Promoting Foreign Direct Investment in the Indo-Pacific Region: Scope and Opportunities

Abstract

Indo-Pacific construct has picked up a motivating pace in recent years. Several countries across the world have shown their interest in joining the Indo-Pacific region. Indo-Pacific region has been the world’s leading source and destination of foreign investment. This article analyses the trends in investment, bilateral and multilateral investment engagements and investment barriers and presents a way to promote foreign direct investment (FDI) in the Indo-Pacific region. It also examines India’s investment relations with some of the Indo-Pacific countries. Further, it looks into the inter-linkages between FDI and global value chain, given that multinational firms play a significant role in bringing international sourcing, technology sharing, and production networking across countries.

Keywords

Foreign direct investment value chain trade regional cooperation Indo-Pacific

Introduction

The Indo-Pacific is the multi-polar region, which covers a geographic space between the Indian and Pacific oceans, which consists of countries from Southeast Asia, South Asia, Africa, Pacific, Middle East and Latin and North Americas.¹ It contributes to more than half of world’s GDP and population and has huge natural resources and potential for new economic opportunities. Given the heterogeneity of the region, the Indo-Pacific countries require huge investment in various sectors to promote economic growth, financing for infrastructure development and so on. In particular, foreign direct investment (FDI) has the potential to generate employment, increase productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development.² FDI is also an important source of private external finance for the developing world, and it indeed plays a catalytic role in fostering economic integration. Several developing countries have also initiated supportive investment environment and introduced various incentives and other policy preferences to attract foreign investments.³

While global flows of FDI have declined in developed countries, developing countries, particularly developing Asia, led by China and India has become the leading FDI destination. Developing Asia is also fast emerging as a leading outward investment source in the world.⁴ In terms of FDI flows, emerging countries in the Indo-Pacific region have become the attractive destinations of FDI in the world. On the other hand, the major FDI outward flows are arising from the developed countries of the Indo-Pacific. Therefore, the Indo-Pacific region has strong potential to generate intra-regional trade and investment opportunities, thereby benefitting the entire region.

In view of the above, this article analyses the trends of investment, investment barriers and policy measures to explore the investment opportunities across the Indo-Pacific region. It analyses India’s investment relations with Indo-Pacific countries as a case to understand how the emerging countries like India has been actively involved in both FDI inflows and outflows with the Indo-Pacific region, compared to the rest of the world. The article also looks into the inter-linkages between FDI and global value chain (GVC) in the Indo-Pacific countries, given that multinational firms play significant role in bringing international sourcing, technology sharing and production networking across countries, which could generate enormous benefits to small and medium enterprises (SMEs) in the Indo-Pacific region. Besides, this article also touches upon the investment opportunities in the infrastructure sector in the Indo-Pacific. Finally, it has presented some important policy recommendations to promote investments in the Indo-Pacific.

The rest of the article is arranged as follows. The ‘Trends in FDI Flows in the Indo-Pacific’ section presents the trends in FDI inflows and outflows in the Indo-Pacific, while the ‘Trends in India’s FDI Inflows and Outflows with the Indo-Pacific’ section analyses the trends in India’s FDI inflows and outflows with the Indo-Pacific region. The linkages between FDI and value chain have been discussed in the ‘Value Chain Linkages and Investment Opportunities’ section. The ‘How to Fill the Investment Gap in Infrastructure Development in the Indo-Pacific’ Section discusses the investment gap in infrastructure development in the Indo-Pacific. The ‘Harmonising Investment Regime and Ease of Regulatory Measures in the Indo-Pacific’ section explores the differences in investment policies and suggests ways to harmonise investment regime and ease of regulatory measures in Indo-Pacific. The ‘Easing Barriers to Investment and Business Environment’ section discusses the policy measures taken by Indo-Pacific countries in terms of easing investment facilitation and business environment. The ‘Regional Investment Policy Framework for the Indo-Pacific’ section analyses bilateral and multilateral investment agreements among Indo-Pacific and suggests an outline of regional investment policy framework for the region. Finally, the ‘Concluding Remarks’ section presents the conclusions and policy recommendations.

