Capital Flows and Development: Lessons from South Asian Experiences

Foreign capital flows have emerged as key channels of global economic integration all across the world over the past two decades. While foreign direct investment (FDI) flows have been undertaken for a long time by multinational enterprises (MNEs) in the course of their overseas expansion, foreign portfolio investments (FPI) representing equity and debt flows unaccompanied by management control have become highly visible and often dominant components of the foreign capital flows in recent years with the rise of foreign institutional investors (FIIs) and sovereign wealth funds on the horizon that seek to make quick returns through short term speculative activities abroad. This paper summarizes the experiences of South Asian countries in attracting FDI and FPI and reviews recent trends, patterns and prospects for these flows and their developmental impact. As the region emerges as a source of FDI as well, the paper also briefly touches upon the trends in these flows and concludes with some policy lessons.