In this context, Bhutan can becomewealthier through accelerating both domestic and foreigninvestment, as well as signing investment treaties. Theseinvestments could provide not just capital but also bringnecessary skills, knowledge and ideas, and help the countrymove beyond hydropower. Today FDI inflows are small andconstrained, on the one hand, by regulatory barriers andinsufficient investment promotion, and, on the other, byinadequacies in skills and infrastructure. Bhutan canbenefit from the experience of East Asia and other countrieson how to break out of this low investment trap. FDI canhelp the macroeconomic balance by increasing exports andreducing the current account deficit, although it is notclear the future impact on growth, since it will depend onthe quality and type of FDI inflows. FDI can also helpcreate trade. Theoretically, firms invest abroad to expandtheir sales markets when trade costs are too high, thereforeFDI is a substitute for trade. FDI in non-tradable sectors(services, etc) has this feature. However, in practice, FDIgoes to export-oriented sectors including extractives butalso manufacturing. Given the landlocked nature ofgeographic setting of Bhutan (with higher trade cost thancountries such as India or Bangladesh), FDI could goprimarily to non-tradable (at least as shown in the recenttrend in the greenfield FDI). In this context, it will beimportant to use FDI to tap into regional value chains.
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