Investment Flows from Japan and China to South Asia: Are They Matching with the Economic Prospects of the Region?

Introduction

Accepting South Asian Association for Regional Cooperation (SAARC) ¹ as the representative of South Asia, we find the region comprises eight countries having a population of 1.72 billion with a current aggregate GDP of US$2.608 trillion (World Bank, 2015). Looking backward, most of the countries in South Asia adopted the market-led growth approach in the 1980s and 1990s by liberalizing and globalizing (L&G) their economies. In the L&G process, they dedicated foreign direct investment (FDI) an important role to play in their drive to economic growth, industrialization and development. Since then they all are striving for FDI.

On the economic front, however, the South Asian countries have sectors of different levels of economic development, from rudimentary to the most modern ones. For instance, while the agricultural sector in the region remains mostly traditional, the manufacturing and service sectors have reached a level of factor-driven competitiveness (World Economic Forum [WEF], 2013). At the same time, some of the sectors in these economies have attained a level of innovative-driven competitiveness if compared to the similar industry in the world. For example, the information technology (IT) sector or space industry of India and the tourism industry in Sri Lanka may be mentioned in this regard. Similarly, the ready-made garment industry of Bangladesh may arguably epitomize the competitiveness of all sorts in one sector.

Interestingly, the South Asian economies have attained an impressive, though varied and sometimes less consistent, growth during the last one and a half decades while their political journey was less smooth. In fact, this uneven growth in these economies may be because of their differences in political, institutional and regulatory environment that affect the business climate and scope of opportunities differently (Hallward-Driemeier, 2007). Even with those differences, South Asia presently has become an economy of more than US$2.6 trillion with India forming the gravity centre. Not only that, the region now houses some of the fastest growing economies in the world, growing at 6 per cent or more annually for quite some time. But foreign investment and access to their technology have a much larger potential to contribute to the economic development of all these economies.

This article has an objective to examine the flow of FDI to South Asia mainly from two Asian economic giants, namely Japan and China, which are incidentally the number one and two economies, respectively in Asia. They have also emerged as two most significant investment sources in the world. In 2012, for example, investors from these two countries invested more US $210 billion worldwide (UNCTAD, 2015a). However, the record of their investments in South Asia in terms of both flows and stocks possibly mismatches the economic logic of investment. Even after accepting the internal constraints in the South Asian economies, the volume of Japanese FDI stocks in South Asia, in particular, looks quite insignificant. In comparison to Japan, Chinese trade and investment relationship with South Asia is relatively a new phenomenon. Along with trade, the Chinese portfolio of investment in South Asia is increasing at a relatively quicker pace since 2003. However, that still has not matched with past economic growth performance or future growth potentials of the South Asian economies. This deserves a review of the policies of both the counterparties for a future mutually beneficial engagement.

There are five more sections in this article. The next section reviews some of the existing literature that has tried to explain various determinants of FDI in different regions and economies in the world, including South Asia. The third section gives the broader objectives of the article and outlines a brief methodology to achieve those objectives. The fourth section describes the state of Japanese and Chinese investments, particularly in South Asia. The fifth section makes an effort to analyse whether the Chinese and Japanese investments have lived up to the past economic growth record and future economic potentials of the South Asian economies. The final section concludes the article.

Review of Literature

Flow of investments across borders is explained by two streams of literature. One of the streams identifies two sets of motives for investing enterprises or multinational corporations (MNCs): they are cost-related and revenue-related motives (Madura, 2010, pp. 397–414). This literature argues that either the reduction of costs or an increase in revenue or achieving both the objectives simultaneously becomes the real motive for MNCs moves to locate the production bases and FDI. On the other hand, a majority of the second stream of literature tries to find the attractiveness of destinations, may be a particular country or region, for FDI flows. The attractiveness depends on a variety of factors, including size and prospects of the economy under investment consideration, condition of its physical infrastructure, socio-political environment, technological readiness, quality of governance, functioning of FDI policies and so on. But in the ultimate analysis, both the streams seem to converge with each other to complete the same mission: finding the suitability of the investment in the host nations.