Trends in FDI Flows in the Indo-Pacific

Emerging countries in the Indo-Pacific region have received particular attention from international investors because of their high rates of economic growth, sound macroeconomic environment, liberalisation of financial market and reasonably stable exchange rates.⁵ As a result, FDI inflows between 2000 and 2017 have increased substantially in the southeast Asian countries like Indonesia (US$ 21.46 billion), Malaysia (US$ 9.51 billion), the Philippines (US$ 10.06 billion), Vietnam (US$ 14.10 billion), and so on (Table 1).

Table 1.

Trends in FDI Inflows and Outflows in the Indo-Pacific Region (US$ Billion)

	Country Name	FDI Inflows		FDI Outflows
	Country Name	2000	2017	2000	2017
Southeast Asia	Brunei Darussalam	0.06	0.47	0.02	−0.08
	Cambodia	0.12	2.79	−0.02	0.11
	Indonesia	−4.55	21.46		2.05
	Lao PDR	0.03	1.60	0.01	0.01
	Malaysia	3.79	9.51	2.03	5.76
	Myanmar	0.25	4.68
	Philippines	1.49	10.06	−0.63	3.51
	Singapore	15.52	63.63	6.85	24.68
	Thailand	3.37	8.05	−0.02	18.63
	Vietnam	1.30	14.10		0.54
South Asia	Bangladesh	0.28	2.15	0.00	0.16
	India	3.58	39.97	0.51	11.09
	Maldives	0.02	0.52
	Pakistan	0.31	2.82	0.01	0.05
	Sri Lanka	0.17	1.37	0.00	0.07
Middle East	Iran	0.19	5.02	0.01
	Oman	0.08	2.92		2.42
	Yemen	0.01	−0.27	−0.01	0.01
East Asia	China	42.10	168.22	4.61	101.91
	Japan	10.69	18.84	45.03	168.57
	South Korea	11.51	17.05	4.84	31.68
	Russia	2.68	28.56	3.18	36.76
Pacific	Australia	14.89	42.58	4.10	4.49
	Fiji	0.00	0.30	0.00	0.00
	New Zealand	−1.51	2.14	−4.14	−0.58
	Papua New Guinea	0.10	−0.18	0.00
Latin and North America	Canada	68.31	27.53	46.65	81.20
	Chile	4.86	6.42	3.99	4.82
	Colombia	2.44	14.01	0.33	3.69
	Ecuador	−0.02	0.62	0.02	0.29
	Mexico	18.38	32.13	0.36	3.38
	United States	350.07	354.83	186.37	379.22
Africa	Kenya	0.11	0.67	0.00	0.26
	Mauritius	0.27	0.29	0.01	0.06
	South Africa	0.97	1.37	0.28	7.44
	Tanzania	0.46	1.18		0.00
	Somalia	0.00	0.38		0.00
	Mozambique	0.14	2.32		0.03
	Madagascar	0.08	0.46		0.11
	Indo-Pacific	552.54 (37.82)	910.58 (46.71)	304.38 (21.67)	892.34 (46.64)
	World	1,460.99	1,949.57	1,404.34	1,913.07

Source: Based on World Development Indicators (WDI), World Bank Database.

Note: * Data in parentheses present share of the Indo-Pacific in world’s total FDI.

China has been an attractive destination for FDI. In 2017, China attracted the largest FDI of about US$ 101 billion. Apart from China, India also attracted significant FDI inflows of about US$ 40 billion in 2017, contributing about 2 per cent to GDP. With further development of the capital markets along with liberalisation of the capital market-related investment laws, FDI flows have become substantial in India. Some of the LDCs have also attracted relatively higher FDI inflows, which have contributed about 4 per cent and above to their respective GDPs. Some of these countries are Cambodia (12.58 per cent), Lao PDR (9.49 per cent), Vietnam (6.30 per cent), Maldives (10.64 per cent) and Mozambique (18.34 per cent) (Figure 1). Overall, in terms of share in the world, the Indo-Pacific region holds about 47 per cent of both FDI inflows and outflows and contributes about 2 per cent to GDP in 2017 (see Figure 2). Most of the FDI outflows are from the developed countries such as the United States, Japan, China, South Korea, Canada, Singapore and Thailand. FDI outflows from India have also increased to about US$11 billion in 2017 (Table 1). On average, the share of FDI outflows to GDP for Indo-Pacific countries is about 2 per cent (Figure 2).

