Foreign Direct Investment and Economic Integration
in the SAARC Region

The IPS was successful in securing the above study under the first phase of funding of the South Asia Network of Economic Institutes (SANEI) funded by the World Bank and coordinated by the Indian Council for Research in International Relations (ICRIER).

Rationale

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) liberalization process in all member countries. This has involved both trade and investment liberalization, 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, confer 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.

Objectives

This study reports on an initial exploration of the above 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 specific sections looked at in detail are: a review of key elements of the theoretical and conceptual framework on the trade-investment nexus; a description of the trade and investment liberalization process in the South Asian region; the patterns of FDI (both from outside and within the region) in South Asia; an exploration of the evidence on the trade-investment links in South Asia by focusing on the textile and garment sector of the region; and a discussion on some firm level evidence from Sri Lanka, which sheds further light on the trade-investment nexus.