Regardless of the high economic growth of 8.1% prior to the pandemic, Bangladesh has struggled to attract foreign direct investments (FDI) into the country which can be explained by the low FDI to GDP ratio of 0.5% in 2019. Infrastructural challenges and gap in policy implementation are some of the primary reasons.
Naturally, the yearlong pandemic has slowed down the global flows of FDIs. The World Investment Report 2020 by the United Nations Conference on Trade and Development (UNCTAD) has predicted a 40% percent decline in FDI flows in 2020. Nonetheless, the numbers can be expected to be stable in 2021, with the recovery of economies.
FDI is a powerful engine for economic growth, especially for developing economies like Bangladesh, which enables countries to gain capital, generate employment, increase production capacity and develop managerial and technological skills. During the pandemic, relocation of multinational companies’ operations from China, which initially started due to the US-China trade war, was accelerated. This presents Bangladesh with an excellent opportunity, which the country needs to capitalize on with a policy-backed, well-regulated and lucrative investment climate.
FY 2019 was a notable year for Bangladesh’s FDI regime as it had witnessed a record amount of net FDI inflows, USD 3.88 billion. However, this figure contradicts UNCTAD’s report due to exclusion of the investment data of the last quarter of 2019, indicating a case of misinformation. According to Bangladesh Investment Development Authority and Bangladesh Bank, FDI inflows leapfrogged in FY 2019 in comparison to USD 2.58 billion recorded in FY 2018.
Among the foreign investors in Bangladesh, China stood at the leading position with the net inflow worth USD 1159.42 million in FY 2019. The Netherlands secured the second position with net inflow amounted to USD 802.84 million, followed by the UK, Singapore, USA, Hong Kong, Norway and India. Japan has recently started shifting its investments from China and seeking relocation, favoring Bangladesh. The biggest single FDI in Bangladesh was made in November 2018 when Japan Tobacco International (JTI) acquired Akij Group’s tobacco business for USD 1.47 billion. As Japan has been such big investments in Bangladesh, it reflects Japan’s confidence in doing business in the country, which can further contribute to drawing the attention of other big foreign investors.
The power sector attracted the highest amount of investments in Bangladesh in 2019, which is USD 1217.84 million. Other major sectors of foreign investments in the country are food products, trade and commerce, transportation and communication, leather and leather products, pharmaceuticals and chemicals, agriculture and fishing, and computer software and IT services. Alongside these, the agro-processing industry, light engineering, digital financial services, etc. are emerging sectors with high potentials to bring in more FDI in the upcoming future.
FIGURE: Net FDI inflows by major sectors during FY 2019 / Source: Bangladesh Bank
Although the net FDI inflow in Bangladesh has significantly increased in recent years, the numbers are not up to the mark in comparison to the regional contemporaries. The neighboring countries seem to be doing much better as the trendline follows.
FIGURE: Comparison with regional peers: FDI inflows (net) as percentage of GDP / Source: World Bank
As mentioned earlier, the FDI to GDP ratio in Bangladesh was 0.5% in 2019, among the lowest in Asia. World Bank Data revealed that India, Indonesia, Vietnam, Pakistan, Myanmar, and Sri Lanka- all of these countries have higher FDI to GDP ratio than Bangladesh.
These regional contemporaries of Bangladesh are also strongly determined to utilize the opportunity of shifting investments from China. To harness investment relocation, countries are promoting their investment climate backed by high tax incentives, loosened regulatory restrictions and sound institutional quality, in areas where Bangladesh lacks suggestively.
The low inflow of FDI in Bangladesh indicates the need for reforms in policies and regulations to restructure the business environment and earn investors’ confidence. This is echoed by Nomura, a Japanese financial services firm, which reported that Bangladesh was not chosen by any of the 51 companies who relocated their production out of China between 2018 and 2019. To increase foreign direct investments in the country, Bangladesh must provide solutions to several overarching problems that lie in the path. The challenges can be classified into two segments; short-term challenges that immediate attention can unravel and long-term ones that necessitate comprehensive policies and proper implementation to be resolved.
Bangladesh’s business climate highlights high regulatory uncertainty, which demotivates foreign investors to enter the country. While choosing host countries, investors assess the clarity in existing policies, reliability of government officials and adherence to rules and regulations. Bangladesh often fails to keep the promises displaying a lack of coordination owing to bureaucratic tangles that discourage investors,
The lack of a dedicated comprehensive FDI policy has been an Achilles’ heel for Bangladesh. Moreover, the scope of signing free trade agreements (FTAs) is available that remains unutilized. Despite the land price in Bangladesh’s economic zones being one-fourth of Vietnam, it is not enough to convince investors. Investors seek assurance that the land made available is free of an ownership dispute. In addition, the Foreign Exchange Regulation Act needs to be updated according to the standards of competitor countries.
Bangladesh Bank often creates hurdles in profit repatriation, one of the preconditions of FDI, which is obstructing FDI inflow. This means foreign investors face difficulties to take back their money or dividends. Regional contemporaries including India, Vietnam and Indonesia have simplified laws regarding investments to lure FDI and Bangladesh needs to follow a similar approach.