Figure 1.

Source: World Development Indicators, World Bank Database.

Figure 2.

Source: Based on WDI, World Bank Database.

Trends in India’s FDI Inflows and Outflows with the Indo-Pacific

India’s FDI inflows from the Indo-Pacific countries have gradually increased over time. India’s inward FDI stock arising from the Indo-Pacific region was almost US$75 billion for the period 2008 and 2016, of which about 45 per cent (US$33 billion) came from the African countries (mostly from Mauritius), 33 per cent (US$25 billion) came from ASEAN (mostly from Singapore) and 15 per cent (US$11 billion) came from East Asian countries like Japan, China, South Korea and Russia (refer to Figures 3 and 4). About 7 per cent of India’s FDI inflows came from Latin America and North American countries (of which about 95 per cent was from the United States). FDI inflows from Middle East, South Asia and Pacific to India have been marginal.

Compared to India’s FDI inflows, India’s FDI outflows are directed more towards Southeast Asia, Africa, Latin America, North America and Pacific countries. India’s outward FDI stock directed to the Indo-Pacific countries was almost US$135 billion for the period 2008 and 2016, of which almost 42 per cent (US$57 billion) went to ASEAN (mostly to Singapore), 37 per cent (US$50 billion) went to Africa (mostly to Mauritius) and 15 per cent (about US$20 billion) went to Latin and North America (mostly to the United States) (see Figures 3 and 4). About 3 per cent of India’s FDI outward stock went to Australia (US$4.3 billion). Although India’s outward FDI to the Middle East and South Asian countries are rising gradually, it is restricted to only 1 per cent each, indicating high investment potential in these countries as well.

Figure 3.

Source: Authors’ calculations based on DIPP, Department of Commerce and RBI Database.

Figure 4.

Source: Authors’ calculations based on DIPP, Department of Commerce and RBI Database.

In ASEAN, major Indian investments in Thailand are in automobiles, electrical and electronic products, hotels and financial services. For instance, Tata Motors Thailand Ltd. has invested about US$ 216.05 million (about 52.5 per cent of India’s total FDI stock in Thailand) between 2008 and 2016.⁶ Similarly, Vietnam is the emerging investment destination for Indian firms. Many Indian firms invested in manufacturing, construction, agriculture and mining and garment sectors in Vietnam. India’s FDI outflows to the USA and Singapore are mostly in Information and Communications Technologies (ICTs), business consultancy and financial services, whereas, India’s FDI outflows to China, Japan and South Korea are mostly in manufacturing activities, such as electrical equipment and automobiles.

Value Chain Linkages and Investment Opportunities

Multinational Corporations (MNCs) have invested in host countries to take advantage of cross-border factor cost differences and gain access to huge market size, abundant natural resources and potential human resources.⁷ The reasons to establish production facilities in host countries are majorly to reduce inventory costs through just-in-time delivery of parts and components, efficient utilisation of capacity, easy access to specialised skills and resources in the host country, to enjoy tax incentives and subsidies offered by the host country to attract investments and also to avoid tariff and non-tariff measures that are imposed while trading with the host country. In this context, multinational firms help to bring international sourcing and production networking across countries, which benefit the domestic suppliers and also the host countries in terms of resources, technology, jobs, and so on. At the same time, FDI does give managerial control to the MNCs, and FDI is profit-driven.⁸

