Lesson for Bhutan from FDI flows in South Asia and the World

The research paper on ‘Engine of FDI in South Asia, Lesson for Bhutan’ by Sanjeev Mehta was presented to participants from different agencies in Thimphu yesterday in a session organized by consultancy and research group QED.

The research was focused on what factors leads to FDI investments in particular countries and secondly on the challenges of the enhancing the welfare effect of FDI.

He said that the global FDI inflows have increased from $57 billion in 1980 to $1.35 trillion currently. There was a significant growth in FDI but the peak was reached in 2008 before the financial crisis hit. It has again started going up to new highs from 2013 onwards.

He said that Bhutan and Pakistan has seen an increase in FDI. He said Bhutan is the only country which has seen an increase in FDI while other countries FDI have decreased. He said, “Bhutan’s FDI is largely based on hydro power projects.”

He said that the emerging global pattern is that the Global Value Change (GVC) contributes about 60% of global trade and Multi-National Company (MNC) coordinated GVCs account for 80% of the global trade. He further said that GVCs and regional value change are emerging as major factors promoting not only trade but trade related investment in these areas.

GVC is the full range of activities that are required to bring a product from its conception, through its design, its sourced raw materials and intermediate inputs, its marketing, its distribution and its support to the final consumer.Specifically, when activities must be coordinated across geographies, the term GVC is used.

He said that the rate of return on FDI stock is approximately 7% globally, but higher in developing countries at 8% than in developed countries at 5%. He said the FDI flow will also depend on the risk expected risk adjusted return on the investment.

He said, “For Bhutan increase in FDI can happen by expanding the infrastructure that would cut down costs and increase the expected rate of return from FDI so that foreign investors would be attracted to Bhutan.”

He said that market size and infrastructure were the two significant predictors of FDI in South Asia. He said higher growth may not translate into greater FDI and cheaper labor is important but not the main factor.

He said, “Tourism has highest scope for FDI in Bhutan followed by the natural resources sector.”

He said with leverage opportunities arising from global value changes it is important for Bhutan and other countries to learn to integrate themselves to the global production systems. “Integrating themselves with the global production system is how they create a system of industries which is linked with global value change,” said the professor.

He said that despite limited clarity on what drives foreign direct investment (FDI) and the channels of its welfare impact, there is greater acknowledgment among developing nations that net benefits of FDI are positive. It is because of this changing perception in the last three decades, coinciding with market reforms across the globe, FDI have increased sharply from $57 billion in 1980 to $1.35 trillion in 2013.

He said, “Attracting FDI is a critical question to Bhutan, which is currently faced with three major and interrelated problems- limited base of economic activities, growing youth unemployment and persistent current account deficits.”

He said that the new millennium has also witnessed a discontinuous shift in the global allocation of (FDI). Direction of the global FDI is undergoing a rapid shift reflecting greater opportunities for profitable investments in developing countries. Share of developed countries in FDI inflows declined sharply from 66 percent in 2007 to 41.5 percent while correspondingly the share of developing countries has increased from 29 percent to 52 percent. However, South Asia enjoys a disproportionately lower and near stagnant FDI inflow given the large current account deficits.

Sanjeev Mehta has an MA in Economics from Rajasthan University. He is a lecturer at Royal Thimphu College and he has recently published a book titled Nature and Structure of the Bhutanese Economy.

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