At a time when the global economy is struggling to turn around to a phase which will ensure employment and income for its citizens the competition for global resources is natural. One of the ways to achieve economic development in a globalised world is through international trade and investment flows. The recent global economic turmoil has affected most countries through lower export, import and remittances as they are integrated with the global economy more than ever before. However, one area which is still less affected due to such economic crisis is the foreign direct investment (FDI). This is not to deny the fact that though FDI has made enormous leaps since the 1990s in terms of its growth in the global economic landscape, the trend has not always been smooth. But the recent Global Investment Trend Monitor of the United Nations Conference on Trade and Development (UNCTAD 2012) shows that global FDI inflow increased by 17 percent in 2011 amounting to USD 1.5 trillion which is even higher than the total average of the pre-crisis period. The average global FDI during 2005-2007 was USD 1.4 trillion. 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 remained stagnant at 0.9 percent and lower than the period between 2006 and 2009. The increase during the period between 2010 and 2011 was 23 per cent which was higher than the global average. The higher FDI inflow was mainly due to higher greenfield investment in the region. Bangladesh received USD 1.13 billion in 2011 marking a 24.4 per cent increase compared to 2010. Keeping in view the challenges that South Asian countries face, particularly in terms of political risks, the UNCTAD report is cautiously optimistic about maintaining the FDI momentum in 2012 in the region. While Bangladesh has reasons to be happy about its achievement in 2011 in attracting higher FDI, there are also enough reasons to be a little less enthusiastic in this case and to organise some thoughts on this.
FDI has been an important component of the development strategy not only of developing and least developed countries, but also of developed countries. In most cases it proved to be a win-win situation for both host and home countries as they could achieve economic growth in the medium to long run. Host countries want to take advantage of capital, technology and knowledge transfer through FDI. They also want to 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, rationalizing production processes better and overcoming some export related drawbacks, such as trade barriers and transport costs. A sizable volume of literature on various dimensions of FDI has established the causal relationship between FDI and economic growth. The case of Bangladesh is no exception, as studies indicate.
It has been suggested in the literature that 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's efforts towards bringing in FDI has started since its independence. The country had put in place FDI friendly policies in 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, remittance of half of the salaries of the expatriate employees, repatriation of capital, convertibility of Bangladeshi taka for international payment and many more. 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.
However, its success in terms of attracting adequate FDI has been lower than the expected level. This is particularly disappointing when Bangladesh is considered to be one of the potential economies despite being besieged by multi-faceted adversities such as frequent natural disasters, high density of population, political turmoil and a low production capacity. The resilience and inherent strength of the economy, mainly due to its robust sectors such as agriculture, readymade garments (RMG) and remittances, have been the basis of such optimism. However, in order to make its graduation to the next level of growth and fully exploit its growth potential, 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 remained stagnant at around 24 to 25 per cent of the gross domestic product (GDP) of the country for the last ten years which was far below the level required for a country aiming to be become a middle-income country by 2021 with a growth rate of 10 per cent. The sixth five-year plan (2011-15) of Bangladesh targets a GDP growth of 8 per cent by the end of the plan period. This requires that the total investment has to grow by 8.1 per cent per year and the share of investment in GDP has to be 32.5 per cent by fiscal 2015. Low domestic investment has been a matter of concern as it holds back foreign investment as well.
In addition to the amount, the features of FDI, such as the type and the concentration are also important for Bangladesh at this phase of its 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. Other sectors such as agriculture, construction and services receive nominal FDI. In 2011, manufacturing sector was the highest recipient at 37.44 per cent of total FDI, while the construction sector received the lowest with a share of only 0.04 percent (Table 1). 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 USD 1 billion mark for the first time. This however, plunged to USD 700 million in 2009 and rose slightly to USD 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 per cent since 1996. These include the UK, the USA, the Netherlands, Norway, Egypt, Singapore, South Korea, Hong Kong and Japan.
Like many other low income countries, against the lower than expected level of FDI inflow, its outflow has been another concern for Bangladesh. This has been due to huge repatriation of profit, dividend and income by foreign companies, particularly by the oil companies. As a result, the net flow of FDI has rather been low; in some years it was in fact negative. A UNDP study also refers to transfer pricing by foreign companies as a way of resources outflow from countries, including Bangladesh. The Centre for Policy Dialogue (CPD) has also brought out a study and showed how the country is being deprived of its revenue due to transfer pricing.
Thus a two-pronged approach has to be followed to attract FDI to Bangladesh. The first issue is how to be more proactive to bring higher FDI to the country through removing the bottlenecks on its way. And the second one is how to change some of the negative features of FDI and make it more effective.
While discussing the impediments to bringing FDI into the country, a host of issues are always raised which range from infrastructural constraints to bureaucratic complexities to corruption. However, the crux of the problem does, in fact, lie in three broad areas. First is the limited access to physical infrastructure, particularly supply of gas and electricity. This 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 being able make any headway towards new investment. In recent times, the rise in FDI has been observed mainly in the export processing zones since there is little or no gas and electricity supply constraint as opposed to the lack of or limited access to these utilities in the domestic tariff area. In order to overcome infrastructural bottlenecks, there is a need for more aid for productive capacity. However, effective use of these funds has to be ensured which presupposes the removal of corruption. Public-private infrastructure development policy can also be a powerful tool to tackle the supply side constraints.
The second bottleneck is the culture of confrontational politics, which 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. The recent violence and political intolerance can only add to the scepticism of potential investors.
The third 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, dearth of effective implementation of regulations and policies, and discriminatory incentive packages act as stumbling blocks in bringing in FDI to the country.
FDI can supplement the local effort 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 called '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. As mentioned earlier capital flight, repatriation of profit and transfer pricing can make the net inflow of FDI insignificant having no visible impact on the economy. 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 for the short and long terms. 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 2011, RMG was the single highest sector to receive FDI. However, other export oriented sectors such as ceramics, frozen food, leather, agribusiness, pharmaceuticals and ship building should also get priority for FDI.
At this point in time it will be more 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, building, cities and energy. As the global attention is increasingly being drawn towards the adoption of a green growth strategy, particularly in the context of the Rio+20 conference of the United Nations in Brazil in June 2012, countries have to gradually comply with such requirements. It is time that Bangladesh develops a demand driven rather than a supply driven strategy for bringing FDI. In doing so contemporary concerns such as the green growth have to be incorporated in policies. Unfortunately, issues of technology transfer and research and development (R&D) 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. This is however, the key for resorting to the proposed green growth strategy and policy makers need to focus on it sooner rather than later. For a steady and long lasting flow of FDI having an impact on the sustainable development of the country, regulatory framework has to be complemented not only with strong oversight mechanism but also with innovative ideas and initiatives.
Fahmida Khatun is an economist and the Head of Research at the Centre for Policy Dialogue. Email: firstname.lastname@example.org