Ebook Foreign Direct Investment And Economic Integration In The Saarc Region
The process of economic integration in South Asia gathered momentum with the implementation of the South Asian Preferential Trade Agreement (SAPTA) in 1995 under the broad framework of the South Asian Association for Regional Cooperation (SAARC). SAPTA has, however, come to be viewed as an interim platform in the move towards economic integration in South Asia. In 1996, South Asian governments committed themselves to the creation of a South Asian Free Trade Area (SAFTA). Although it was decided at the ninth SAARC Summit to establish SAFTA by 2001, this has proved too ambitious a target. The Eminent Persons Group appointed to examine the implications of the transition to SAFTA recommended that the timeframe be revised, for the non-Least Developed Country (LDC) states of SAARC to have free trade with members by 2008 and for LDC member states to follow by 2010.
Both theory and evidence from regional integration arrangements suggest that measures that reduce trade costs among partner countries may provide an important stimulus not only to trade, but also to foreign direct investment (FDI). Also, specific regional integration initiatives can influence the level and pattern of FDI flows between member countries, as well as, between member countries and outsiders. The SAARC integration initiatives have taken place in the context of a significant (non-discriminatory) liberalisation process in all member countries. This has involved both trade and investment liberalisation, and the adoption of a pro-FDI stance. Though significant trade and investment barriers remain in place in many countries, the regional economies are today far more open than they were until the late 1980s. There is a general acceptance that expanded trade, as well as FDI, confers large net benefits However, though intra SAARC trade has been quite extensively analysed, the FDI-trade nexus has received relatively little research attention in South Asia.
Even after considerable liberalisation, intra-SAARC trade remains a tiny fraction of total trade of the region, being constrained not only by political and policy factors, but also by underlying similarity of the economies that limits comparative advantage driven trade. But, it must be noted that for some of the smaller economies, bilateral trade with a SAARC partner, typically India, constitutes a large and important component of their overall trade. The relative paucity of intra SAARC investments in the past is also not difficult to fathom, given not only that these are poor, net capital importing countries that had few firms with the capacity to undertake significant outward FDI, but also that, until recently, quite stringent controls on outward FDI have been in place in most countries, and that they have offered relatively inhospitable environments for inward FDI. In recent times, the liberalisation process in the region has infused a dynamism to the region’s economies in several ways. Economies are becoming more open, outward oriented, and more receptive to foreign investment and trade; at the same time, many business firms are expanding their horizons, and are not only entering into joint ventures and other partnerships with foreign firms but are also taking the initiative to undertake FDI in other countries.
This paper reports on an initial exploration of these and related issues, documenting the nature of intra-SAARC investment flows, and presenting the results of some preliminary investigations of the emerging trade and investment linkages within the SAARC, with particular attention to India-Sri Lanka links. The scope of this study is quite limited, but it is hoped that this will lead to a more comprehensive future study of this important phenomenon. Before moving to the empirical aspects of the study, we briefly review the elements of the theoretical and conceptual framework that underpins the study in the next two sections (section 2 and section 3). This is followed by a description of the trade and investment liberalisation process in the South Asian region in section 4, and the patterns of FDI (from outside the region as well as from within the region) in South Asia in section 5. Section 6 explores the evidence on the trade-investment links in South Asia by focusing on the textile and garment sector of the region. Then section 7 discusses some firm level evidence from Sri Lanka which sheds further light on the trade-investment nexus.
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