For the purpose of reviewing the literature, this study is more focused to the second stream that identifies different variables or determinants that help attract FDI in an economy. A United Nations Conference on Trade and Development (UNCTAD, 2006) study identifies five sets of variables or determinants of FDI: policy variables (trade policy, tax policy, macroeconomic policy and privatization policy), business variables (business conditions and investment benefits), market-related economic determinants (market structure, market size and market growth), resource-related economic determinants (technological base, labour cost and raw materials) and efficiency-related economic determinants (productivity of labour, transport and communication costs) and so on. Unsurprisingly, empirical studies devoted to finding the association between FDI flows and their determinants do not form uniformity in findings all the time. The same variables may have worked differently in different economies.

In the regional context, we find studies of Amal, Tomio and Raboch (2010) for eight Latin American countries, Ho and Rashid (2011) for Association of Southeast Asian Nations (ASEAN), Jiang, Liping and Sharma (2013) for China and Bhavan, Xu and Zhong (2011) for selected South Asian economies that try to find the determinants of FDI. Of them, Bhavan et al. (2011) applied the Arellano–Bond dynamic panel estimation method to study the determinants and growth effect of FDI on selected South Asian economies. The study finds that while population, trade openness and infrastructure are the significant positive factors in attracting FDI in South Asia, the geographical distance affects FDI inflows negatively, and human capital bears no significance in FDI flows. A study by Gould, Tan and Emamgholi (2014) investigated flow of foreign investments in South Asia and identified the detrimental effects of high overall regulatory restrictions on FDI and specific restrictions on doing business with other countries. They reduce the benefits to cross-border investments. Interestingly, the study observes, ‘while the number of developed countries investing in South Asia has remained roughly the same over the last decade, the number of other developing countries investing in South Asia has almost doubled—suggesting greater South–South linkages’ (Gould et al., 2014, p. 136). An earlier study of Sahoo (2006) identified that market size, infrastructure and the availability of cheap labour were the significant positive determinants of FDI inflows in South Asia.

Unfortunately, no study seems available that looked into the Japanese and Chinese FDI in South Asia on a comparative basis. Iqbal (1997) made an effort to find out why Japanese FDI was shy to go to South Asian economies. He identified that a significant chunk of the Japanese FDI went to resource development projects in various parts of the world, but South Asia had little to offer in this regard. Further, Jain (2000) assessed that Japanese influence in the South Asian investment markets was limited. In his words,

Japan and South Asian nations remained distant to each other. The distance is not just borne of geographic location but of different history, economic, political and social experience. For Japan, South Asia is ‘other Asia’, not the intimate Asia that it associates with East and Southeast Asia. (Jain, 2000, p. 208)

In another study, Brunjes, Levine, Palmer and Smith (2013) reported that China’s economic engagement in South Asia has grown quickly in the recent years and identified economic profit as the primary motive for that. Looking at the Chinese domestic conditions, they predicted its trade and investment relations with the South Asian countries to go further up. On the other hand, Barai, Kar and Bhasin (2015) argued a number of reasons, namely space for economic expansion, four D-factors, ² huge market, etc. for which Japan should invest more in South Asia, in general, and India, in particular.

Thus, the non-availability of a similar sort of study gives the justification to this article, which compares Japanese and Chinese investments in South Asia and assesses their inadequate response to the economic rationale of investment.

Objectives and Methodology

A report of the Economist Intelligence Unit (EIU, 2015, p. 3) predicted the size of top 10 economies in the world for 2050 that include China at the first, India at the third, Indonesia at the fourth and Japan at the fifth positions, while the USA was at the second spot. There are indications that the emerging economic world order in the twenty-first century will be dominated by few Asian economies and the USA. Interestingly, by 2050 the Indian economy is projected to be bigger than the total of next five economies combined. ³ Tiny Sri Lanka will have a much higher nominal per capita GDP than many of the top GDP per capita countries in the world, placed at the fifth position in the list. So, a new paradigm of the investment is expected to emerge for South Asia. In that emerging context, China cannot ignore a big backyard which is predicted to be economically robust and vibrant, and politically strong. On the other hand, a high economic commitment between Japan and South Asia may be required to deepen the political understanding between them that could work as a counterweight to any future Chinese posture. However, the broad objective of this article is to discuss the Japanese and Chinese investment flows in South Asia and examine whether they have matched with the past economic performance and future economic potentials of the region as a whole. So, the article will be an addition to the existing level of literature to the extent that it depicts a picture of investment exposures of two economic giants in a zone that is yet to be considered important in their investment policy. In that, they might also be missing an opportunity to position themselves in a future economic scenario where South Asia is expected to have a stronger presence in the world.

