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OP-ED: Understanding FDI in Bangladesh

  • Published at 11:57 pm November 22nd, 2020
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What can be done to attract more FDI?

Foreign direct investment (FDI) inflow, a major component of spurring growth in a developing economy like Bangladesh along with other development tools, usually plays a big role in transferring technology, creating employment opportunities, and transforming traditional skills into high-end technology. 

Over the decades, with providing the world’s competitive facilities, namely lands, port infrastructures, cheaper labour, and natural resources, Bangladesh has been attracting such foreign investments. Approximately, the Bangladesh economy, whose GDP is about $347 billion, currently wants to attract more FDI to support its ongoing socio-economic developments.

Bangladesh's steady economic growth by overcoming all obstacles is an example for many countries in the world. The country's GDP growth has been over 7% for the last few years. Despite many hurdles and scarcity for lands and a few problems in legal infrastructure, its current overall growth is better than many LDC members and even developing countries.

The US is the single highest investor, which accounts for 20% of the total FDI inflow in Bangladesh. China, Japan, the UK, Saudi Arabia, and a few other countries are among the top ten investors.

The major FDI recipient sectors in Bangladesh are energy and power, textile, food, banking, leather, service, telecommunication, information and communication technology, trading, engineering, and a few others. Till today, energy and power are the highest recipient among all, which is ultimately helping the economy to grow and the government is getting revenue from the FDI financed companies located inside and outside of the economic zones. 

Japan and China

Investments in 2018 were an all-time high, worth $2bn whereas it was a record low of -119 (minus) in 2005. The sharp rise in FDI in 2018 was caused by a big investment by a Japanese company and Chinese strategic investment in the Dhaka Stock Exchange (DSE), which was not a regular phenomenon. 

Japan Tobacco invested $1.47bn to acquire United Dhaka Tobacco, a venture of Akij Group, while two Chinese stock exchanges invested Tk9.47 billion for buying a 25% stake of the Dhaka Stock Exchange. While China became the leading investor in the country with $1.03bn, the US, traditionally the top investor, dropped to fourth with only $174m in FDI for 2018.

However, after an increasing trend till 2018, the inflow dropped in 2019. As per latest GLOBAL FDI Report, FDI fell in the world and Bangladesh is no exception -- the inflow to Bangladesh saw a sharp decline by 56% to $1.6 billion in 2019, according to a report of the United Nations Conference on Trade and Development (UNCTAD). 

Pandemic setback

There was a big plan to attract more in the 100 economic and special economic zones, but the plan is facing a setback due to the prolonged pandemic. In 2020, the country’s apparel sector is expected to be severely affected by factors like closed down factories and falling global demand for apparel goods.

The economy relies heavily on RMG export, which is bearing the brunt as the inadequacy of the labour force is hampering productivity and not letting the sector go up to the global value chain. Adding more salt to the wound, there is poor work ethic in the service sector and the ongoing pandemic may make Bangladesh less attractive to foreign investors.

Though the government is working to expedite the process of business registration, power and gas supply, and land acquisition, necessary legal infrastructure and other support are of utmost importance for any foreign business.

Here, we like to emphasize on a few major issues which needs to be addressed as soon as possible:

  • To continue the country’s GDP growth trend, it has to look for high value-added products and services, in particular research and development-based sectors, which is already missing the potentialities due to an absence of adequate skill development among the working age people 

  • It also needs to change or relax several of the existing ordinances and policies for attracting more FDI. In Vietnam, India, and other South Asian countries, the investment patterns diverged and had continuity in overseas investment because of their business environment and skilled workforce in different sectors

  • At the competitive edge to continue economic progress, the government needs to take a few measures for resolving problems in the legal infrastructure and it needs to improve both sea and airport facilities, develop land under economic zones with adequate utility services, and bring changes to its existing Customs Act 69 and further amendments to Foreign Exchange Regulation (Amendment) Act, 2015. Potenga Container Terminal (PCT) at the Chittagong seaport is believed to help improve port efficiency significantly, but it’s failing to meet the deadline again and again. 

  • Automation in customs is essential at all ports in Bangladesh in bringing discipline and speed up clearance to support healthy business growth

  • The government launched a public and private partnership cell under the prime minister's office which has already been commissioned a decade ago, but it is yet to prove its effectiveness. They did take a few projects in the past, but there is no new project

  • In a virtual discussion on “Bi-annual economic state and future stance of Bangladesh economy: Private sector perspective” organized by the Dhaka Chamber of Commerce and Industries (DCCI), it was mentioned that 21 types of permissions were needed for starting a garments factory in Bangladesh, which is very discouraging for entrepreneurs and FDI. Efforts should be taken on a priority basis to simplify the process 

  • Recent activities by some private hospitals created an image crisis for Bangladesh and the government needs to look into this issue immediately. Bold steps are needed to ensure good governance and accountability 

  • One of the main reasons for dropping FDI is harassment by revenue collection agencies. Government procurement and revenue collection processes need to be 100% automated to ensure good governance 

  • The key tools to organize funding have been identified as increasing domestic investment and FDI. Therefore, the foremost plan of action of Bangladesh Investment Development Authority( BIDA ) is now to find ways and means to bring a revolution to the Small and Medium Enterprises (SMEs) while there is increased focus on attracting FDI.

Bangladesh needs to gear up its domestic investment to give a message to the global investors that business is happening here in a suitable climate. It has to lure foreign investors by developing lands in its special economic zones and if the government could complete the projects within the deadline, FDI inflow would increase as targeted.

Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics. This article first appeared in the AmCham Bangladesh Journal.



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