Intra-regional FDI and Economic Integration in South Asia

This article examines trends and patterns of intra-regional foreign direct investment (FDI) in South Asia, with a focus on the potential for integrating production processes among countries in the region through further trade and investment policy reforms. The empirical evidence pieced together from scattered sources suggests that horizontal (market seeking) FDI has continued to dominate South Asian intra-regional FDI, with a significant shift in recent years in favour of services sector activities. Vertical (efficiency seeking) FDI in the region has remained confined to a few product lines, predominately garments, and also a few industries in which the availability of specific natural resources plays an important role in the site selection decisions of firms. In other industries, including electronics and electrical goods in which global production sharing is heavily concentrated, there is no evidence of notable cross-border operations by regional firms.