A transformation in the economic journey
One of the ways to achieve economic development in a globalised world is through international trade and investment flows. Foreign direct investment (FDI) has been beneficial to both host and home countries in several cases in terms of higher economic growth in the medium to long run. Host countries can take advantage of capital, technology and knowledge transfer through FDI. They can see this as a source of improving efficiency through competition with foreign companies. The home country, on the other hand, is benefited by penetrating into markets, gaining access to raw materials, diversifying business activities, rationalising production processes better and overcoming some export related drawbacks, such as trade barriers and transport costs.
Since the 1990s FDI has made enormous leaps in terms of its growth in the global economic landscape. In recent times, notwithstanding the economic crisis global FDI inflow increased by 17 percent in 2011 amounting to US$ 1.5 trillion which is even higher than the total average of the pre-crisis period (UNCTAD 2012). The increase in FDI has been experienced by developed, developing and transition economies, except for most of the African countries. South Asia too has been able to attract more FDI in 2011 compared to 2010 though its global share is stagnant at 0.9 percent and lower than the period during 2006 to 2009. The increase during 2010 to 2011 is 23 percent which is higher than the global average. Bangladesh has received US$ 1.13 billion in 2011 marking a 24.4 percent increase compared to 2010. While this is quite encouraging, one has to be cautiously optimistic for the growth of FDI as the trend of its growth has not been smooth due to several predicaments along the way.
The size of the market, cost of labour, volume of trade and regulatory framework are the major determinants of attracting FDI to a country. This has been evident in case of Bangladesh too. Bangladesh has put in place FDI friendly policies since the early 1980s, much before some of its neighbours. The Foreign Investment Promotion and Protection Act 1980 was such an attempt. At present the regulatory framework is quite lenient towards FDI which provides attractive incentives to foreign investors. Some of these include tax exemption at various phases, easy work permits of expatriate employees and remittance of half of their salaries, repatriation of capital and convertibility of Bangladeshi Taka for international payment. The cost of labour in Bangladesh is one of the lowest in the world. With a large population, the size of the market is also big enough in terms of having a sizable population with disposable income. Over the years the country has graduated from a traditionally aid-dependent to a trade dependent one and has been integrated with the global economy through increased trade which has opened further opportunities for FDI.
Despite being besieged by multi-faceted adversities such as frequent natural disasters, high density of population, political turmoil and a low production capacity, Bangladesh has demonstrated its resilience. The inherent strength of the economy, mainly due to its robust sectors such as agriculture, readymade garments (RMG) and remittances, have been the source of better economic performance. However, in order to transform the economy into a higher level in terms of increased growth the country's investment scenario has to be improved. The lack of adequate investment is one of the important reasons for the growth below the potential of the economy. The domestic investment rate has been stagnant at around 24 to 25 percent of the gross domestic product (GDP) of the country for the last 10 years or so which is far below the level required for a country aiming to be become a middle-income country by 2021 with a growth rate of 10 percent. The Sixth Five-Year Plan (2011-15) of Bangladesh targets a GDP growth of 8 percent by the end of the plan period. This requires that the total investment has to grow by 8.1 percent per year and the share of investment in GDP has to be 32.5 percent by fiscal 2015.
Not only the volume, the type and the concentration of FDI flow are also important for Bangladesh for its graduation to a higher level of development. In the 1990s, there was an attraction for the East Asian and European investors to invest in the RMG sector of Bangladesh, thanks to the Generalised System of Preferences and the availability of labour at a competitive price. The recent trend shows that the concentration of FDI is mainly on manufacturing, transport, storage and communication, trade and commerce and power, gas and petroleum (Figure 1). Other sectors such as agriculture, construction and services receive nominal FDI. The growth of FDI in Bangladesh has, however, been very inconsistent. A major inflow of FDI was observed in the mid 2000s, in 2008 to be specific, reaching US$ 1 billion mark for the first time. This however, plunged to US$ 700 million in 2009 and rose slightly to US$ 913 million in 2010. In terms of sources of FDI, though Bangladesh receives FDI from about 50 countries, only 10 countries contributed more than 80 percent since 1996. These include the UK, the USA, the Netherlands, Norway, Egypt, Singapore, South Korea, Hong Kong and Japan.
The impediments to bringing FDI into the country lie in three broad areas. First, limited access to physical infrastructure, particularly supply of gas and electricity has emerged as a binding constraint on investment promotion in Bangladesh. The wide gap between the demand and supply of gas and electricity has frustrated the private investment as the domestic entrepreneurs are not able to make any headway towards new investment. In recent times, the rise in FDI has been observed mainly in the export processing zones since they do not suffer from gas and electricity supply constraint as opposed to the lack of or limited access to these utilities in the domestic tariff area.
The culture of confrontational politics also poses a serious threat for the safety of property and resources of prospective investors. Acrimony and bitterness among political parties often lead to destruction and affect lives and properties of people which in turn deter not only foreign investment but also local private investment. Many investors are even willing to spend on infrastructure to facilitate their investment in other sectors, only if there are political stability and predictability of return on their investment.
Another serious constraint is the lack of good governance and prevalence of corruption, which have put a scar on the reputation of the country at the global level. Because of advantages such as competitive prices for labour and other services, investors may find Bangladesh a lucrative investment destination. However, predicaments such as delay and a lack of transparency in decision-making process, a dearth of effective implementation of regulations and policies, and discriminatory incentive packages act as stumbling blocks in bringing in FDI to the country.
FDI is also dependent on local efforts to produce goods and services and create jobs. If local businesses flourish, foreign investors will have confidence to bring their resources. Promotion of local businesses through access to adequate finance and creation of an enabling environment should also be a key strategy to bring FDI. Economic diplomacy is vital at this day and age to attract foreign resources as more countries compete for less and limited resource. This has to be accompanied by good marketing skill which in other words is termed as 'branding'. Such image building task has to be done primarily by the government but complemented by the private sector and all citizens of the country.
In case of managing FDI properly the effort has to be focused on the effectiveness of FDI inflow. It should be kept in mind that FDI is not a panacea for achieving growth as it can have negative implications. Capital flight, repatriation of profit and transfer pricing can make the net inflow of FDI insignificant having no visible impact in the country. To improve the effectiveness of FDI in terms of having greater impact on employment generation, poverty reduction and economic growth, effort should be geared towards attracting strategic investment both in the short and long term. As a labour abundant country FDI is needed for labour intensive manufacturing sectors. Foreign investment is acutely needed for the development of the physical infrastructure sector as it is holding back the development of the country. Though foreign investors do not want to come to Bangladesh due to poor physical infrastructure, the sector itself can be one for prospective foreign investment. In addition to RMG other export oriented sectors such as ceramics, frozen food, leather, agribusiness, pharmaceuticals and ship building should also receive due importance for FDI.
It will also be useful for the country to select some new areas for FDI in view of the global development. One such area is the development of green technology for greening its agriculture, industry, buildings, cities and energy as global attention is increasingly moving towards the adoption of a green growth strategy. Unfortunately, issues of technology transfer and research and development have been the neglected ones both for the foreign investors and domestic policy makers due to which the country has not seen much technology transfer along with FDI. Any future investment should be packaged to include these two crucial elements that can help achieve a higher and sustainable growth in the country.
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The writer is the Research Director at the Centre for Policy Dialogue.
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