the region scored above average on obtaining temporary work permits, with India performing best. Afghanistan performed well in currency conversion and transfer and ease of opening a foreign subsidiary. The country allows 100 percent foreign ownership and has no sector restrictions for foreign investment, but all investments over US$3 million require the approval of the High Commission on Investment. These findings imply that the country’s poor performances on the Heritage Foundation’s investment freedom subindex and overall foreign investment outturn are largely driven by fragility and security issues.

South Asian economies have moved to improve their FDI arrangements since 2012, but, unfortunately, relative progress cannot be benchmarked globally because the Investing Across Borders index has not been updated. This discussion highlights some recent developments; for a more historical analysis of the liberalization of each FDI arrangement, see Sahoo (2006). This section also covers the FDI arrangements of Bhutan and Maldives, which were not captured in global data sets. Table 3.4 summarizes FDI legislation for the eight countries and provides links to their regulatory bodies and investment promotion agencies that provide the current incentive programs. The largest two economies have made significant strides in the overall investment climate, as reflected by their improved positions in the overall Ease of Doing Business rankings. India and Pakistan improved from the 130th and 138th positions in the Doing Business Report 2016 rankings to 63rd and 108th, respectively, in 2020 (World Bank 2020). The nations of the region have also paid increasing attention to the role of special economic zones in stimulating FDI. Table 3.5 summarizes the progress in establishing zones in South Asia relative to some East Asian economies.

India has shown renewed interest in accelerating FDI inflows since 2014, especially in the context of the government’s “Make in India” campaign. The country