In my last column, I looked at the geographic origins of FDI inflows to Bangladesh.
We saw a concentration there, albeit declining over time, with the top five countries accounting for about half and the top 10 for about three-quarters of all FDI flows to Bangladesh during 2014/15-2019/20.
There is a greater concentration in the sectoral distribution of the FDI inflows, although it is also declining over time.
Twenty-five years ago (1996/97-2000/01), almost half (45%) of net FDI inflows went to just two sectors, while the top five got 82%. More recently (2016/17-2019/20), the corresponding proportions were lower - 36% and 67% respectively.
The sectoral composition of FDI flows or stock in a country reflects the interplay of the foreign investors’ business strategies, and economic characteristics and developments in the recipient country.
We may distinguish between three motivations that underpin FDI. First is ‘market-seeking’ FDI where the investor’s main interest is in selling in the domestic market of the recipient country.
Often, the market-seeking foreign investor has a history of selling certain products to a country from a production base in its home country or elsewhere.
It then decides to manufacture the products in the recipient country itself.
Within this category of market-seeking FDI, we may make a distinction between investment in tradable and non-tradable goods.
A motorcycle or a TV is an example of a tradable good because such goods can be exported from one country to another.
By contrast, power generation will be considered non-tradable because power is usually sold within the country in which it is generated although there are some exceptions.
The same is true for banking.
Some foreign investors are ‘natural-resource’ seeking, i.e., their eyes are on some natural resource located in Bangladesh, such as natural gas.
Finally, there are the ‘efficiency-seeking’ investors whose main interest is the export market and who have decided that it will be cost-efficient to produce in Bangladesh and sell the products abroad.
These are the factors that drive foreign investor interest in a country.
Public policy
The role of public policy in the recipient country is to steer FDI towards activities that are desirable from the view of the country.
In some cases, the two sets of interest may match well without any public policy intervention. However, in most cases, some policy intervention is required to create the match.
With that conceptual discussion out of the way, let us now examine where FDI has flowed to within Bangladesh during the past twenty-five years.
Consider the first chart that shows the stock of FDI in Bangladesh at the end of June 2020.
We can see that almost 75% of the stock is concentrated in six sectors: gas and petroleum, textiles and apparels, banking, power, food, and telecommunications, with the first two alone accounting for almost 40%.
Following the definitions introduced earlier, gas and petroleum relates to natural-resource seeking FDI.
Textiles and apparels reflect efficiency-seeking FDI since these are export-oriented sectors - directly in the case of apparels and indirectly in the case of textiles.
Three sectors, i.e., power, banking, and telecoms relate to market-seeking non-tradable FDI because the goods and services are meant for the domestic market.
I do not have disaggregated data to assess how much of the output from FDI in the food sector is meant for the domestic market and how much is exported.
The FDI stock at the end of fiscal 2019/20 is, of course, the accumulation of net FDI inflows over the years.
The composition of these flows has changed over time.
For example, the second half of the 1990s was dominated by the power, and gas and petroleum, sectors (chart 2).
These received 21% and 24% of net FDI inflows during 1996/97-2000/01. Manufacturing, mostly textile and apparels, came second and services (notably banking) took the third position.
Some FDI went to the telecoms sector, which had been opened to the private sector in the early 1990s, but the amounts were modest.
Ten years later, i.e., during 2006/07-2010/11, there was some noticeable change in the FDI scenario (chart 3).
Telecoms became the single largest sector attracting FDI inflows, followed by manufacturing and banking.
The earlier leaders, i.e., gas and petroleum, and power, remained important but were now in the fourth and fifth places respectively in terms of net FDI inflows.
Why telecom
The emergence of telecoms as the dominant FDI sector during this time coincides with a sharp acceleration in the mobile phone penetration ratio in Bangladesh.
In 2005, there were only two mobile phone subscriptions per 100 people. By 2007, this had jumped to 14 and by 2011 to 46, a big jump in just six years.
This impact of the significant FDI inflow into telecoms is also reflected in the continued increase in mobile penetration rates in the subsequent years.
Fast forward another ten years and we see further change in the sectoral composition of FDI inflows (chart 4).
This time the limelight is on the power sector.
The sector’s importance had reduced significantly during 2006/07-2010/01, when it dropped from second to fifth position and received only 3.9% of net FDI inflows.
But it emerged as the top sectoral destination for FDI inflows in recent years. During 2016/17-2019/20 almost a quarter (23.6 %) of net FDI inflows went to this sector.
Telecom FDI remained important during this period, not surprising given the continued increase in mobile phone use.
However, its share had fallen sharply since the peak in 2006/07-2010/11, from almost 40% to 11%.
The decline of FDI in the gas and petroleum sector continued, with the annual average FDI inflow dropping to just 4%, compared to 24% in the second half of the 1990s.
Throughout this 25-year period, i.e., from 1996 to 2020, textiles and apparels, and banking had maintained a significant presence among FDI inflows.
The share of textiles and apparels hovered between 12 and 22%, that of banking between 10 and 17%.
Two sectors that had a modest presence in the earlier time periods had become important in the most recent period, i.e., 2016/17-2019/20.
These are food and ICT. After hovering between 1.7 and 4.4 % of all FDI inflows in the earlier period, food products attracted 10% of all FDI inflows during 2016/17-2019/20.
ICT accounted for under 1% in earlier periods; it attracted 1.7% in the latest period.
It is still not significant, but the latest figures could be the harbinger of more FDI interest in the ICT sector in the coming years.
To summarize, in the early years, much foreign investor interest was confined to exploiting natural resources and in providing traditional services such as banking.
Later, with the domestic economy expanding, FDI inflows were dominated by market-seeking investment in infrastructure such as power generation and telecommunication.
A key objective of FDI should be to help diversify our exports in order to reduce our dependence on garments and gradually shift towards more skill-intensive, complex products, a theme on which I had written earlier in these columns.
It appears from the above analysis that this objective has not been realized. Very little of the FDI inflow has gone into export-oriented industries and that too in the traditional sectors such as garments and leather goods.
Thus, while the move away from natural-resource seeking FDI to investments in infrastructure is welcome, the strategy going forward should be to attract more FDI inflows towards efficiency-seeking FDI that can help diversify our export basket.
The author is an economist, previously with an international development agency