About 70 per cent of the MNCs are involved in GVC activities and it is contributing to about 60 per cent of global trade. Shares of developing countries in value added trade increased from 20 per cent in 1990 to over 40 per cent in 2013.⁹ Therefore, countries’ integration into the global economy is often closely linked to the active participation in GVCs, both in terms of upstream and downstream linkages. Upstream and downstream links explain the participation of a country in GVCs through its exports, that is, the use of foreign intermediaries in the exports (backward participation) or the use of respective countries’ domestic intermediaries in exports (forward participation), depending upon the level of integration and the stages of integration process in an economy. For instance, the use of foreign intermediaries in most of the Indo-Pacific countries’ exports (i.e. backward participation) is higher than the use of Indo-Pacific countries’ intermediates in other countries’ exports (forward participation) (Figure 5). Southeast Asia and East Asia have strong backward linkages in the GVCs and are likely to increase the import of their intermediates. Other subregions like West and Central Africa have weaker backward linkages and are becoming important import destinations for intermediates.¹⁰

Figure 5.

Source: Authors’ calculations based on OECD TiVA Database.

ASEAN countries actively participate in the GVCs. Southeast Asian countries like Vietnam, Malaysia, Thailand and Indonesia have achieved remarkable market access in GVCs. About 40 to 50 per cent of value added embodied in terms of forward and backward participation in the gross exports in ASEAN countries is at par with other developed countries such as Japan, Australia and Singapore (Figure 9). Southeast Asia has also witnessed the significant intra-regional investment, accounted for 25 per cent of the total FDI inflows in the ASEAN in 2016.¹¹ Companies in the ASEAN region have invested approximately US$21 billion, which has led to the surge of fragmentation in production and tasks between nations within ASEAN.

Similarly, China is also an active participant in GVCs. China’s participation in GVCs is largely in electrical and electronic equipment. China’s engagement in production networking of Apple’s iPhone mobile¹² helped several Chinese companies like Xiaomi, Oppo and Huawei become leaders of mobile manufacturing. In fact, Chinese companies like Xiaomi have heavily invested in India under the ‘Make in India’ initiative to exploit the potential Indian market for fast growing demand of mobile phones. China is also in advanced stage of GVCs, gradually uplifting to high technology-intensive productions and value chain process and shifting the low and medium technology-intensive production and value chain process (also called as China one plus model) to the Southeast Asian countries like Vietnam, Lao PDR, the Philippines and other South Asian countries like India, Bangladesh and Sri Lanka. India is also emerging in the GVCs in terms of both FDI flows and integration in international productions and tasks. India’s major trading and FDI partners among the Indo-Pacific sub-regions are almost similar, and, thus, there is potential to strengthen India’s engagement in value chains with the Indo-Pacific sub-regions.

Not all investments by MNCs lead to technology transfer and positive spillovers. MNCs may limit the production fragmentation with little access to technology to engage in low-value added activities in order to reduce the scope of technical change and technological learning to the host countries. Several studies also caution that MNCs may in fact crowd out domestic investments.¹³ Despite engaging in GVCs, MNCs have a built-in advantage adopting its own supply chain route over domestic suppliers. Therefore, to strengthen the value chain and investment linkages, the Indo-Pacific countries should design appropriate policies and incentives for the MNCs to encourage local-affiliate production, local sourcing of parts and components, and transfer of technology to local manufacturers so that maximum spillover benefits can be realised. Particularly, SMEs play a strong role in forward or backward linkages with foreign or domestic firms for the production of parts and components. Unlike large enterprises, SMEs face huge challenges in improving productivity due to lack of financial resources and human skills. Therefore, the Indo-Pacific countries should give special focus to enhance the entrepreneurship, provide financial access, and support forums for SMEs to explore business relationships. In addition, the Indo-Pacific countries should also provide harmonised customs system to enhance the integrated supply chains across the region. There is also a need for cohesive collaboration among the Indo-Pacific countries in facilitating investment agreements to liberalise capital flows and enhance the ease of doing business in the region.