We have adopted a hybrid methodology to explore the objectives of the article. To develop this, we have taken a multi-theoretical framework from the limited available literature to formulate our propositions and arguments. As research designs cannot be pre-specified but ‘emerge, unroll, cascade, or unfold during the research process’ (Lincoln & Guba, 1985, p. 142), and it would be incongruent to specify these designs in advance. Hence, we have applied this hybrid methodology here. Further, the types of research methods used are also consistent, which usually selected by naturalistic inquirers involve those most closely associated with a human component: interviewing, participant observation, document and content analysis (and other measures). In practice, it also leads to the application of hybrid methods. One reason is that research studies usually include a number of different research questions, so a research method appropriate for one question may be inappropriate for another, like our study. The other reason for using hybrid methods is that it enables triangulation to be used. Easterby-Smith, Thorpe and Lowe (2002) referred to data triangulation as the collecting of data at different times or from different sources. So not only does the use of hybrid methods assist in data triangulation but it also helps to balance out any of the potential weaknesses in each data collection method. But whichever methods are used, in the final analysis Oakley’s argument is sound: ‘all methods must be open, consistently applied and replicable by others’ (Oakley, Bichmann, & Rifkin, 1999). Accordingly, we have collected data from the EIU of the Economist, UNCTAD, World Development Indicators (WDI), WEF, etc. sources of different time periods. This periodic data has been used for analysis in the designated sections to strengthen our arguments.

Analysis

Japanese and Chinese Investments in South Asia

To begin with, let us have an idea on how the two economies, namely Japan and China, have emerged as significant global sources of FDI over time. While Japanese investment abroad is indebted to its rapid economic growth in the 1960s, the Chinese push for overseas investment is rooted in its economic progress made in the 1990s and afterward. Interestingly, both of them followed the export-led growth model for their economic development that ultimately has turned them into major sources of FDI.

For Japan, both outflows and inflows of FDI in the 1960s were not that significant, and the investment gap was modest. However, the gap widened in the 1970s as outbound FDI increased at a much faster pace. But between 1980 and 1990, Japanese outward investment increased exponentially. As a result, in 1990 the outward stocks of Japanese investment stood at US $201.4 billion against the inflow stocks of US $9.85 billion, which is a ratio of 20.5 (UNCTAD, 2015a). This trend in the Japanese outflow has been continuing since then and by the end of 2013, the inward and outward stock figures stood at US $170.9 billion and US $992.9 billion, respectively.

A number of factors are considered to be responsible for a bigger Japanese outward investment. The rapid appreciation of the yen after the Plaza Accord in 1985 has remained a significant influencer, in this case. As a result, ASEAN countries were the main initial beneficiaries of the Japanese FDI. Later, the price bubble burst in 1991 dealt a blow to the prospect of the domestic economy of Japan as it ensured a long-term economic slump in Japan and, unfortunately, that has been continuing since then. Additionally, the rise in manufacturing costs due to increase in wage and transport costs, competition in the external markets, etc. forced many Japanese investors to find lower-cost production bases in newly industrialized countries (NICs) and China. At the same time, Japanese investors also used their outward investments to foster trade. Observing the pattern of outward investments during that period, Urata (1993, p. 285) argued, ‘The main motive behind Japanese FDI in Asia is to set up an export base, while the main motive of Japanese FDI in the United States and the EC is to maintain or capture the local market.’

A look at China, however, reveals that it incentivized domestic over international investment until the late 1980s, though it started setting up foreign firms since it began the open door policy in 1978 (Sauvant, 2005). The initial Chinese disinclination to allow outward investment may be was due to the apprehension of capital flight and loss of control of state assets (Buckley, Cross, Tan, Xin, & Voss, 2008). Following the implementation of ‘Go Global’ programme in 2001, the Chinese government relaxed its foreign exchange controls, approval procedures and investment restrictions, and from 2003 onwards, it allowed privately owned enterprises to apply for permission to invest internationally (Buckley et al., 2008). Since this time, Chinese outward investment has rapidly expanded, from US $2.85 billion in 2003 to more than US $101 billion in 2013 (UNCTAD, 2015a). In these outflows, state-owned enterprises (SOEs) continued to be the largest investors—mainly in petroleum, construction, telecommunications and shipping. But more recently, private companies such as Lenovo have started to invest abroad (Morck, Yeung, & Zhao, 2008).

