30
Trade Insight
Vo. 8, No.
1, 2012
D
ue to economic slowdown, highunemployment, and sovereigndebt risks in developed economies
after the nancial crisis, investment isgradually owing to rapidly growing
emerging and developing economies.South Asia has drawn the attentionof investors as a result of impressivegrowth rates, investment reforms,expanding domestic markets andgood macroeconomic conditions.However, despite the increasing levelof investment, several investmentclimate constraints, which are notentirely common to all countries, arePakistan. FDI as a share of GDP ishighest in the Maldives (8.58 percent),followed by India, Pakistan, Sri Lanka,Bangladesh, Bhutan, Afghanistan andNepal (Figure 1).
The amount of FDI inows to
South Asia was increasing rapidlyuntil 2008, reaching US$50.28 billionfrom US$575 million in 1990.
1
In 2010,it dropped to US$28.34 billion, whichrepresented 2.28 percent of total world
FDI inows. The average annualFDI inows during 1990–2000 were
US$2.56 billion, which increased toUS$21.5 billion during 2001–2010. The
FDI inows are not distributed evenly
in South Asia. India’s share of total
FDI inows to South Asia was 41.18
percent in 1990, which reached 86.95percent in 2010 amounting to US$24.64
billion. It reects investors’ condence
in the Indian economy, its reform pro-cess and the rapidly growing domesticmarket.
Obstacles to investment
Compared to the global investmentlevel, the relatively low shares of FDIand GFCF in GDP indicate a range of obstacles faced by investors, discour-aging them from scaling up invest-ments in the region. Overall, the majorconstraints to investment, as perceived
by rms in South Asia, are lack of ad
-equate supply of electricity, access tostill restraining potential investment.While acknowledging that sound mac-roeconomic conditions are crucial forincreasing investment, this article will
focus on country-specic rm-level
challenges to investment.
Investment in South Asia
In South Asia, latest available datashow that Bhutan has the highest
gross xed capital formation (GFCF)
as a share of gross domestic product(GDP) (41.33 percent). It is followed by the Maldives, India, Sri Lanka,Bangladesh, Nepal, Afghanistan and
Figure 1
GFCF and FDI (share of GDP), 2010
Note: GFCF for Bhutan and the Maldives refer to 2009 and 2005 respectively; FDI for Nepal refers to 2009.Source: World Bank, World Development Indicators.
4510
n
GFCF
n
FDI98765432104035302520151050
G F C F ( % o f G D P ) F D I ( % o f G D P )
M a l d i v e s I n d i a P a k i s t a n S r i L a n k a B a n g l a d e s h B h u t a n A f g h a n i s t a n N e p a l
investment climate
Challenges to investment in
South Asia
chndn Sko
Despite the increasing level of investment, several investment climate constraints,which are not entirely common to all countries, are still restraining potential investment.
31
Trade Insight
Vo. 8, No.
1, 2012
nance, political instability, tax rates,
corruption, access to land, security, in-formality, tax administration hassles,lack of human capital, rigid labourregulations and transportation, amongothers (Figure 2).
2
Country-specifc constraints
The South Asian average of perceptionof challenges to investment climate
masks country-specic obstacles to
investment. Hence, a closer look at
country-specic challenges to invest
-ment is warranted.
Afghanistan
Around 20 percent of rms in Afghan
-istan perceived that crime, theft anddisorder were the biggest obstacles toinvestment. Other main obstacles werelack of adequate electricity supply
(17.9 percent), access to nance (16.8
percent), political instability (16.4 per-cent), access to land (12.2 percent) andcorruption (8.4 percent). Constraintssuch as tax rates, courts system, hu-man capital and labour regulationswere considered less worrisome than
the ones mentioned earlier. Speci
-
cally, about 45 percent of rms paid
extra for private security, whichincreased cost by 2.8 percent of annualsales. The number of electrical outagesin a typical month averaged 20 and it
lasted for 11.5 hours, inicting losses
of about 6.5 percent of annual sales.
Consequently, 71.1 percent of rms
owned or shared a generator, whichwas used to supply about 74.9 percent
of power demand by rms. It takes 46
days to get electrical connection uponsubmitting an application. Regarding
access to nance, only 3.4 percent of rms had a bank loan and 1.4 percentof them were using banks to nance
investments. Furthermore, 79 percentof loans required collateral and itsvalue amounted to almost 254 percentof the loan amount.
Bangladesh
Around 43 percent of rms in Bangla
-desh perceived lack of adequate sup-ply of electricity as the main obstacleto investment. Other top constraints
were access to nance (34.9 percent),
political instability (11.4 percent),corruption (4.3 percent) and access
to land (4.1 percent). Specically, the
number of power outages in a typicalmonth averaged 101, which lastedfor 1.1 hours and increased cost by10.6 percent of annual sales. About 52
percent of rms owned or shared a
generator, which supplied 23.6 percent
of total electricity demand by rms. It
takes approximately 50 days to obtainan electrical connection upon submit-ting an application. Approximately
24.7 percent of rms used banks tonance investments and only 17.1 per
-
cent of total investment was nanced
by banks. Regarding corruption, 85
percent of rms reported that theyexpected to give gifts to public ofcials
to “get things done”, especially to getan operating licence, import licence,construction permit, electrical connec-tion and water connection. Mean-
while, 54.4 percent of rms expected
to give gifts during meetings with
tax ofcials and 18.4 percent of rmsidentied courts system as a challenge
to better investment climate.
Bhutan
Around 22 percent of rms in Bhutanperceived access to nance as the main
obstacle to better investment climate.The other major constraints were taxrates (12.6 percent), inadequatelyeducated workforce (10.5 percent),labour regulations (9.7 percent) andtransportation (9.1 percent). Access toland, courts system, electricity supplyand political instability were perceivedto be less problematic for investors.
Approximately 64 percent of rmsused banks to nance investments andalmost all rms needed loans. Fur
-thermore, 97 percent of loans requiredcollateral, whose value was about 283percent of loan. Investors felt that taxadministration hassles and high tax
rates (40.8 percent of prot
3
) were alsodiscouraging investors. Regardinghuman capital, there were virtually nopermanent skilled full-time workersin the manufacturing sector and only
23.3 percent of rms were offering
formal training. Cumbersome labourregulations and inadequately edu-cated workforce were also problem-atic for investors. While real annualsales growth and annual employmentgrowth were 17.9 percent and 13.1percent respectively, annual labourproductivity growth was just 5.7percent.
India
Approximately 35 percent of rmsidentied electricity as the main
obstacle to investment. The other mainchallenges were tax rates (16.8 per-cent), corruption (10.7 percent), tax ad-ministration hassles (8.5 percent), and
access to nance (4.5 percent). Political
Figure 2
Percepon of obstacles to beer investment climate in South Asia
Source: International Finance Corporation, Enterprise Surveys.
ElectricityAccess to financePolitical instabilityTax ratesCorruptionAccess to landCrime, theft and disorder Practices of the informal sector Tax administrationInadequately educated workforceLabour regulationsTransportationBusiness licensing and permitsCustoms and trade regulationsCourts28.714.313.46.55.85.24.64.13.63.52.62.21.60.5051015Percent of firms2025303.3
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