Attracting Foreign Direct Investment : What Can South Asia's Lack of Success Teach Other Developing Countries?
Like many other developing countries, South Asian nations have been experiencing increased foreign direct investment inflows over the past decade as developing countries get a larger share of cross-border investments that were once sent to develope...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2013/11/18491804/attracting-foreign-direct-investment-can-south-asias-lack-success-teach-other-developing-countries http://hdl.handle.net/10986/16918 |
| Summary: | Like many other developing countries,
South Asian nations have been experiencing increased foreign
direct investment inflows over the past decade as developing
countries get a larger share of cross-border investments
that were once sent to developed countries. Nonetheless,
South Asia's inflows of foreign direct investment
remain the lowest relative to gross domestic product among
developing country regions. Why are South Asia's
foreign direct investment inflows so low and what lessons
can be drawn for developing countries as a whole? The
analysis in this paper uses a novel empirical model that
accounts for possible trends in convergence in the ratio of
foreign direct investment to gross domestic product between
countries and cross-sectional data for 78 countries from
2000 to 2011. The sample contains 52 developing countries.
The analysis finds that two key factors are at work -- high
overall regulatory restrictions on foreign direct investment
and specific restrictions placed on doing business with
other countries. These factors include overall trade
restrictiveness, which reduces the benefits to cross-border
investments, and weak institutions to protect foreign
investors and facilitate investment. Nonetheless, the
potential for faster growth in intra- and inter-regional
foreign direct investment flows is significant. The main
factors leading to this conclusion are South Asia's
current low levels of foreign direct investment, the many
unexploited opportunities for embodied knowledge transfer,
and supply-chain linkages. The overall lessons for
developing countries are that liberalizing policy
constraints in both trade and foreign investment, keeping
corporate tax rates modest, and improving governance and
transparency could help to substantially improve foreign
direct investment flows. |
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