Figure 1 gives us a comparative view on the outbound investments from Japan and China from 1990 to 2013. By 1990, Japan became a significant investor while China was yet to join the investor club in any meaningful way. But the price bubble burst in 1991 seems to have an adverse impact on the Japanese outflows. However, Japanese FDI again attained pace from 2004 to reach a pre-recession high of US $128.1 billion or 6.4 per cent of the world total in 2008. However, the financial crisis in 2008–2009 put a spanner on the Japanese FDI flow, then gained momentum from 2010 and touched an all-time high in 2013 to reach US $135.7 billion or 9.6 per cent of the world total (UNCTAD, 2015a). Overall, the investment flow from Japan seems to have synchronized with the outflow trend of the world.

In comparison, the Chinese outward investments in the 1990s begged little reference as they were insignificant in counting. But the scenario started changing in the next decade, particularly from 2003 since when outward flows of FDI from China went on increasing to reach US $101 billion (7.2 per cent of the world) in 2013 (UNCTAD, 2015a). This shows 34.8 times jump within a decade. More importantly, the financial crisis of 2008–2009 seems to have affected Chinese FDI only momentarily in 2009 and then bounced back in 2010. It is important to note that in 2013, Japan and China together contributed about 16.8 per cent of the world’s outward FDI and 6.1 per cent of outstanding investment stocks (UNCTAD, 2015a).

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Figure 1.

Source: Constructed; data from UNCTAD (WIR), 2014.

How do the economies of South Asia figure in the investment chart of Japan and China? Tables 1 and 2 have been prepared to show the flows of Japanese and Chinese FDI to the South Asian economies from 2003 to 2012.

A closer look at Table 1 also reveals that the Japanese investors are more comfortable to invest in the developed countries, may be for historical and cultural reasons. In 2012, for example, 63 per cent of its total outward investment headed towards developed economies. During the period of 2003 to 2012, it was 2009 only when Japan invested more in the developing countries than the developed nations. Evidently, the bulk of its FDI in the developing economies goes to the economies of East and Southeast Asian regions. Physical nearness, relatively low cost of labour and cultural closeness may explain the substantial Japanese investment in these regions. From the same table, it also appears that South Asia is yet to attract the Japanese investors, even though the third largest Asian economy is located in the region. To substantiate, in 2012, only US $2.8 billion (6.34 per cent) of the total of US $44.6 billion Japanese investment in developing economies headed towards South Asia. That too was India-centric, as it received 98.6 per cent of that Japanese FDI. Bangladesh, Pakistan and Sri Lanka are the other economies that received a little of Japanese investment during the period of our consideration.

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Table 1.

Japan: FDI Flows to South Asian Economies (Millions of US dollars)

Region/Economies	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
World	28,773	30,951	45,781	50,266	73,549	128,020	74,699	56,263	114,353	122,548
Developed economies	20,198	16,592	22,282	28,701	42,034	72,966	35,468	29,693	62,763	77,176
Developing economies	8,326	14,055	23,438	21,372	31,386	54,737	38,782	26,189	51,257	44,616
South Asia	125	139	268	512	1,558	5,485	3,718	2,771	2,328	2,831
Bangladesh	–	–	–7	– 26	–	398	–5	6	44	29
India	125	139	270	513	1,513	5,253	3,679	2,747	2,274	2,792
The Maldives	–	–	–	–	–12	–	–	17	–	–
Nepal	–	–	–	–	–	0	–	–1	1	1
Pakistan	–	–	31	24	51	116	31	5	8	13
Sri Lanka	–	–	–26	–	6	–282	12	–3	2	–4

Source: Compiled; UNCTAD (2015b), based on data from the Bank of Japan.

On the other hand, the Chinese investment abroad has a significant difference in this that they invest much more of their investment in the developing economies. Table 2 clearly shows that from 2003 to 2012, the share of Chinese investment in developed countries was never that high, the highest being about 18 per cent in 2011. In 2012, the share of developing countries in Chinese investment increased to 84.6 per cent of the total. However, the South Asian economies are yet to make noticeable places in the list of Chinese FDI destinations, though China’s economic reach in the South Asian economies has grown considerably since the late 1990s. In this regard, Kelegama (2014) observed, ‘For now, China’s foreign direct investment (FDI) in the South Asian region has not kept pace with growing trade. However, during the last three years, Chinese investment has grown rapidly in some South Asian countries such as Pakistan, Sri Lanka, and Bangladesh.’ Chinese investment figures in Table 2 supplement his observation.

