Analyzing Digital Foreign Investments in CAREC Countries

The effectiveness of regional integration/investment agreements is based on i) conventional factors (firm location, local competitiveness, and investment motives) and ii) new drivers of digital FDI (digital regulation, data privacy and security, digital freedom, and digital adoption).

Aligning digital regulation and policies across countries is essential to provide a conducive environment for foreign technology firms. Many of these firms originate from developed countries and face higher barriers while making investment decisions in developing economies.

Also, as the CAREC region is distinct due to its unique socio-political structure, it requires a broad framework of North-South and South-South cooperation in socio-economic, political, and technical domains. Political and technical cooperation among governments and firms (particularly big technology companies) helps to align ICT regulations related to data localization/privacy policies, digital security, and intellectual property rights. Political and technological integration is imperious to offer platforms for settlement of investment disputes. This could reduce FDI sectoral restrictions, enforce ICT trade agreements, reduce tariffs and taxes, and facilitate implementation of a dual taxation system.

Social and cultural integration would help to reduce restrictions on top tech firms that reinforce further opportunities for the digital platform economy. Most CAREC countries have higher restrictions on social media and web-based social and e-commerce services, which can be reduced by offering regional digital broadcasting and commerce policies.

Moreover, a regional investment promotion agency could be established to identify business opportunities across CAREC countries and offer a one-window platform for mutual investment and business expansion in neighboring countries. Regional integration efforts of multi-development partners, such as the Asian Development Bank and CAREC Program, support member countries in capacity building and complement existing national-level policies.

Regional cooperation and integration are juridically established via international agreements and conventions. Under the CAREC Integrated Trade Agenda 2030, the development of e-commerce and digital transformation has long been the top priority. ADB and the CAREC Institute completed two studies that examined the infrastructure and regulatory frameworks related to the growth of e-commerce ecosystems. They also created knowledge-sharing modules on the Regional Improvement of Border Services and Digital SPS Certification (ADB 2022). Further, CAREC countries have digital startup support programs, initiatives, and established technonology and IT parks. Each member country has digital startups that lead the market in their respective sectors (finance, tourism, health, transport, and other services). Therefore, regional integration support with additional access to funds to scale up and enter the CAREC regional markets is another big opportunity to foster trade and economic growth.

Specific recommendations based on key findings of this study include

Improve international and national network connectivity. Launch 5G networks in major cities and industrial hubs, as well as in rural areas, particularly in Kazakhstan, Mongolia, and Uzbekistan.

Enhance data security. Develop Internet exchange points and domestic data centers to support reliable data transmissions and security. Update data security regulations to improve people and firms’ trust in digital transactions, fintech, and other business operations.

Improve digital skills. Conduct training on digital skills and capacity building of workers to provide an equipped labor force to local and foreign firms in Pakistan. In particular, these programs can focus on application development, back-end development, data science, and cyber security.

Minimize tariff and taxes. Reduce taxes on ICT equipment and devices to facilitate local infrastructure development and promote digital FDI. In the CAREC region, Pakistan has the highest tariff rate, followed by Azerbaijan.

Ease restrictions on lease/acquisition of land for business. Simplify the process for property leasing and registration to encourage multinational companies to establish and expand their digital business operations in the People’s Republic of China and Tajikistan.

Promote regional coordination and cooperation. Improve regional integration to ensure infrastructure bilateral and multilateral investment agreements on the mutual protection of investments in Turkmenistan. Initiatives could include infrastructure investment and technology transfer from digitally advanced countries in Azerbaijan.

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^[1] CAREC is composed of Afghanistan, Azerbaijan, People’s Republic of China, Georgia, Kazakhstan, Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan.

^[2] Digital CAREC Virtual Policy Dialogue: Analysis of the Regional Digital Gap. February 2022.