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Trade and Investment Linkages and Policy Coordination: Lessons from Case Studies in Asian Developing Countries

Policy brief by Duval, Yann; Bhattacharya, Debapriya; Jayawardhana, Tilani; Khanal, Dilli; Tahsina, Tazeen; Shreshta, Prakash / ARTNet, 2008

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ARTNeT launched an exploratory study on trade and investment policy linkages and coordination in 2007, which included small-scale exploratory surveys of private sector stakeholders in three South-Asian countries (Bangladesh, Nepal and Sri Lanka). The purpose of the pilot surveys was to identify the needs and priorities for improved trade and investment policy coordination and coherence in these countries. Following a short overview of trade and investment linkages from an Asian perspective, this brief summarizes the key findings from the surveys and draws preliminary policy implications.


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ARTNeT
Asia-Pacific Research and Training Network on Trade - www.artnetontrade.org - Tel: +66 2 288 1422 - Email: artnetontrade@un.org


An initiative of


Trade and Investment Linkages and Policy Coordination: Lessons from
Case Studies in Asian Developing Countries


by Yann Duval, Debapriya Bhattacharya, Tilani Jayawardhana, Dilli Raj Khanal, Tazeen Tahsina, and Prakash Kumar Shreshta*


Asia has undoubtedly benefited greatly from
globalization, with many countries of the region relying
to a significant extent on international trade and
investment as their main engine for economic growth
and development. As the economies of the region
continue to grow at the fastest pace of any other
regions in the world, however, some have begun to
question how well the gains are shared within the
countries themselves. Indeed, there is some evidence
that higher economic growth has led to increases in
inequality in the countries of the region. This in turn has
led to the realization that trade, investment and related
domestic policies, which are de facto developed and
implemented independently by various government
bodies, need to be made more coherent if one is to
achieve a more sustainable and inclusive growth, as well
to maintain a country or a region’s competitiveness in
the global economy.

In that context, ARTNeT launched an exploratory study
on trade and investment policy linkages and
coordination in 2007,1 which included small-scale
exploratory surveys of private sector stakeholders in
three South-Asian countries (Bangladesh, Nepal and Sri
Lanka). The purpose of the pilot surveys was to identify
the needs and priorities for improved trade and
investment policy coordination and coherence in these
countries. Following a short overview of trade and
investment linkages from an Asian perspective, this brief
summarizes the key findings from the surveys and draws
preliminary policy implications.

Trade and investment linkages and coordination
in Asia

The link between trade and investment, particularly
foreign direct investment (FDI), has been extensively
discussed in the literature. As trade barriers have fallen
over the past two decades in most parts of the world
and as intra-firm trade between countries have


ARTNeT Policy Brief


* Y. Duval is Economic Affairs Officer, Trade and Investment Division, Economic and Social Commission for Asia and the Pacific
(ESCAP). At the time the studies were conducted, D. Bhattacharya and T. Tahsina were Executive Director and Research
Associate, Center for Policy Dialogue (CPD, Bangladesh), T. Jayawardhana was Research Officer, Institute for Policy Studies
(IPS, Sri Lanka) and D. R. Khanal and P. K. Shreshta were Chairman and Research Associate, Institute for Policy Research and
Development (IPRAD, Nepal). The views presented are those of the authors and do not necessarily reflect the views of the
United Nations and ARTNeT members and partners. The technical and financial support by ESCAP and the International
Development Research Centre (IDRC, Canada) in preparing this brief are gratefully acknowledged.


increased, a strong relationship has been observed
between foreign trade and investment flows, including
in Asia. For example, Chaisrisawatsuk et al. (2007),
studying the linkages between trade and FDI flows of
ASEAN and OECD countries,2 finds strong positive and
self-reinforcing relationships between bilateral trade and
FDI flows, with trade inducing FDI as well as FDI inducing
trade – the latter to a lesser extent, however.


2 Dataset included OECD and ASEAN-6 countries bilateral trade flows
and bilateral FDI inflows from 1980-2004.


1 Some of the papers undertaken as part of the regional study are
available in ESCAP (2007).


Figure 1 - Exports and FDI stocks in Asia (1999-2006)


Source: Duval (2008); data compiled from WITS, ITC trade-map and investment-
map.
Notes: (1) N-E Asia: North-East Asia flows include only China; Hong-Kong,
China, Taiwan Province of China; Rep. of Korea and Mongolia exports
and FDI stocks:
(2) South Asia includes Bangladesh, Bhutan, India, Nepal, Pakistan and
Sri Lanka.