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Table 2.

China: Flow of Investment in South Asian Economies (Millions of US dollars)

Region/Economy	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
World	2,855	5,498	12,261	17,634	26,506	55,907	56,529	68,811	74,654	87,804
Developed economies	211	336	731	520	2,747	2,787	7,043	10,864	13,423	13,508
Developing economies	2,605	5,065	11,216	16,565	22,891	52,055	48,780	56,736	60,034	70,017
South Asia	20	22	29	15	947	460	204	928	1,525	1,143
Afghanistan	–	–	–	–	–	114	16	2	296	18
Bangladesh	1	1	–	5	4	5	11	7	10	33
India	–	–	11	6	22	102	–25	48	180	277
Nepal	–	2	1	–	1	–	1	1	9	8
Pakistan	10	1	4	–62	911	265	77	331	333	89
Sri Lanka	–	–	–	–	–2	9	–1	28	81	17

Source: Compiled; UNCTAD (2015b), based on data from the Ministry of Commerce (MOFCOM).

In addition, Appendix Table A2 summarizes the total inflows of foreign investment in eight economies in South Asia and shares of Japan and China of that FDI for ten years: from 2003 to 2012. Among the economies, Japan has been investing in Bangladesh, India, Pakistan and Sri Lanka more. Overall, India seems to have remained at the centre of Japanese investment attention where its investment has crossed the critical level of 5 per cent of the total flows of FDI in India for both 2011 and 2012. In Bangladesh, however, Japan had the highest share of investment of 8.3 per cent of the total in 2003. Pakistan is also receiving some investment from Japan. But the history of Japanese investment in Sri Lanka seems to have been affected by the civil war, and in 2008 Japanese investment experienced a net withdrawal of US $282 million. We see a repeat of Japanese investment withdrawals from Sri Lanka again in 2010 and 2012. Among the SAARC countries, Afghanistan and Bhutan are yet to record any FDI from Japan.

Curiously, FDI from China in South Asia seems to be a recent phenomenon. With the exception of Bhutan and the Maldives, all other economies have registered Chinese investment during the period of our discussion. However, for historical reason, Pakistan has remained the largest recipient of Chinese investment in South Asia. Afghanistan, Bangladesh, Nepal and Sri Lanka have been seeing fast growth of Chinese FDI (Appendix Table A1). Though India is by far the largest economy in South Asia, it is yet to receive any significant Chinese investment so far. That again may be explained by the unfriendly past they live with.

Are Japanese and Chinese Investments Matching with the Prospects of South Asian Economies?

A pertinent question that arises is whether the Japanese and Chinese investment flows to South Asia are matching with the economic performance or future potentials of the region as a whole. To answer this question, let us begin with a comparative investment picture of Japan and China in some of the regions of the world. Figures 2 and 3 have been drawn to depict the Japanese and Chinese regional investment scenarios, respectively.

As stated earlier, Japanese external investment is principally directed to the developed economies. As a result, the gap in Japanese investment between developed and developing economies had always been there and is widening since 2010. Figure 2 also shows that the Japanese FDI in the developing Asia is highly focused on the East Asian economies in particular. However, we follow an exception in 2011 when Southeast Asia received more Japanese investment than any other developing regions. From the South Asian perspective, Japan has remained an important investor, but its investment in the region looks little when compared with its investment in the East and Southeast Asia. West Asia too is largely ignored by the Japanese investors.

In contrast, China maintains a diametrically opposite approach to investment internationally, as the developing economies are central to that strategy. This reflects the Chinese desire for diversification and consists of normal economic interests (Brunjes et al., 2013, p. ix). Figure 3 shows that since 2003, Chinese aggregate investment in the developing economies is growing at a faster pace. Interestingly, the gap is widening since the 2009 financial crisis.

Indeed, from Figures 2 and 3 we can draw at least two similarities by observing Japanese and Chinese outward investments in different regions. Firstly, like the Japanese FDI flows, East Asia constitutes the single largest zone for the Chinese investors followed by Southeast Asia, South Asia and West Asia. Secondly, South Asia still figures insignificantly in the flows of Chinese FDI as well.