How to Fill the Investment Gap in Infrastructure Development in the Indo-Pacific

Most of the Indo-Pacific countries have been looking for infrastructure financing. For example, India has a requirement of investment worth US$777.73 billion in infrastructure by 2022. In this regard, private sector can play a significant role in contributing infrastructure investment. ADB (2017) claims that about US$22.6 trillion investment is needed to fill up the infrastructure gap by 2030 in the Asia-Pacific region (as per the baseline estimates). Particularly, East Asia (US$13.7 trillion), South Asia (US$5.4 trillion) and Southeast Asia (US$2.7 trillion) have huge investment needs by 2030 to fill up the infrastructure gap in the region (Table 2).

Table 2.

Estimated Infrastructure Investment Needs by Region, 2016–2030 (US$ Billion in 2015 price)

Region/ Sub-region	2030 UN Projected Annual GDP Growth (%)	2030 Population Projection (billion)	Projected GDP Per Capita	Investment Needs	Baseline Estimates		Climate-adjusted Estimates**
Region/ Sub-region	2030 UN Projected Annual GDP Growth (%)	2030 Population Projection (billion)	Projected GDP Per Capita	Investment Needs	Annual Average	Investment Needs as % of GDP	Investment Needs	Annual Average	Investment Needs as % of GDP
Middle East	3.1	0.096	6,202	492	33	6.8	565	38	7.8
East Asia	5.1	1.503	18,602	13,781	919	4.5	16,062	1,071	5.2
South Asia*	6.5	2.059	3,446	5,477	365	7.6	6,347	423	8.8
Southeast Asia	5.1	0.723	7,040	2,759	184	5	3,147	210	5.7
The Pacific	3.1	0.014	2,889	42	2.8	8.2	46	3.1	9.1
Asia and the Pacific	5.3	4.396	9,277	22,551	1,503	5.1	26,166	1,744	5.9

Source: Adopted from ADB (2017).

Note: *Pakistan and Afghanistan are included in South Asia. **Climate change adjusted figures include climate mitigation and climate proofing costs, but do not include other adaptation costs, especially those associated with sea level rise.

The governments of Australia, Japan and the United States have signed MoUs to mobilise and support the deployment of private sector investment capital to deliver major new infrastructure projects, enhance digital connectivity and energy infrastructure and achieve common development goals in the Indo-Pacific.¹⁴ They have agreed to establish an investment fund (the United States may investment close to US$ 113 million) to deliver infrastructure projects that would bring potential contribution in the Indo-Pacific region. Besides, Papua New Guinea (PNG) would receive investment from the United States, Australia, Japan and New Zealand, which have proposed to provide electrical infrastructure, which would bring electricity to almost 70 per cent of population by 2030.¹⁵ Australia has also proposed to establish the Australian Infrastructure Financing Facility for countries in the Pacific Region with US$2 billion for infrastructure development in the Pacific countries and Timor-Leste.

India has witnessed substantial progress in infrastructure development.¹⁶ According to the Department of Industrial Policy and Promotion (DIPP), Government of India, during April 2000 to June 2018, India received US$24.87 billion FDI in sectors such as townships, housing, roads and ports. In 2018, the Asian Infrastructure Investment Bank (AIIB) has announced US$200 million investment into India’s National Investment and Infrastructure Fund (NIIF). India and Japan have joined hands for infrastructure development in India’s northeastern states and set up an India–Japan Coordination Forum for Development of North East to undertake strategic infrastructure projects in the northeastern region of India.

Given the massive need of investment requirement for infrastructure development across the Indo-Pacific, some of the major Indo-Pacific countries have already proposed to strengthen the infrastructure development. It is high time to consolidate the efforts of countries to mobilise the resources, both financial and technical. This can be done by setting up Indo-Pacific Development Fund (IPDF) and Indo-Pacific Development Bank (IPDB). Both of these initiatives may enhance and prioritise foreign investment, on one hand, and facilitate private sector’s investment in quality infrastructure development, on the other. At the same time, regional infrastructure initiatives will generate employment and create opportunities for developers, financiers and government agencies to contribute to the delivery of quality infrastructure in the Indo-Pacific region. This would also stimulate the growth and long-term development of the region.