Brief No. 15, June 2008


POLICY
BR I E F


Figure 1 illustrates this positive link between trade and
investment in Asia, where sub-regions that exports
most are also the ones where FDI stocks are highest.
Interestingly, although the South Asian grouping includes
the fast growing economy of India, manufacturing





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exports from that region remain small compared to
those of other Asian subregions. The figure also suggests
that exports of South-East Asian countries might not be
keeping up with those of North-East Asia.

At the regional level, the realization that trade,
investment and other economic policies were
inextricably interlinked has led governments in the region
to rethink the way economic cooperation agreements
were negotiated. The tendency is now to negotiate
broader economic cooperation agreements and the
many bilateral preferential trade agreements that have
flourished in recent years in Asia include investment
provisions (see, e.g., Kumar, 2007).

At the national level, although some forms of overall
economic policy coordination mechanisms are in place
in all countries, the extent to which trade and investment
policies are actually coordinated, and the extent to
which they are developed through inclusive
consultations, often remain unclear. Information
obtained from Asian ESCAP member countries during an
ARTNeT Consultative Meeting in July 2007 shows that the
institutional mechanisms vary greatly from country to
country.3 Four of the eleven developing countries who
provided inputs - for example, Malaysia - appear to
have one ministry or department responsible for both
trade and investment policy issues, while others - for
example, Thailand - deal with trade and investment
through two distinct institutions.

In addition, consultations with the private sector appear
to take place through chambers of commerce and
business associations, implicitly assuming that those
organizations are truly representative of the needs of the
private sector, which may not always be the case.
Finally, involvement of non-governmental stakeholders
other than from the business sector seems limited in most
of the countries, although experts from academia are
involved in some of the apex policy planning bodies.

Importance of trade policies among investment-
related policies

The discussion below is based on small scale perception
surveys on trade and investment policy coherence that
were conducted among investors, importers and
exporters in three South Asian countries – Bangladesh,
Nepal and Sri Lanka.4 One important objective of the
surveys was to identify the importance of policies other
than investment policies and related investment
promotion activities on investment. The results suggest
that both trade and tax policies play a crucial role in
influencing investors’ decision to continue to invest (see
table 1). Infrastructure and financial sector development
as well as public governance are also perceived as very
important by investors, followed by human resource
development policies. In contrast, competition policies,
corporate governance policies and responsible business
conduct policies are ranked as relatively less important


investment-related policies by investors in the three
countries. Those results are broadly consistent with
expectation, as these policies, and the last two in
particular, may be seen as likely to reduce the freedom
of investors.5 In addition, the non-existence or weakness
of these policies in the countries studied, as in many
other developing countries in the region, may lead
investors to undervalue their importance and potential
benefits.


The difference in importance between the first four
policy areas that may affect investors is not
large, suggesting that investors on average value
an integrated and balanced approach to the
development of a favorable investment environment.
This result points to the need for regular assessment of
the various policy areas from investors’ point of view to
monitor which may be becoming the “weakest link” for
investment.

The results of the exploratory surveys also suggest that
the priority and importance of various components of a
holistic/comprehensive policy framework are likely to
vary substantially across stakeholder groups, including
among investors themselves. For example, results from
Bangladesh indicate that foreign investors put the same
emphasis on trade and tax policies, while domestic
investors emphasized mainly trade policy. Non-exporting
domestic producers also stressed the importance of tax
policy relative to trade policy, in contrast to exporters.
Interestingly, multinational corporations seemed to
perceive all policy areas as equally important, while
other private stakeholders’ ranking of the importance of
policies varied much more substantially – the absolute
ranking in importance of the policies remained similar,
however.

The regular assessment of the various policy areas within
an agreed comprehensive trade and investment policy
frameworks, as suggested above, would therefore need
to involve a balanced representations of the various
investors (e.g., based on size and export orientation), as
well as from consumer and other stakeholder groups
which are likely to emphasize competition policies and
corporate governance and social responsibility6.


3 See country notes at: http://www.unescap.org/tid/artnet/mtg/tipc.asp.
4 The design of the initial survey instrument was inspired from the
OECD Policy Framework for Investment (PFI), as this framework was
thought to provide an appropriate basis for the development of more
comprehensive and integrated trade and investment policy frameworks
in countries of the region. The pilot survey/interview instrument is
provided in Annex of Duval (2008).


Table 1- Importance of selected policies for investors


in three South Asian countries


5 This argument is less compelling for competition policies as investors
may assess these policies differently depending on market structure and
their relative market dominance. Competition policies can indeed be
seen as increasing investor’s freedom to compete and enter into new
markets.