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Figure 2.

Source: Constructed; data from UNCTAD, 2015b.

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Figure 3.

Source: Constructed; data from UNCTAD, 2015b.

Appendix Table A2 has been constructed to give a comparative view of the ranks Japan and China have had with their FDI in the individual South Asian economies from 2010 to 2012. In Afghanistan, according to the available data, China seems to have remained the only major investor. During the same period, the significant players in Bangladesh are Singapore, Egypt and China. For Bhutan and Sri Lanka, India has remained the top investor, while for Sri Lanka, China is a major player too. Interestingly, India, the single largest destination for FDI in South Asia, has Mauritius as the top investing country for all those years. Singapore, Japan and the Netherlands are important investors too. For the same period, Japan is a tiny but number one investor in the Maldives. Meanwhile, Nepal is the only country where the names of both the countries have propped up as top investors. At the same time, Pakistan is mostly a beneficiary of investments from the USA, UK, some Middle Eastern countries and China.

So, how much of the trend of Japanese and Chinese investment was matching with the past economic performance and future prospects of the South Asian region? To examine this, we have prepared Table 3 that includes a comparative average economic growth position of various regions of the world from 1990 to 2013; divided into three phases, namely 1990–2000, 2000–2009 and 2009–2013. Just to get a better idea, the savings status of the same zones for 2013 has also been incorporated in the table. Next to that, the figures of Japanese and Chinese outbound investment stocks for 2012 have also been included to give a view on the importance the Japanese and Chinese investors attach to different regions. As a reminder, along with other economic factors, growth rate and gross domestic savings are also considered important for making investment decisions.

From Table 3, one can clearly see the rationale of Japanese investment in East Asia and Pacific, as the zone, as a whole, had the highest economic growth rate among the regions in the world from 1990 to 2013. However, if China is excluded from the list of countries in the region, the annual average growth rate would be much lower for them during the period. In fact, the World Development Indicator (WDI) 2015 reports that this was the time when China was growing at a much faster pace than the rest, averaging 10.6 percent between 1990 and 2000, 10.9 percent between 2000 and 2009 and 8.7 percent from 2009 to 2013 (World Bank, 2015, p. 82). Relatedly, the Japanese investors responded positively to this growth by channelling a large amount of investment to the region that could be seen from the Japanese FDI stocks that increased 2.7 times, from US $101 billion (including US $10 billion in China) in 2001 to US $271 billion (including US $93 billion in China) in 2012. Interestingly, during the entire period of 1990–2013, South Asia maintained the second-best average economic growth rate in the world. Not only that, during this period South Asia as a whole also maintained a very healthy savings rate, which as a percentage of GDP stood at about 31 per cent in 2013. So, by this economic performance, South Asia should have received much more importance and attention from the Japanese investors, in particular, as they joined the FDI fray much earlier than their Chinese counterparts. Ironically, South Asia now hosts just about US $15 billion (Table 3) of Japanese outbound investment stocks, while the Chinese stock is lagging at US $6 billion.

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Table 3.

Comparative Growth, Savings Rate of Different Regions and Japanese and Chinese FDI Stocks

Regions	1990–2000	2000–2009	2009–2013	Gross Savings as % of GDP (2013)	Regions	Japanese FDI Stocks, 2012 (US $bn)	Chinese FDI Stocks, 2012 (US $bn)
Low income	2.7	5.4	6.3	24.9	World	1,038	532
Middle income	4.3	6.4	5.8	31.0	Developed economies	606	73
Low and middle income	4.3	6.4	5.8	31.0	Developing economies	421	446
East Asia and Pacific	5.8	9.4	8.1	46.3	Africa	7	22
Europe and Central Asia	0.2	5.4	4.3	17.0	East Asia	150	316
Latin America and Caribbean	3.1	3.6	3.8	17.7	China	93
Middle East and North Africa	3.9	4.9	2.3	–	Southeast Asia	121	28
South Asia	5.6	7.2	6.6	30.7	South Asia	15	6
Sub-Saharan Africa	2.3	5.7	4.2	19.4	West Asia	5	4
High income	2.6	2.1	1.8	20.8	Latin America and the Caribbean	119	68
Core Europe	2.1	1.5	0.6	22.0	Transition economies	3	13

Source: Compiled; World Bank (2015, p. 86) for Growth and Savings data and UNCTAD (2015b), (http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI-Statistics-Bilateral.aspx) for country-specific FDI stocks figures.

