Foreign direct investment (FDI) inflows to South Asia rose by 23 per cent to $39 billion in 2011 following declines in 2009 and 2010, UNCTAD’s World Investment Report 20121 reveals.
The report, subtitled “Towards a New Generation of Investment Policies”, was released today.
The recovery took place mainly as a result of the good performance of India – which is the largest FDI recipient in South Asia and accounts for more than four fifths of total FDI inflows to the region. FDI inflows to that country alone reached $32 billion in 2011. Inflows to the Islamic Republic of Iran and to Pakistan, the second- and third-largest FDI recipients, amounted to $4.2 billion and $1.3 billion, respectively (see figure). Bangladesh has also emerged as a major recipient, with FDI inflows increasing to a record high of $1.1 billion.
Countries in the region face different challenges, such as political risks and obstacles to FDI, which need to be tackled to build an attractive investment climate, the report says. Nevertheless, recent developments have highlighted new opportunities. For example, the political relationship between India and Pakistan, the two major economies on the subcontinent, has been moving towards greater engagement. In Afghanistan, significant FDI has been flowing into extractive industries, despite the country’s continuing internal conflict.
In 2011, about 145 cross-border mergers and acquisitions (M&As) and 1,045 greenfield FDI projects – that is, ground-up investments in new ventures – by foreign firms were recorded In South Asia. Cross-border M&As rose by 131 per cent in value, and the total reached $13 billion in 2011, surpassing the previous record set in 2008. This significant increase was driven mainly by large transactions in extractive industries.
After three years’ decline, outbound FDI from the region recovered as well. In 2011, FDI outflows from South Asia rose by 12 per cent to $15.2 billion. Outflows from India, the region’s dominant source of FDI, increased to $14.8 billion (see figure 1). Though cross-border M&As slid across all three sectors – extractive industries, manufacturing and services – the drop was compensated largely by a rise in overseas greenfield projects, particularly in extractive industries, metal and metal products, and business services.
FDI growth seems to be keeping its momentum in 2012. As economic growth in India has slowed, however, concerns have risen about short-term prospects for FDI inflows to South Asia, the World Investment Report says. The global economic situation has created further uncertainties. Whether countries in the region can overcome old challenges and grasp new opportunities will depend to a large extent on governments’ efforts to further open up their economies and deepen regional economic integration, the report contends.
Figure 1 - Top five recipients and sources of FDI flows in South Asia, 2010 and 2011 (Billions of US dollars)
Source: UNCTAD, World Investment Report 2012.
Note: Countries ranked on the basis of the magnitude of 2011 FDI flows.