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Foreign investments are among the key ingredients for
developing countries to hasten their growth and development. Two prominent
proof of this are small territories, small population, but big economies Hong
Kong and Singapore. They started as very poor economies in the 1950s and 60s
respectively and their openness to global trade and investments very early have
allowed them to maximize the financial, technological and managerial resources
that foreign businessmen and professionals could share.
There are two main avenues for foreign capital to enter an
economy. Via foreign direct investments (FDIs) and via portfolio investments
like the stock market. Here we will
discuss only FDIs and leave the latter to future topics in this column.
The UN Conference on Trade and Development (UNCTAD) has
released the World Investment Report (WIR) 2015 in late June 2015. In the
report are a number of very interesting data, some of which will be discussed
here.
Cumulative values of FDI inward stock, net of capital
outflows, is an important indicator of foreign investments in an economy. Here
are the numbers.
South Asian economies overall were not able to maximize
the potentials of FDIs all these years. India has the biggest FDI inward stock
in the region, but comparing what it got with small population, small
territories Hong Kong and Singapore, the
investments it has attracted looked
modest.
Nepal in particular needs to be more open to foreign
investments considering the small amount it has attracted with just half-billion
dollars as of 2014.
Socialist economies China and Vietnam that allowed
certain degrees of economic freedom and the market system were able to maximize
the potentials and benefits of FDIs. Vietnam’s FDI stock has expanded 23x in
just two decades while China’s has expanded by 15x.
Other South East Asian economies were also able to expand
their FDI stock rather fast. Aside from Vietnam’s 23x expansion, Singapore and
Indonesia expanded 16x, Philippines 11x, and Thailand 9x.
We now check the value of FDI inflows over the last three
years. The numbers for Afghanistan, Nepal and Bhutan are not good, the low
values they got in 2012 further shrank in the next two years. Thus, the share
of FDI as percent of gross domestic capital formation (GDCF) or simply total
domestic investments, has been declining.
Bangladesh, Sri Lanka and Maldives have retained the
average inflows per year while India and Pakistan have ramped up the FDIs they
are attracting.
Some important lessons that South Asian economies can
learn from their neighbors in North East and South East Asia would be the
following.
One, being open to global trade and investments would
mean being open to the various opportunities that other economies in other parts of the planet
can share. Global business is about integration and competition, about
complementation and substitution. There are lessons to be learned,
opportunities to be opened, so that business risks can be minimized and better
handled.
Two, as shown in the numbers above, Hong Kong and
Singapore are very good proof and examples that openness to global investments
and trade can bring in more investments than one can imagine and hope for.
Three, there is a need to reverse the recent decline in
FDI inflows especially in Nepal and Bhutan. More than high profit, foreign
businessmen are concerned with the security of their investments, that these
will not be confiscated or nationalized
even in periods of domestic political upheavals. Having the rule of law,
respect of private property ownership, and ensuring the economic freedom of
entrepreneurs, local or foreign, small or big, are important ingredients to
attract investments, both foreign and local.
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See also:
Business 360-24: Reducing Construction and Electricity Permits, April 08, 2015
Business 360-25, Economic Liberalization and GDP Expansion, June 23, 2015
Business 360--26, Nepal earthquake and lessons from it, July 12, 2015
Business 360-27, Public health in Asia, July 18, 2015
Business 360-27, Public health in Asia, July 18, 2015
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