Despite stagnant foreign direct investment (FDI) inflow of $44 billion in 2016, India will most likely remain most favoured destination due to its attractiveness among MNCs for cross-border mergers and acquisitions, a UN trade report has said.
On the flip side, it said there are tax related concerns that may pose as a deterrent to some foreign investors.
In South Asia, FDI inflows increased by 6 per cent to $54 billion in 2016, said the report by United Nations Conference on Trade and Development.
"Flows to India were stagnant at $44 billion (in 2016). Cross-border mergers and acquisitions deals have become increasingly important for foreign multinational enterprises to enter the rapidly-growing Indian market," said the UNCTAD's
'World Investment Report 2017'.
Despite a historically high number of announced greenfield projects in 2015, FDI inflows to India were flat last year with only 1 per cent up from 2015, the report said.
FDI inflows into developing Asia were down by 15 per cent to $443 billion in 2016, the first decline since 2012.
"This affected three sub-regions, with only South Asia spared. However, an improved economic outlook in major economies, such as ASEAN, China and India, will likely boost investor confidence, propping up the region's FDI prospects for 2017," it said.
FDI inflows to developing Asia are expected to increase by 15 per cent in 2017 to $515 billion, as an improved economic outlook in major Asian economies is likely to boost investor confidence.
"The favourite FDI destinations remain the US, China and India," UNCTAD said, adding "Although new liberalisation efforts continue to improve the investment climate in India, tax-related concerns remain a deterrent for some foreign investors".
In major recipients such as China, India and Indonesia, renewed policy efforts to attract FDI could contribute to an increase of inflows in this year, it said.
The foreign outflows from South Asia declined by 29 per cent to only USD 6 billion in 2016, as India's outward FDI dropped by about one third, it added.
On cross border mergers, the report cited USD 13 billion acquisition of India's Essar Oil by Rosneft (Russian Federation) as one of the significant deals during the year.
The report noted that signing of a tax treaty by India and Mauritius in May 2016 "might have" contributed to reduced round-tripping FDI.
"Foreign multinational enterprises (MNEs) are increasingly relying on cross-border M&As to penetrate the rapidly growing Indian market."
Pakistan's inflows increased by 56 per cent due to significant investment in infrastructure from China in support of the One Belt One Road initiative.
For the first time, China was the world's second-largest investor as FDI outflows surged by 44 per cent to USD 183 billion, a new high.
BRICS -- the economic group comprising Brazil, Russia, India, China and South Africa - accounted for 22 per cent of global GDP but received only 11 per cent of global inward FDI stock in 2016.
FDI flows to the five BRICS countries last year rose by 7 per cent to USD 277 billion. The increase in inflows to Russia, India and South Africa more than compensated for the decline of FDI to Brazil and China.