To lure relocating investors, countries had restructured their tax policies. For example, India has reduced the corporate tax rate from 30% to 22%, and new enterprises in the industrial sector will enjoy a tax rate of 17%. Moreover, in India, Vietnam, Thailand, there are no VAT requirements for setting up industries in the economic zone, which is 15% in Bangladesh. Coping with the competition, the corporate tax rate and VAT policies need to be revised to inject the nation with high FDI inflow.
The level of convenience of doing business in a host country plays a crucial role in making investment decisions. Bangladesh struggles to gain investors’ confidence as it severely lacks in the Ease of Doing Business index by the World Bank. In 2019, Bangladesh ranked 168th out of 190 countries moving up in the index from its previous position on 176th. However, the country lags behind the South Asian countries putting itself in tough competition. Even though Bangladesh is recognized for its low labor cost, the ease of doing business in other countries trumps this benefit for the investors.
TABLE: Comparison of ease of doing business among the regional contemporaries / Source: Doing Business Index
According to the ‘Doing Business 2020’ report, Bangladesh improved in three indicators; starting a business, getting electricity and getting credit. Increased power capacity, digitization in the registration process and improved access to credit information have led the country to obtain a better rank in the index. However, Bangladesh acutely underscores in four indicators; registering property, trading across borders, enforcing contracts and resolving insolvency. Digitizing land administration, simplifying compliances, enhancing the quality of judicial processes are imperative to provide fast and cost-effective services, which will lead the country to increase the ease of doing business and appeal to foreign investors.
Bangladesh’s underdeveloped capital market highly contributes to the investment decision of foreign companies as it negatively influences investors’ confidence. Lack of a fully developed bond market serves as a major concern for the investors to put their money on a bet. Strengthening the capital market is a long-term process that takes years. Developing a vibrant bond market can be the first step towards establishing a strong stock market.
Despite having several underlying issues affecting FDI growth, Bangladesh can bring more investments by adopting timely policies and materializing them. As the eighth largest consumer market in the world, Bangladesh has a natural advantage due to its strategic geographic location and demographic dividend. Moreover, the current emphasis on infrastructure development, bilateral agreements, improved power sector and some thriving sectors provides the country with an opportunity to witness increased FDI inflow in the next few years.
In Bangladesh, pharmaceutical, agro-processing, ICT, light engineering, digital financial services, tourism, etc. are highly potential sectors. Owing to the strong agricultural economy in Bangladesh, the USA has shown interest in investing in the biotechnology sector. According to the Bangladesh Economic Zones Authority (BEZA), a 20% cash incentive will be provided in the agro-processing food sector in the economic zones for foreign investors and joint ventures. Similar incentives can be provided in other emerging and thriving sectors of the country to help them flourish.
Bangladesh has undertaken several mega projects to develop transport and communication infrastructure including the Padma Bridge, the third terminal of the Shahjalal International Airport, metro rail lines, a tunnel under the Karnaphuli River, and the deep seaport in Matarbari. Moreover, the hi-tech parks will facilitate investments with attractive incentives provided by the government. The faster establishment of these infrastructures will help Bangladesh draw foreign investments.
Previously, foreign investors used to avoid setting up companies in Bangladesh due to its power and electricity issues. However, the Bangladesh power sector has seen 57% growth in the last six years enabling the country to provide an uninterrupted power supply to its economic zones. Moreover, access to electricity has also been simplified by employing digitized systems. Increased capacity of the power sector can be further promoted to the investors to catch their interests.
Bangladesh has preferential trade policies with several countries, which facilitates FDI. China and India have recently committed to make investments worth around USD 31 billion and USD 4.5 billion respectively as part of implementing China’s “One belt, one road” initiative. Through infrastructure and economic collaboration, Bangladesh will be connected to other parts of Asia and Africa that will open new gateways for trading. Bangladesh is also a signatory to MIGA (Multilateral Investment Guarantee Agency) which insures investors against losses incurred due to non-commercial risks and political unrest, further encouraging FDI. In addition, Japan’s collaboration will continue in Bangladesh under the Big B initiative.
Since its establishment, the Bangladesh Investment Development Authority (BIDA) has initiated powerful reforms to attract foreign investors through easing business. It has achieved remarkable progress in the One-Stop Service, which will simplify lengthy processes and ensure transparency. A comprehensive FDI policy should also be developed with clarified objectives. Bangladesh bank should ensure the ease of profit repatriation for the investors. Simplification of taxation, customs clearance and foreign exchange reforms are the critical issues that need attention. However, the real emphasis should be placed on the effective implementation of policies for alluring more FDI in the country to maintain strong economic performance in the long run.
Ishrat Jahan Holy, Content Writer and Silvia Rozario, Senior Business Consultant at LightCastle Partners, have prepared the write-up. For further clarifications, contact here: [email protected]
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