The Bangladesh government tries in many ways to encourage foreign investors and has a set of policies and incentives to attract them. But what about those who are already here?
There is a tendency to take such investors for granted – since they are already here, we need not pay much attention to them.
This is a wrong approach. But before we dwell further on this, let us examine an interesting set of statistics.
The Bangladesh Bank regularly produces data on FDI inflows into the country.
Total FDI inflows are typically broken down into three categories: equity investment, reinvested earnings, and intra-company loans.
I would like to focus on the second of these categories, which represent reinvestments made by existing foreign investors.
As we can see from the chart below, this category is significant in Bangladesh.
During the last two and a half decades, reinvested earnings have typically accounted for 30-40% of all FDI inflows into the country.
The ratio has fluctuated from year to year but has exceeded 30% in 19 of the 24 years shown in the chart.
Moreover, the ratio is rising. This is evident from the dotted line which shows the five-year moving averages. Moving averages help us abstract from annual fluctuations and see the long-run trend more clearly.
This average has increased from below 30% in the late 1990s to more than 50% in recent years.
The ratio would be higher if we include intra-company loans, which are loans provided by a parent company to its subsidiary in Bangladesh.
In Bangladesh, much of these inflows relate to investors already in the country.
The figures on reinvested earnings are based on surveys of foreign investors.
Relevant government officials have told me that the response rate for these surveys, while quite high, is not 100%.
Thus, it is likely that the reinvested earnings are even more important than they appear from these charts.
One of the reasons why the ratio of reinvested earnings to total FDI inflows is high, and rising, is our failure to attract significant numbers of new investors.
Thus, we end up relying on existing investors to boost our FDI figures.
The fact that they are reinvesting in respectable amounts is somewhat reassuring. And this is a good signal for potential new investors since such investors almost always check what existing investors are doing.
But there is no ground for complacency. Discussions with existing foreign investors in Bangladesh often bring out a litany of complaints about adverse government actions that create uncertainty for them.
This is a worldwide phenomenon.
In country after country, governments take policy or regulatory decisions, often on a case-by-case basis, that adversely affect the operations of existing foreign investors.
They violate contracts signed with such investors and surprise them with unexpected regulatory changes.
Arbitrary restrictions on transferring profits or on converting profits from local to foreign currency is another source of risk for investors.
Thus, it is no surprise that a 2017 World Bank survey found 45% of the surveyed investors rating investment protection guarantees as critically important in their decisions to invest abroad.
Aggrieved investors react by withdrawing existing investments or abandoning plans for additional investments.
While the withdrawal of an existing investment is noticed, governments may never come to know about investments that had been planned but abandoned.
In Bangladesh too, there may have been planned reinvestments that have not materialized because existing investors have had their fingers burnt.
So, what can the government do? Bangladesh can follow the example of a growing number of countries that have set up investor grievance systems that focus on investors who are already operating in a country.
In countries as diverse as Georgia and Mongolia, such systems have managed to preserve investments that would otherwise have been lost.
Such a grievance mechanism will help the government of Bangladesh identify issues being faced by existing investors, not in an ad-hoc manner but more systematically.
Once the precise nature of the grievance is identified and an assessment made of how much investment (existing or planned) is at stake, the government may take corrective actions.
Often this would mean bringing other government agencies to the table.
I know that the government often addresses problems faced by individual investors when they are made aware of these.
But we need to move away from such ad-hoc resolution of individual investor problems to a more systematic approach to address grievances.
The author is an economist, previously with an international development agency
