The Prospect of Economic Investment in the Indian Ocean Rim Countries

Cover Story

The countries in the Indian Ocean rim region are undergoing structural transition in the form of shrinking agriculture and manufacturing output, but growing services sectors

Investment seeks return and a steady stream of returns in the current period in the Indian Ocean Rim countries, in turn, creates conducive environment for fresh investments in the next period. This happens when the economic fundamentals in the host countries are robust and predictable. Otherwise, simply witnessing higher magnitudes of investment flows for some years leaves no room for complacency. Investment flows may not sustain in the years following the boom period due to high degree of pro-cyclicality to volatility in heavily interconnected financial markets, especially in the crisis hours. As observed in the past, sudden stops in capital flows particularly short-term portfolio investments to the developing countries have proved costly in terms of foregone output and employment. In this era of global financial integration, it is imperative to understand the behaviour of the investors clearly in order to examine the nature and pattern of inflows and outflows that a country witnesses at different points of time. Any analysis of the trends in investment flows to a country or a region based on the mere size of the flows would be misleading as those flows could be the outcome of a strong push factor operating in the advanced countries in view of prolonged stagnation having very little (or no) link to the structural changes in the concerned host country. By that logic, the prospects of investment to a country/region not only depends on the rosy trends in investment flows to that country in the past but also to a great extent on the credibility and predictability of the reform initiatives that are being undertaken in that country. In that perspective, this short piece is not an attempt to analyse the trends in the current investment flows including foreign direct investment (FDI), portfolio investments, bank borrowings and other forms of investments in the Indian Ocean countries only; rather it examines the factors that could enable the countries to maintain robust investment environment over the medium-term which would attract investments linked to fundamentals of the economy possibly nullifying the volatility of distressed investments which are inherently “if not the United States, for the time being somewhere else” types. For this paper, we have considered the foreign direct investment to and from the Indian Ocean rim countries.2

FDI Flows in the Recession Years

Looking at the fragile recovery in the United States and the EU, it is hard to conjecture any dramatic turnaround in the global economy in the next few years.3 The total inward and outward FDI stock for the Indian Ocean rim countries together to/from the global sources increased roughly by 2.5 times over the period 2006-14. Inward FDI rose from $1097 billion in 2006 to $2723 billion in 2014 whereas outward FDI improved from $643 billion to $1590 billion over the same period. Like other regions, the countries in the Indian Ocean region faced sudden drop in FDI inflows and abrupt capital outflows in the recession years. In 2008–the crisis year–both inward and outward FDI fell by 4.7 percent and 9.6 percent respectively. Although it recovered slowly in the post-crisis years, the trends in FDI flows after 2010 seem disturbing (see Table 1). Except a few countries including Comoros, Kenya, Mozambique, Seychelles, Sri Lanka, the United Arab Emirates and Tanzania, FDI inflows are not predictable.4 Likewise, outward FDI from the region has either declined or remained very uncertain. In particular, most of the countries in the Indian Ocean rim region registered a sharp fall in FDI inflows and outflows which if not alarming still remains a worrying concern.5

The ITC Investment Map analysis presents interesting patterns in the FDI flows to the Indian Ocean rim countries in the recent years. By the latest reported data, it is observed that some countries in the region are attractive destinations for FDI inflows. For instance, Australia is the most preferred destination for global FDI inflows to the primary sector in terms of the volume of investment. Similarly, Indonesia and Malaysia are at the sixth and ninth places in this global ranking. For the secondary sector, Indonesia and Thailand are the top destinations. For the tertiary sector, Australia, India and Indonesia are the major locations for foreign investments (see Table 2). Outflows from the Indian Ocean rim countries are growing steadily showing encouraging trends with potential for further growth in the future. Compared to the ranks of the countries in 2010, the performance of the countries in the Indian Ocean rim region as the most attractive locations for FDI has improved considerably in the recent years.

Mergers & Acquisitions (M&As) show varying trends for the Indian Ocean rim countries. In general, the investment behaviour of the countries in the region is outward-oriented. In relative terms, net purchases are higher than net sales for the leading investing countries in the region such as Indonesia, Malaysia, Singapore, South Africa, Thailand and so on. For Australia—the largest investor in terms of the size of M&A transactions—the sales have declined in the past three years whereas no such commensurate purchases have materialised (see Table 3). Besides M&As, the volume of Greenfield FDI projects reveals the potential of the region for investment. Due to heterogeneous country sizes, the magnitudes of M&As and Greenfield investments vary remarkably across the Indian Ocean rim. However, it is rising steadily for most of the countries in the region in the recession years (see Table 4).

