A new approach to attract FDI in Bangladesh

A new approach to attract FDI in Bangladesh

Md Joynal Abdin

The Financial Express on October 04, 2011

Not only the least developed countries (LDC), but also developed economies are offering special incentives to attract Foreign Direct Investment (FDI) inflow. This is because FDI brings some special benefits to the host country.

FDI brings access to international market: A Multi-National Corporation (MNC) has market shares in various countries. It focuses on the existing market to export products from its new destination. As a result, local competitors can get access to that market.

FDI brings access to foreign sources of supply: A local firm can also get international sources of supply of quality raw materials in a competitive price like the MNC.

FDI brings management know-how: Multinational corporations have a proven managerial expertise which leads them to success. These managerial practices are transferred to organisations of the host country.

FDI facilitate transfer of knowledge and technologies into the host country. Knowledge may be relevant to product or process or marketing techniques. Technology transfer facilitates product diversification and up-gradation of standards.

FDI generates employment which results in skill development of the native labour force, supervisors and managers. Finally, FDI creates competitive business environment that helps increase efficiency of local firms and make them more competitive.

All of the above issues are positive aspects of FDI. It has some negative aspects as well. If a country cannot deal with FDI efficiently then its negative effects may harm the economy.

Rapid capital inflow into the economy through FDI investment may be the cause of rapid capital outflow as profit repatriation and business closing.

When government provides excessive protection to an FDI firm it may give that company a monopoly in business and the market environment may not permit growth of competitors. It is harmful for that sector development in that country. Consumers may have to suffer for such protection to the FDI firms.

Expected technology transfer may not occur in the absence of technology transfer-friendly policy framework.

Excessive incentive to the FDI firms may be harmful to the domestic competitors, if level playing field is not ensured by adequate policy guidelines.

Footloose companies may stay as long as the cost is low. Their repatriation or outflow may create economic crisis in the host country.

Local firms may learn unethical business practices from the FDI firm to avoid tax and duties.

After all these criticism, FDI is desirable to all LDCs and developing countries to upgrade their economies. As a result, host countries are designing their FDI-friendly policy framework with incentive regimes.

Bangladesh is offering a very attractive FDI-friendly policy regime along with 100 per cent foreign ownership, 100 per cent repatriation facilities, investment of earned dividend as FDI, tax exemptions on royalties, tax exemptions on interest on foreign loan, corporate tax holidays, reduced tariff rate in case of import of raw materials and capital machineries, cash incentives and export subsidies in case of selected products, 90 per cent loans against LC, unrestricted exit policy and many more.

The annual actual FDI flow into Bangladesh between 1996 and 2009 in million US$ were 232, 575, 576, 309, 579, 355, 328, 350, 460, 845, 793, 666, 1086, and 716 respectively. During this period, we observed several up and down turns of FDI into Bangladesh. Now, time has come to analyse the causes of these upward flows and downturn of FDI. There were upward trend during 1997, 1998 and 2000 but it fell from 2001 to 2007. After 2007 FDI inflow raised even during the global financial crisis of 2008. To study the causes, we may go through the policy changes, internal business environment, and global market access facilities for Bangladesh and government initiatives to attract FDI into Bangladesh. After identifying the reasons behind these up and downturn, measures can be taken to avoid repetition of such down turn in case of FDI.

From 1977 to 2010, the highest amount of FDI came into Bangladesh from Saudi Arabia (KSA) $2275.66 million followed by Norway $1651.70 million, USA $1045.67 million, Japan $911.37 million, UK $687.66 million and Malaysia $569.53 million. From the sectoral analysis, we observed that the service sectors attracted $4575.90 million, the highest amount of FDI, followed by the chemical sector at $1985.93 million, textile $221.25 million, agro-based industries $154.29 million and the engineering sector $38.96 million.

FDI may enter a country in various modes like greenfield investment, acquisition/merger, brownfield investment, sales office, representative office and non-equity form of investment. A foreign company invests in a country with different motives like market seeking motive, resources/asset seeking motive, efficiency seeking motive, and cutting cost motive etc. FDI regulators in a country have to be aware that with which motive the firm wants to invest in a host country. The First two types of motives mentioned above may harm the host country in the long run. So, such companies should not be encouraged. The second and third and fourth motive seekers may be encouraged to invest.

Bangladesh is offering many incentives to attract FDI. But we observe that these have failed to attract adequate inflow of foreign investments. So we should think of an alternative approach. It may be the ‘Investor Targeting’ model.

Steps of investor targeting model may be as follows: Identifying potential sectors for investment; target at least five sectors considering special national strengths and growth potentials; target a long initial list of trans-national companies (TNCs) operating in the targeted sectors; targeted sectors may be declared as special investment sector (SIS) but targeted TNCs shall not be disclosed; developing specific projects by disclosing types of investment desire like greenfield, joint-venture or PPP etc; Identify key executives of the targeted companies and companies which desire to expand into the host country and begin corporate negotiations to bring the targeted companies into the targeted sectors of the host country.

The investment promotion agencies of Bangladesh like the Board of Investment (BoI) and BEPZA may think of this model to develop few more sectors to reduce dependency on a single one i.e. readymade garment sector (RMG). If our mindset changes from a regulator into a facilitator then this model can be implemented for the sake of economic development of Bangladesh. Thus, employment generation, technology transfer, and increased labour productivity, innovation and upgrading managerial efficiency may be achieved. Economic growth may be faster and Bangladesh may be a middle income country by 2021.

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Published by

Md. Joynal Abdin

Development Researcher, Columnist and Author

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