Harmonising Investment Regime and Ease of Regulatory Measures in the Indo-Pacific

Most of the sub-regions in the Indo-Pacific have significantly opened up their economies for capital flows, such as Latin America and North America, Central Asia, Pacific and Central Asia. However, Southeast Asia, South Asia and African countries are lagging behind. In terms of trade openness, Southeast Asia has been performing much better in promoting trade, compared to other Indo-Pacific countries (Figure 6). Both capital account and trade liberalisation help to promote FDI and value chain linkages. Therefore, Indo-Pacific countries may like to focus on progressive liberalisation of investment regime with a view towards achieving a transparent and open investment environment in the region as well as building value chain linkages.

Figure 6.

Source: Based on (a) Chinn and Ito (2006) and (b) WDI, World Bank Database.

Some of the Indo-Pacific countries have initiated multiple investment policy measures to promote FDI for development of their economies since 2010. Figure 7 shows the number of investment policy measures taken by the Indo-Pacific countries. Countries like India (72), China (52), Russia (60), Myanmar (27), Indonesia (24), Australia (26) and Canada (26) have introduced higher number of policy measures, which are aimed mostly to liberalise FDI policies by providing tax incentives, subsidies and extending the sectors for plausible investments. On the other hand, India has liberalised FDI up to 100 per cent in almost all the sectors. Baring few, the country has liberalised up to 49 per cent in the sectors, including defence, insurance, banking and pension. India also offers investment incentives such as 200 per cent deduction on in-house R&D facility, goods imported for R&D purpose receive incentives and investment allowance at the rate of 15 per cent to manufacturing companies that invest more than US$ 14 million in plant and machinery of electronics. To further simplify the existing procedures for seeking clearance of FDI proposals, Foreign Investment Promotion Board (FIPB) was abolished, and individual departments of the Government have been empowered to clear FDI proposals in consultation with the DIPP.

Figure 7.

Source: UNCTAD Database.

Similarly, Southeast Asian countries have continued their efforts to facilitate FDI by simplifying processes and using information communications technology to reduce red tape. For example, the Indonesian Investment Coordination Board has simplified the process for obtaining investment licences and made the procedures to obtain tax privileges easier.¹⁷ Singapore has introduced ‘online single submission’ to complete registration more easily for the investors. Similarly, the Philippines has launched a business data bank to renew permits in a shorter time for the investors.¹⁸ Thailand has issued a regulation exempting certain business activities from the requirement for obtaining a foreign business licence.¹⁹

Besides, globally, there is also an attempt to improve the investment facilitation. The recent negotiations under the Regional Comprehensive Economic Partnership (and also CPTPP) may enhance the harmonisation of procedural aspects for better investment facilitation.²⁰ India has also proposed an ‘Agreement on Trade Facilitation in Services’ in WTO. As FDI is a mode of the delivery of a service, such an agreement could become a stepping-stone for multilateral efforts towards investment facilitation.²¹ Besides, Asia Pacific Trade Agreement members have started negotiations in 2018 to promote and facilitate FDI among the member countries, based on the implementation of the Framework Agreement on Promotion, Protection and Liberalisation of Investment.²²

The Indo-Pacific countries must aim to simplify and streamline the investment regimes and processes. The Indo-Pacific countries shall encourage and foster institutional cooperation and coordination through a single window system of facilitating investment promotion. This would create attractive investment environment, avoid delay in investment process at different levels of government and lower the cost of doing business, especially for SMEs. Besides, countries should also regulate and monitor the FDI in the specific sector to safeguard the domestic investor and prevention of exploitation of environment, particularly in the developing countries.

Easing Barriers to Investment and Business Environment

Ease of doing business is one of the important factors to attract FDI. Therefore, foreign investors closely look at the country’s performance in Ease of Doing Business (EDB), reported by the World Bank. Business decisions of foreign investors depend on countries’ performance in quality of business environment, investment climate at the border level, quality of law and regulations, availability of resources such as land, credit, electricity, labour market regulations, protection and dispute settlements for the investors. In this regard, the Indo-Pacific countries have been trying to improve their regulatory environments for investors to start a business at par with developed countries.