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Complementarity between trade and investment
policies

The perception of the business sector stakeholders
interviewed support the idea of complementarity
between trade and investment, with 92%, 88% and 80%
of respondents in Sri Lanka, Bangladesh and Nepal,
respectively, agreeing that “policies relating to trade in
goods and services can support more and better quality
investment by expanding opportunities to reap scale
economies and by facilitating integration into global
supply chains, boosting productivity and rates of return
on investment”.7 The perception of the business sector is
consistent with findings based on econometric analysis
[e.g., Chaisrisawatsuk et al. (2007)].8 The differences in
perception across the three countries may provide an
indication of the business sector’s readiness for further
liberalization.

Satisfaction with trade policy measures for
investment

While business sector stakeholders overwhelmingly
recognize the importance of the trade and investment
link, they generally indicate that they are only
“somewhat satisfied” with trade policies and measures
taken by their governments and which may
affect investment (Duval, 2008). Uncertainty and
unpredictability of trade policy and regulations (TPM1)9
may be more of an issue in Bangladesh, while
Mechanisms in place to consult investors on planned
changes to trade policy (TPM2) appear to be of most
concern in Nepal and Sri Lanka. Among the trade
policy/regulatory areas included in the survey, Customs,
regulatory and administrative procedures at the border
(TPM3) is the one with which the Nepalese business
sector seems to be least satisfied.

Government efforts to enter into market-expanding
international trade agreements (TPM4) is the area in
which the highest level of satisfaction is reached in Sri
Lanka. Businesses also seem to be relatively more
satisfied with Government measures seeking to support
overall trading activities (TPM5), potentially suggesting
that they find that these specific trade support measures
(e.g., Government backed trade finance) may not
significantly affect investment, as opposed to tackling
broader systemic issues.

Stakeholders satisfaction with policies appear to also
depend on the sector in which they operate. In
particular, companies or representatives of traditional
manufacturing sectors appear to be relatively more
satisfied than the companies operating in fast-growing


services sectors. For example, in Sri Lanka, 78% of the
services companies in the sample agreed that the
Government tended to be unpredictable and
discouraged further investment, while government
policy was only seen as a problem by 35% of the textile
and clothing manufacturing companies.

Priority trade policy measures for investment

The priorities identified by the business sectors generally
reflect quite directly their levels of satisfaction discussed
earlier. The highest priority identified in both Nepal and
Bangladesh is to reduce compliance costs of regulatory
and administrative procedures. Reducing trade policy
uncertainty and consulting investors and other interested
parties also receive high priority.

Priority rankings in Sri Lanka are different, reflecting in
part its higher level of economic development.
Reducing regulatory compliance costs only comes
fourth in terms of policy priority. Increasing trade policy
predictability appears to be highest priority, with 90% of
the business sector asking for this issue to be tackled as
part of a national policy framework on investment.
Implementation of trade policy measures that address
sectoral weaknesses in the country is also seen as high
priority, followed by the need to consult investors on
planned trade policy changes.

Interestingly, results in all three countries indicate that
“increasing investment opportunities through market-
expanding international trade agreements” should
receive a low priority relative to the other trade policy
measures identified in the survey (i.e., TPM1, 2 ,3 and 5).
This result is striking given the time and resources
governments in the region have allocated in recent
years to the negotiation of trade agreements,
particularly and increasingly at the bilateral level, and
puts into question the effectiveness and need for these
agreements.

Conclusion and implications

Results presented above should be interpreted with
caution as they are mainly based on small scale
exploratory pilot surveys in three countries. More
extensive and structured data collection efforts would
be needed in the three countries studied, as well as in
other countries in Asia, to confirm the results and draw
strong policy conclusions for either individual country in
the region. That being said, the three case studies
suggest the following trade-related policy directions to
improve trade and investment policy frameworks in
developing countries of the region:


6 It may be worth noting in that context, that it is unlikely that any
government agencies could conduct this assessment in an unbiased
manner, and that it may therefore be more appropriate to leave these
assessments to independent research institutions to the extent possible.


8 While Lee and Lee (2007) also find exports and FDI to be generally
complementary, they find the relationship between exports and FDI of
Korean multinational firms to be more complementary when their
affiliates are located in a less developed country – as opposed to in a
developed country.

9 TPM1-5: Trade Policy Measures suggested in the OECD PFI.


7 Chapter 3, OECD Policy Framework for Investment (PFI).


• Reduce uncertainty/increase predictability of
trade policy as well as related policies. This can be
achieved by increasing lead time and information
provided to stakeholders before a policy change
is made and making sure that the policy changes
do not occur too frequently. Simplification of
trade policies, for example by simplifying tariff
schedules, may be helpful in this regard. More
effective use of the WTO and its rules-based
system could also be made as a means to lend
predictability and irreversibility to trade policy-
making and trade policy reforms.