Investment Potential

The countries in the Indian Ocean rim region are undergoing structural transition in the form of shrinking agriculture and manufacturing output, but growing services sectors. The share of services in total value added for most countries in the region are above 50 percent except Indonesia, Oman, Tanzania, Thailand and the United Arab Emirates. For some countries including Australia, Singapore and Mauritius, services account for more than 70 percent of the national output. In other words, there could be a change in the nature of investment flows to the region as the service orientation in the regional economies deepens. From the above mentioned trends, it is pretty clear that the countries in the region are increasingly becoming attractive FDI destinations as well as leading sources of FDI for the world as a whole. While a linear projection would suggest rise in FDI flows for the regional economies, the potential for investment could be judged from the economic fundamentals such as GDP growth, prices, external sector stability and the business environment. In that perspective, the expectations formed about the investment prospects in the Indian Ocean rim countries are analysed here.

Barring Iran and Thailand, GDP growth in the region was more or less in line with the medium-term trend. As per IMF projections for the period 2015-2020, GDP growth looks brighter for the Indian Ocean rim countries. In particular, high growth rates for India, Mozambique, Bangladesh, Sri Lanka, Kenya, etc. may attract substantial global attention resulting in surging FDI inflows to the region. Current balance has deteriorated for some regional economies such as Australia, Yemen, Comoros, India, Kenya, Mozambique, Mauritius and others. It is likely that these countries may continue to witness current account deficits for some more years. However, inflation is predicted to be low for most countries in the region which may console the investors to a significant extent as the growth prospects outweighs instability especially in view of pessimistic tendencies in global investment cycle.

The FDI flows respond positively to the developments in the business environment. In that respect, Indian Ocean rim region is not uniform. The ranks of countries in terms of ease of doing business differ significantly. For good number of regional economies, the index is low thereby revealing constraint in doing business. In addition, the corruption perception index is equally bad for the countries in the region. If the investors believe on these two macro indicators and downgrade the region, then the likelihood of a precipitous fall cannot be denied. But, this does not fit to the recent history of FDI flows to the region despite episodes of reversals in short-term flows are very often noticed. The other business indicators like time required to start a business, cost of exports, number of tax payments, etc. weaken the investment environment in this era of liberalisation and competition (see Table 5). Overall, the business environment at this point of time is apparently not healthy. However, the same indicators show consistent improvement in business environment for most countries in the region. It is therefore hard to predict the nature and pattern of FDI flows to the Indian Ocean rim region based on these indicators.

Conclusion

FDI flows for the Indian Ocean rim countries have improved considerably over the past few years. Both inward and outward FDI show upward trends with a good number of mergers, acquisitions and Greenfield investments. This active participation of the regional economies in global FDI deals shows the dynamism of the region in the global economy. Growth prospects are likely to be bright for most countries in the region which would perhaps attract FDI to the region. However, the downside risks for the regional economies in the form of current account imbalances are not ruled out for the next few years. Despite being major locations for global FDI, the business environment in the region needs to improve so as to sustain the investment flows and achieve faster economic growth and change in the Indian Ocean rim countries.

Go to Content Page

Author

Dr. Priyadarshi Dash

* Dr. Priyadarshi Dash works as a Research Associate at Research and Information System for Developing Countries (RIS), New Delhi. His research interests broadly cover topics in foreign exchange reserves, macroeconomics and international finance. He holds a master degree in Economics from Utkal University, Odisha (at Ravenshaw (Autonomous) College, Cuttack), and M.Phil in Planning & Development and PhD in Economics from Indian Institute of Technology (IIT), Bombay. He was honoured with the “Award for Excellence in Thesis Work” by the IIT Bombay in the year 2011. He was ‘Visiting Fellow’ at Korea Institute for Industrial Economics and Trade (KIET), Seoul during October 15-December 31, 2012 under the Asia Development Fellowship by the Asia Foundation.

  • +

    References

    1 Research Associate at Research and Information System for Developing Countries (RIS), New Delhi. Email: pdash@ris.org.in. The views are personal.

    2 For this study, Indian Ocean Rim region covers the 20 member countries of Indian Ocean Rim Association (IORA). However, the analysis does not cover IORA as a single entity.

    3 For this study, the period after 2008 is considered as the recession years.

    4 Instead of period averages, we have purposively presented growth rates in Table 1 in order to examine the extent of volatility and uncertainly inherent in the annual growth rates.

    5 Due to space constraints, detailed country-level analysis has been avoided.

Back to Top

Diplomatist Magazine was launched in October of 1996 as the signature magazine of L.B. Associates (Pvt) Ltd, a contract publishing house based in Noida, a satellite town of New Delhi, India, the National Capital.

Search