Investment outflows from India, the region’s dominant FDI source, decreased to $8.6 billion, due to a shrinking in the value of cross-border mergers and acquisitions (M&As) by Indian companies.

In fact FDI inflows to South Asia declined by 24% to touch the level of $34 billion in 2012 according to UNCTAD’s World Investment Report-2013 released on Wednesday.

Also the FDI inflows to Pakistan fell by 36% to be at $847 million and the inflows to Sri Lanka declined by 21% dipping to $776 million.

In Bangladesh the FDI inflows were about $ 1 billion, declining by 13%. However, the country remained the third-largest recipient of FDI in the region, after India, and the second-placed Iran, where FDI inflows increased by 17%, reaching a historic high at $5 billion.

FDI inflows to East and South-East Asia also declined, but slightly by 5% to be at $326 billion. But driven by intra-regional restructuring, lower-income countries are bright spots for labour-intensive investment, the report said.

FDI inflows to China dropped by 2% in 2012, though remaining high at $121 billion, despite strong downward pressure on FDI in manufacturing sector caused by rising production costs, weakening export markets and relocation of foreign firms to lower-income countries.

Hong Kong, the second largest FDI recipient in East and South-East Asia, witnessed a 22% decline in FDI inflows to be at $75 billion.

According to the UNCTAD report Indian economy experienced its slowest growth in a decade in 2012 and also struggled with risks related to high price inflation. As a result, investor confidence was affected, and FDI inflows to India declined significantly.

However, the report lends some confidence with the hope as India’s FDI prospects are improving. Inflows to the services sector are likely to grow. It lauds the Indian Government’s efforts to open up key economic areas such as retailing. FDI inflows to manufacturing are expected to increase as a number of countries, including Japan and South Korea, establish country-specific and industry-specific industrial zones in the Delhi-Mumbai Industrial Corridor (DMIC). Leveraging public funds from foreign countries, these bilateral efforts may result in an increasing amount of FDI targeting industries such as electronics in India in the years to come.

The UNCTAD report further adds that a number of countries in the region, including Bangladesh, India, Pakistan and Sri Lanka, have emerged as important players in the manufacturing and export of ready-made garments. Linking these countries to global value chains and markets, contract manufacturing has helped to boost productive capacities in the apparel industry in South Asia.

Leading local contract manufacturers, such as Brandix and MAS in Sri Lanka, have started to invest in production facilities in other regions, especially Africa. Starting with “cut, make, and trim” production in the 1980s and 1990s, these firms established themselves in original design manufacturing in the 2000s, serving brand owners in developed countries. As “full package” garment suppliers, they have been particularly competitive in niche markets such as sportswear, swimwear and children’s clothing.

Among these South Asian countries, Bangladesh stands out as the current sourcing “hot spot” in the industry, by offering the advantage of both low costs and large capacity. However, working conditions and other labour issues are a major concern, and a number of recent disastrous accidents have underscored the daunting challenges facing the country’s booming garment industry.

Investment outflows from India, the region’s dominant FDI source, also decreased to $8.6 billion, due to a shrinking in the value of cross-border mergers and acquisitions (M&As) by Indian companies.

During the past decade or so, Indian multinationals have been active players in global M&A markets, particularly in the developed world. Among the 18 cross-border M&A deals with an investment value of above $1 billion that were undertaken by Indian companies in the 2005–2011 period, 13 were in developed countries, most notably the United States, the United Kingdom and Australia.

However, none of these deals took place in 2012; Indian companies seemed to be much less active in international M&A markets than in previous years, and were increasingly focused on their domestic operations, the report says. As a result, the total value of cross-border M&As undertaken by Indian companies dropped by nearly three fifths in 2012, to about $2.6 billion.

According to the UNCTAD report, FDI inflows to least developed countries (LDCs) rose by 20% in 2012 to a record level of $26 billion. FDI inflows to African countries increased by 5% to be at $50 billion. Developing countries led by India have boosted the share of investment in LDCs.

However, the FDI inflows to the world’s 38 developed economies fell in aggregate by 32% touching the level of $561 billion in 2012. This decline was exaggerated by changes in intra-company loans across borders.

On the whole, across the globe FDI has declined by 18% in 2012. But as the developing countries received majority of investment for the first time ever, the UNCTAD report forecasts that the FDI flows in 2013 would remain close to the 2012 level.

It finally lends hope that the increasing dominance of global value chains (GVCs) in world trade gives developing countries the opportunity to increase their “value capture” – that is, to harvest greater profits, wages, and retained investment – as goods make ever-more-complex international journeys from raw materials to finished products.