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Selected references

Chaisrisawatsuk, S. and W. Chaisrisawatsuk (2007), “Imports,


exports and foreign direct investment interactions and their
effects”, pp.97-115, Chapter IV in ESCAP, Towards coherent
policy frameworks: understanding trade and investment
linkages, Trade and Investment Studies, No. 62, United
Nations, New York.



Duval, Yann (2008), “Trade and Investment Linkages and Policy


Coordination: Lessons from Case Studies in Asian
Developing Countries”, OECD Global Forum on
International Investment, 27-28 March 2008, www.oecd.org/
investment/gfi-7; ARTNeT Working Paper No.55,
www.artnetontrade.org



ESCAP (2007), Towards coherent policy frameworks:


understanding trade and investment linkages, Trade and
Investment Studies, No. 62, United Nations, New York.



Kumar, N. (2007), “Investment provisions in regional trading


arrangements in Asia: relevance, emerging trends, and
policy implications”, pp.1-23, Chapter I in ESCAP, Towards
coherent policy frameworks: understanding trade and
investment linkages, Trade and Investment Studies, No. 62,
United Nations, New York.



Lee, Hongshik and Joon Hyung Lee (2007), “An Empirical


Assessment of a Tradeoff between FDI and Exports”, KIEP
Working Paper 07-05, Korea Institute of Economic Policy,
www.kiep.go.kr .



OECD (2006), Policy framework for investment, OECD


publishing.


trade and investment policy making. Business
representatives surveyed perceived that many
non-trade policy and non-investment policy issues
affect their ability and willingness to trade and/or
invest. Focusing more on developing business
facilitation and competitiveness policies -
regardless of whether the businesses are domestic
or foreign owned – may actually be more
effective in increasing trade and generating
investment.


• Review existing institutional mechanisms in place
for trade and investment policy making, and
revise them as necessary to ensure more
complementarity. The mechanisms should, to the
extent possible, engage all relevant stakeholder
groups in developing policies regularly and
consistently. Relying on independent research
institutions to identify private sector and consumer
interests may be necessary given the difficulty
associated with identifying representative
organizations and samples. In the context of
identifying consumers’ interest, regional and
comparative analysis of consumers’ well-being
(purchasing power in various sectors) may be
highly relevant and could be facilitated by
Governments.


• Allocate resources to strengthening policy
implementation and enforcement, as opposed to
developing new policies. For example, as
suggested by the results in this study, reducing
human and capital resources spent on
negotiations of bilateral agreements and
increasing resources that go into border trade
management and facilitation may be considered
in many developing countries in the region.


• Build capacity and develop institutional
mechanisms to regulate emerging or fast-growing
sectors, particularly in services. While many
governments have significant experience in
regulating the agricultural and manufacturing
sectors that were gradually opening, many have
much less experience dealing with fast growing
and sometimes fast-opening national services
sectors. Services sectors (e.g., health, transport,
finance, and telecommunication) often involve
ministries and agencies that have not been
routinely or closely involved in international trade
and investment policy issues, leading to a lack of
coherence and policy predictability in these
sectors.


• Take a holistic, as opposed to a narrow or
negotiation’s based approach to international


What is ARTNeT? The Asia-Pacific Research and Training Network on Trade (ARTNeT) is an open
regional network of research and academic instiutions specializing in internation trade policy and
facilitation issues. Network members currently include over 20 leading national trade research
and academic institutions from as many developing countries from East, South, and
Southeast Asia and the Pacific. IDRC, UNCTAD, UNDP, UNESCAP and the WTO, as core
network partners, provide substantive and/or financial support to the network. The Trade and
Investment Division of UNESCAP, the regional branch of the United Nations for Asia and the Pacific, provides the
Secretariat of the network and a direct regional link to trade policymakers and other international
organizations.

ARTNeT aims at increasing the amount of policy-oriented trade research in the region by harnessing the
research capacity already available and developing additional capacity through regional team research
projects, enhanced research dissemination mechanisms, increased interactions between trade policymakers
and researchers, and specific capacity-building activities catering to researchers and research institutions from
least developed countries. A key feature of the network’s operation is that its research programme is discussed
and approved on an annual basis during a consultative meeting of policymakers, research institutions and
other stakeholders. For more information, please contact the ARTNeT Secretariat or visit www.artnetontrade.org.




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