Understandably, there are a number of economic and non-economic factors that play a significant role to entice investment in a country/region. For South Asia, insufficiency of infrastructure, overpopulation, corruption, disruptive political discourse, a workforce that lacks required education and discipline, etc. could be named as some of the tentative barriers that may discourage foreign investment.

But if we assess South Asia as a whole on the basis of past economic growth performance and future economic prospects, then a higher level of inward investment could have been expected. Apparently, the prospect for foreign investments in South Asia seems to have not been capitalized to a satisfactory level. Also, most of the economies in the region have a domestic consumption-based growth approach instead of an export-oriented growth model, supported by a larger population and have achieved 6 per cent plus growth rate. So the signal of their future economic potential should not have been missed by prudent investors from Japan and China.

In an objective view, Japan seems to have missed more by overlooking the fundamental difference in the development approach of the South Asian economies. Not only that, given the Indo-centric geography, the South Asian economies may be much more welcoming to Japanese investment than that from China, largely because of concerns of India. In this analysis, the SAARC region is considered to be part of India’s geopolitical backyard. The recent trouble with the Chinese ‘Colombo Port City project’ ⁴ in Sri Lanka may be a good example of this apprehension.

That is why India’s

overall policy stance toward China may impact the flow of Chinese investment in the region as well. According to S.D. Muni, India’s policy towards China revolves around the 4 ‘C’s, containment, conflict, competition, and cooperation. Various groups in India support different ‘C’s: the Indian business community supports competition while part of the military supports containment, the bureaucracy calls for cooperation, and so on. (Kelegama, 2014)

Conclusions

Looking at the future of FDI from these two sources, it may be assumed that China’s increasing focus on the domestic economy should create some pressure on the yuan to appreciate in the future unless otherwise the international currency politics and other strategic moves force the yuan to be devalued significantly. However, any future appreciation of the yuan should trigger an outflow of Chinese investment, as was the case with Japan after the appreciation of the yen in the 1980s. In that instance, ASEAN countries were the main beneficiaries of Japanese FDI flows. Thus, given China’s strong trading and investment foothold, and the relatively low labour costs compared to East Asia, the SAARC region is in a position to attract more Chinese FDI in the coming years (Kelegama, 2014). Japan, on the other hand, is following a different strategy at the moment. The monetary policy of quantitative easing implemented since April 2013 has pushed the value of yen artificially down. This was done to make Japanese exports competitive internationally as well as to slow down the hollowing out of Japanese manufacturing base. If successful, this can stifle the flow of Japanese investment outside in the medium to long term. But given the labour situation in Japan, the second purpose of the policy move may fail. In the ultimate analysis, this should not deter the Japanese FDI flows to South Asia.

There is an apprehension that China may end up in the peculiar Japanese no-man’s-land between growth and non-growth in the not-too-distant future. But we have the following possibilities for China at the moment: unless forced otherwise, the yuan will appreciate and an extra-rich class of entrepreneur will look for overseas bases for their business and production. So, the Chinese economic presence in the South Asian region may be inevitably growing as most of the economies require China’s financial assistance and benefit from deepening trading and investment links. Moreover, India is developing into an open market economy. A number of factors are playing in India’s favour: a young population and corresponding low dependency ratio, remittance from a burgeoning Indian diaspora, healthy savings and investment rates, increasing integration into the global economy and so on. That is why, the outlook for India’s medium-term growth is looking very positive. The surrounding economies of Bangladesh, Bhutan, the Maldives, Nepal and Sri Lanka have the promise to grow as well. In fact, the Indo-centric South Asia is showing a much better economic prospect than the past, making the whole region an attractive destination for future investment.

So, both Japanese and Chinese investment flows to South Asia may see acceleration for a number of reasons in the future. They include the growing economic and strategic importance of India as a partner of Japan, the election of a more representative government in Sri Lanka, an increase in geostrategic weight of Pakistan to China, a better economic prospect of the region as a whole and so on. In essence, the presence of India at the geographic centre also enhances the overall expectation and importance of the region as a whole because of the size of the market and its growth potentials. This makes further ground for Japanese and Chinese investment in the region and the investors from both the countries should not miss the signal, though they seem to have failed to receive it in the past.