ABSTRACT
Foreign capital flows have emerged as key channels of global economic integration all across the world over the past two decades. While foreign direct investment (FDI) flows have been undertaken for a long time by multinational enterprises (MNEs) in the course of their overseas expansion, foreign portfolio investments (FPI) representing equity and debt flows unaccompanied by management control have become highly visible and often dominant components of the foreign capital flows in recent years with the rise of foreign institutional investors (FIIs) and sovereign wealth funds on the horizon that seek to make quick returns through short term speculative activities abroad. FDI flows represent longer-term investments made abroad bringing together capital and
entrepreneurship, technology and managerial know-how and sometimes even market access, hence seen by developing countries as catalysts of development. Therefore, most developing countries actively seek to attract FDI flows with different policy instruments. FDI inflows received by developing countries have grown rapidly into sizeable magnitude, from an annual average of US$25 billion in the second half of the 1980s to a peak of nearly US$620 billion in 2008, with the share of developing economies in global flows surging to a remarkable 37 per cent in 2008. FPIs, in contrast, tend to have limited potential of contributing to development, if at all, given their short-term and speculative nature. Their distribution across countries is highly uneven as they target only the fast growing emerging economies to benefit from their dynamism. In fact they are often seen to be bringing volatility to the financial and exchange rate markets. Hence, a number of emerging market economies are seeking to moderate their volatility through a variety of capital controls. Recent years have also seen the rise of FDI and FPI flows in South Asia. This can be partly
attributed to substantial liberalization of their policy regimes since the early 1990s and with their economies embarking on a robust growth trajectory in the new millennium, they have also begun to attract increasing attention of MNEs as well as FIIs as destinations for investments. The current decade also marks the beginning of the emergence of developing countries as sources of outward investments. Developing country enterprises especially in India have increasingly used outward FDI as a strategic tool for strengthening their international
competitiveness. As a result FDI flows have begun to be of bi-directional in nature rather than only one-sided with South Asian countries playing host. Against that background, this chapter summarizes and examines the experiences of South
Asian countries in attracting foreign direct and portfolio investments and reviews the recent trends, patterns and prospects for these flows and their developmental impact. As the region emerges as a source of FDI as well, this chapter also briefly touches upon the trends in these flows, especially the intraregional flows. It concludes with some policy lessons.