The Indo-Pacific countries have shown significant progress in improving the overall rank of Ease of Doing Business (Figure 8). For instance, Kenya has significantly improved its EDB rank to 61st position in 2019. Among the Southeast Asian countries, Indonesia, Brunei and Vietnam have improved their ranks, compared to the previous year. India’s rank has moved up to 77 in 2019. In terms of Starting a Business ranking, except East Asia, countries in North America and some of the Southeast Asian countries have ranked 80 and above. Nevertheless, most of the Indo-Pacific countries are active in attracting FDI through reforms and effective governance. India has taken several regulatory measures to make it easier to do business in India, particularly, reducing the number of procedures and time taken to start a business. In India, early approval (53 days) of electricity connection for a business and other reform measures do create business-friendly environment for both domestic and foreign enterprises.

Figure 8.

Source: The World Bank Database.

Another indicator that the investors widely use to compare between the countries is Global Competitiveness Index (GCI). GCI helps to understand the effectiveness of government’s policy towards improving performance and increasing productivity of an economy. GCI covers three broad parameters: (i) restoring basic requirement such as institution, infrastructure, macroeconomic environment and health and primary education; (ii) enhancing efficiency through higher education and training, market and labour efficiency, financial sector development and market size; and (iii) enduring innovation and sophistication factors.

Though there is wide variation in the ranking across the Indo-Pacific region, countries have gradually improved their ranks in 2016–2017, compared to 2010–2011. For instance, India has climbed up consecutively in a row to reach 39th position in 2016–2017 from 51st position in 2010–2011 (Figure 9). The overall improvement in market efficiency, business sophistication, innovation, monetary and fiscal policy measures has made India’s position attractive in GCI. Similarly, Cambodia has moved up in GCI to 89th in 2016–2017 from 109th in 2010–2011, followed by the Philippines, which has moved up to 57th position in 2016–2017 from 85th position in 2010–2011. Similarly, other Indo-Pacific countries like Mexico, Mauritius, South Africa and Kenya have also improved their GCI ranks substantially from the previous year. With an initiative like ‘Make in India’, India is committed to improve business environment. It goes without saying that regional investment cooperation in the Indo-Pacific will pave the way to improve transparency and predictability of investment rules, regulations and procedures that would be conducive to attract FDI.

Figure 9.

Source: World Economic Forum Database.

Regional Investment Policy Framework for the Indo-Pacific

Bilateral Investment Treaties (BITs) are likely to make an indirect contribution to sustainable development by promoting FDI. A successful BIT would eliminate market access restrictions and give a better opportunity to invest in and penetrate markets in the host country. Besides, BIT would also remove high barriers in the host country, allowing foreign country companies to invest and expand both in host and home countries. Several studies found a positive effect of BITs on FDI.²³ The major features of BIT are applicability (i.e. BITs apply to existing and future investments till the date on which India entered into the BIT), fair and equitable treatment, full protection and security, national treatment and most-favoured nation treatment, expropriation, dispute settlement mechanisms, both between states and between an investor and a state. Many BIT partners approach these treaties with the dual purpose of protecting their outward investments in and attracting inward investment from their co-signatories.

Among the Indo-Pacific countries, about 167 Treaties with Investment Provisions (TIPs) are signed, compared to 25 BITs signed. The number of BITs and TIPs that are signed and in force are 145 and 142, respectively (Figure 10). Particularly, most of the BITs are signed between Southeast Asia, South Asia and East Asian countries, compared to other sub-regions. There is also a considerable number of BIT agreements signed and in force across the Indo-Pacific region as well. To some extent, there is a convergence in investment agreements among the Indo-Pacific countries. Therefore, the Indo-Pacific countries shall aim for a regional investment policy framework, which would help facilitate regional coordination and exploit economies of scale while improving investment frameworks and policies across the region. It may also provide a mechanism for knowledge-sharing and policy dialogue around good practices.

