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62 QUANTIFICATION OF BENEFITS FROM ECONOMIC COOPERATION IN SOUTH ASIA and skill difference between the home and the host economies. As trade cost increases in the host country, firms with vertical FDI will have to import goods from the host country at a higher cost (Joon 2007). If the difference in skill between the home and host countries increases however, relative wages for low skilled labor will decrease, thereby increasing the incentive for firms to exploit this lower production cost by producing in the low wage economy. Consequently, vertical FDI will increase as trade costs decrease and skill difference increases (Yeyati, Stein and Daude, 2003 and Lesher and Miroudot 2006). Based on the above, the Knowledge-Capital model, analyses the impact of the given factors (market size, trade costs and skill difference between the two countries) and their intersections. The Knowledge-Capital model was empirically tested by Carr et al. (2001), and one of the important results obtained was that trade costs positively impact FDI when the skill difference between home and host country is small and negatively impact FDI when large skill differences exist between the two countries. From their study one can infer that in the presence of small skill differences between parent and host economies, a rise in trade cost will result in the impact of an increase in horizontal FDI dominating the decrease in vertical FDI. In the presence of large skill differences. On the other hand, decrease in vertical FDI is larger than the increase in horizontal FDI, when trade costs rise. Jang (2007) defines decreased trade costs as an FTA and tries to test this relationship. According to the Knowledge-Capital model, one may expect the decrease in horizontal FDI to be greater than the increase in vertical FDI when trade costs declines in the presence of small skill differences between the parent and the host countries, and vice versa in the presence of large skill differences. Since vertical FDI dominates horizontal FDI in countries where skill difference is large, one should expect an FTA involving member countries with large differences in skill levels to have a positive impact on FDI. Similarly, reduced trade costs act as a disincentive for building plants in the host economy, which in the presence of small skill differences, causes a decrease in horizontal FDI to dominate the increase in vertical FDI. Therefore, FTAs with member countries with small skill differences can be expected to discourage FDI between those economies. Many empirical studies have tried to study the impact FTAs have on intra-regional and extra-regional FDI. Yeyati et al. (2003) find that regional integration on the whole contributes to attracting FDI. A study by Velde and Bezemer on the other hand, established that the impact on FDI would be different for different types of regions and the position of countries within a region would be pivotal for attracting FDI. In the context of Korea–US FTA, Kang and Park found that FTA increased FDI by 14–35% from member countries and by 28–35% from non-member countries. Baltagi et al. (2005) conducted a study on bilateral outward FDI stocks into Europe over 1989–2001 and found that an RTA increases FDI up to 78% among European countries. With respect to South Asia, very few studies have estimated the impact of intra-regional trade on inward and intra-regional FDI. One of the reasons for this is lack of bilateral data on FDI over time. This chapter attempts to estimate the impact of intra-regional trade on inward FDI into member countries of SAFTA and domestic investments in the member countries. TRENDS IN INWARD AND INTRA-REGIONAL FDI IN SOUTH ASIA Trends in Inward FDI in South Asia Inward FDI into South Asia has increased exponentially since the last decade. FDI inflow increased from US$ 575 million in 1990 to US $ 9.8 billion in 2005 and reached US$ 22 billion in 2006. The stock of FDI increased from US $4 billion in 1990 to US $ 72 billion in 2006. The turn of the century marked the growth of inflow of FDI into the region. The average annual trend growth in FDI inflow from 2000 to 2006 increased to 28% from 10% in the period 1980 to 1990 and 20% in the period 1990 to 2000. With respect to share of SAFTA member countries in inward FDI in South Asia, India receives almost 77% of the inward FDI flows. Pakistan receives around 15% and Bangladesh and Sri Lanka 5% and 3% respectively. Fig 8.1 Extent of Inward FDI in South Asia: 1980–2006 Source: UNCTAD