Figure 10.

Source: Authors’ calculation based on investmentpolicyhub.unctad.org

The Indo-Pacific region has several international investment agreements, which show overlapping or duplicated commitments for countries that are party to various international investment agreements. As happening in trade, some form of consolidation in investment agreements is also desirable. This would be the beginning of the investment cooperation framework for the Indo-Pacific countries. This framework will reduce the investment costs in terms of differences in the investment regimes and other geographical costs factors, improve legal regimes and mechanisms to enhance investor protection, coordinate effective regimes for tax incentives for investment and facilitate long-term investments in infrastructure development. Success of such a ‘non-binding’ regional agreement may help the Indo-Pacific countries to promote cooperation in some other important areas, where regional cooperation has the potential to produce high dividends such as cooperation on taxes, development of regional capital market and cross-border listings, to mention a few.

This regional agreement would benefit the developing countries and LDCs in the region to access technology and know-how, while fostering multinational enterprises with local firms through backward and forward linkages within the region for active participation in global and regional value chains. Therefore, strengthening trade and investment relations in the Indo-Pacific region would drive both south–south and north–south cooperation in terms of sharing resources and exchanging ideas for sustainable development within the region. Besides, attracting investment for infrastructure development would help to uplift the countries in the regions, which are lagged behind, to ensure sustainable development across the region.

Concluding Remarks

Countries promote FDI inflows to fill investment gap, create employment, transfer technology, access GVC and increase competition. Nevertheless, due to economies of scale, FDI may crowd out domestic investment and share low-value added activities with the interest of exploiting resource-seeking and market-seeking intention. In that case, countries can have a valid economic and non-economic rationale for limiting foreign ownership and control, relating to national security and to protect domestic investors. The conflict of interest of the foreign investor and host countries motive, however, does not provide the rationale for discrimination between domestic and foreign investors. Instead, host countries have to address the challenges through appropriate policies to ensure smooth FDI flows that benefit the domestic economy.

The Indo-Pacific countries may aim for a regional investment framework, which would help the countries to facilitate regional coordination and exploit economies of scale. A regional framework in the Indo-Pacific will motivate countries in not only harmonising the investment regime but also streamlining and simplifying the procedures for investment applications and approvals. To start with, the Indo-Pacific countries may consider region-wide dissemination of investment information, including investment rules, regulations, policies and procedures. This regional framework will bring further transparency and restore competitive investment environment, thereby benefitting the investors.

There is an untapped opportunity for cross-border business collaboration across the Indo-Pacific region. Setting up Indo-Pacific Business Forum (IPBF) will speed up the business collaboration, including business alliances or mergers and acquisition. What would be crucial is the coordination between the governments and industry associations? They need to work hand-in-hand to initiate and drive the business facilitation measures for promoting investment, competitiveness and knowledge-sharing in the region.

The Indo-Pacific countries should promote an integrated framework for skill development in diverse sectors for developing countries and LDC across the region. This would also ensure the specific need of high-skilled workforce for a competitive export sector, particularly, meeting the challenges for the Indo-Pacific to upgrade the technology, increase productivity and move up with the other emerging developing countries. While framing a regional understanding in FDI, the Indo-Pacific countries must also focus on capacity building programmes, technical trainings and language proficiency to develop skilled workforce that can cater to the needs of a foreign investor to meet the business needs.

Finally, it is high time to consolidate the efforts of countries to mobilise the resources, both financial and technical. Given the massive need of infrastructure investment, the Indo-Pacific countries may consider setting up an IPDF and IPDB. These initiatives may enhance and prioritise foreign investment, on one hand, and facilitate private sector’s investment in quality infrastructure development, on the other. This would also further stimulate the growth and long-term development of the region.

Footnotes

Acknowledgements

The authors are grateful to the anonymous referee of the journal for useful comments on the earlier version of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Notes

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