I MPACT OF SAFTA ON INWARD AND OUTWARD FOREIGN DIRECT INVESTMENTS 63 Lanka has come from India, while for Nepal, Indian investments contribute to the extent of 51% of total investments in Nepal. Share of Nepal in total South Asian FDI is highest, i.e. 37%. A close look is required on each country’s FDI inflows from the region and extra-region (Table 8.1). Looking at the sectoral trends in South Asian FDI we find that South Asian FDI is mainly directed towards the industrial sector (chemical and engineering) with US$ 1.43 million. This is reflected in the share of South Asia in the global total, which consists of 9.10% (Table 8.2). Bangladesh Fig 8.2 Share of South Asian Countries in Total Inward FDI Flows in South Asia Source: UNCTAD Trends in Intra-Regional FDI As compared to other regions in Asia, South Asia has very low intra-regional FDI flows. Only India has been investing to some extent in the South Asian countries within the region, investments directing mainly towards Sri Lanka and Nepal. 2.6% foreign investment in Sri FDI inflow to Bangladesh in 2005 was around US$ 1 billion, registering 83.6% growth over the previous year. The top investor countries in 2005 were UK (US$ 152.8 million), USA (US$ 141.8 million), Singapore (US$ 97.5 million), UAE (US$ 55.4 million) and Norway (US$ 543.5 million). The Netherlands FDI was US$ 15.4 million, making the Netherlands the 14th biggest FDI source in Bangladesh (17th place in 2004). Most of the FDIs in Bangladesh are from extraregional sources. However, the share of South Asian Table 8.1 Intra-Regional FDI Hosts of FDI/Sources of FDI Intra-Regional FDI (US$ million) in 2006 India Pakistan Sri Lanka Bangladesh Nepal India n.a. 6.0 (2.6%) 0.99 (0.2%) 5.1 (51%) Pakistan n.a. (0.6%) 0.59 (0.1%) (0.03%) Sri Lanka (0.01%) n.a. 0.52 (0.1%) n.a. Bangladesh 0.59 (0.01%) 0.79 (0.08%) 0.41 (0.18%) n.a. Nepal n.a. n.a. n.a. n.a. Share of South Asia 0.04% n.a. 2.1% 0.4% 37.6% Source: IPS (2000), World Investment <strong>Report</strong> (2003), Bangladesh Bank (2006), Board of Investment (2007), Moazzem K. (2006). Note: Figures in parenthesis indicates percentage share of total FDI inflow to the respective country. * Data represents different sources and different time periods and may not be always comparable. Table 8.2 FDI Inflow 2006: Distribution by Sectors (million US$) Sources Sectors Agriculture and Food Industry Service Misc Total South Asia Total 0.15 1.43 0.52 0 2.1 India 0.15 0.84 0.99 Pakistan 0.59 0.59 Sri Lanka 0.52 0.52 Nepal Bhutan Maldives Global Total 5.32 15.76 469.1 0.1 490.27 Share of South Asia in Global Total 2.70% 9.10% 0.10% 0% 0.40% Source: Compiled from Board of Investment (BOI)
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QUANTIFICATION OF BENEFITS FROM ECO
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QUANTIFICATION OF BENEFITS FROM ECO
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Preface Our consultations with seni
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viii CONTENTS 7. Revenue and Welfar
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Executive Summary OBJECTIVE This st
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EXECUTIVE SUMMARY xiii Table 1 EAMA
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EXECUTIVE SUMMARY xv India A full S
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EXECUTIVE SUMMARY xvii indicates th
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EXECUTIVE SUMMARY xix ments on basi
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Part I BENEFITS FROM TRADE, INVESTM
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4 QUANTIFICATION OF BENEFITS FROM E
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15 Prospects for the Telecommunicat
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APPENDICES
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Appendix 8 Intra SAARC FDI Collabor
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Appendix 11 Table A11.1 On an Emplo
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Appendix 12 Original Commitments/In
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Appendix 14 Table A14.1 Telecommuni
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Appendix 15 REFERENCE PAPER Scope T
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Bibliography Abelson, P. (1996),
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BIBLIOGRAPHY 241 Cuba (2002), Negot
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BIBLIOGRAPHY 243 (2004), Impacts of
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BIBLIOGRAPHY 245 Silva, Patricia an
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BIBLIOGRAPHY 247 (1998), Tourism Se
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