Merits and Demerits of Foreign Direct Investment

Merits and Demerits of Foreign Direct Investment

Md. Joynal Abdin

The Daily Sun on May 26, 2017

 

There are significant reserves of foreign currency in Bangladesh. It is mounting up during the last few years. At the same time, we have a good amount of unutilised money in the banking system. It seems good to listen that we are becoming a wealthy nation with handsome cash in hand. But till now our investment in percentage of GDP is about 29%. It is 56% in Bhutan, 33.25% in India. Bangladesh’s investment in percentage of GDP is increasing day by day but the growth rate is too slow.

It is a matter of investigation whether foreign currency reserve and unutilised cash in banking system is mounting because of this poor performance in investment or not. In terms of attracting foreign direct investment (FDI) we are performing even poorer than the neighbouring or competitor countries. Bangladesh earned USD 1191, 1726, 1432, 1830 and 2001 million during the last five fiscal years. It is only 0.98, 1.19, 1.74, 1.47 and 1.73% of the GDP whereas India earned FDI of 2.00, 1.31, 1.52, 1.70 and    2.11% of its GDP during the last five years. Vietnam got FDI 5.48, 5.37, 5.20, 4.94 and 6.10% of its GDP. The Maldives received FDI 17.29, 9.05, 12.91, 10.77 and 8.70% of its GDP during the last five years.

Let’s have a look at the benefits of receiving FDI into a developing country like Bangladesh. FDI could offer the following benefits to its host country:

1    Increasing supply of foreign currency and channelise international sources of industrial funds;

2    Increases employment opportunity and help to reduce unemployment rate;

3    Increases skills of the host country’s labour and facilitate technology transfer;

4    Increases managerial knowledge of the host country’s professionals;

5    Foster economic growth, export earnings;

6    Introduces products standardisation and international exposure of other products;

7    Provides corporate tax to the government and contribute in revenue growth;

8    Creates a competitive business environment and productivity improves with the competition;

9    Develops international channel of distribution;

10    Assists in adopting international standard policies and creates a global business regime;

11    Contributes to development of backward and forward linkage local enterprises and

12    Assists in improving living standard of the stakeholders through different social responsibility measures.

Bangladesh is fighting with the development barriers like unemployment, poverty reduction, enlarging product basket, enlarging export basket etc. since its independence. It achieved significant economic advancements but till we have scope to grow further. Therefore, the government attaches the highest priority to industrialisation of the economy by any means. Already we have eight Export Processing Zones (EPZ), 78 Industrial Estate developed by BSCIC to host investment. Furthermore, the government is progressing to establish 100 Special Economic Zone (SEZ) in Bangladesh. All these arrangements are to host investment either from local or foreign sources. Bangladesh Investment Development Authority (BIDA) has been restructured by merging the Board of Investment (BoI) and Privatisation Commission together. BIDA is organising conferences, seminars, road shows abroad to draw attention of the foreign investors. The government declared a long list of fiscal and non-fiscal incentives to boost up the investment movement. But till now Bangladesh’s performance in FDI attraction is considered poor. It is because a number of other factors like good governance, political stability / understanding among the political parties, security and safety of investment, law and order situation, availability of industrial logistics, hassle-free business registration and licensing etc. are involved with an investment decision making.

Now Bangladesh has to go for a comprehensive investment services like one stop service, approaching foreign investors with specific project proposals, justification of investment policies and revision (if necessary), establishment of sector specific technical and engineering institute, establishment of sector specific testing laboratories, signing free trade agreements with existing and potential export destinations, reducing business licenses and registration requirements, activating BIDA with own manpower instead of the cadre officials deployed in deputation to activate the investment attraction measures.

Bangladesh has everything to be a good destination for foreign investment. It is located at the heart of South Asia, corridor between SAARC and ASEAN countries. It has a large number of domestic consumers. Purchasing power of local people is increasing day by day with economic growth of the country. Bangladesh has a good number of sectors to invest profitably with supply of enough manpower in competitive cost. The government keeps assisting the investors with a long list of fiscal and non-fiscal incentives. Finally export items of Bangladesh are enjoying duty-free and quota-free market access to most of the export markets other than the USA. All the LDC facilities under the WTO arrangement are enjoying by an entrepreneurs while doing international trade with Bangladesh. Therefore, Bangladesh could be considered as one of the most attractive locations to relocate global business corporations to the EPZs and SEZs being developed by the government.

It is for sure that Bangladesh needs foreign investment to boost-up its economy but we must remember that there are some adverse effects of FDI too. For example, FDI in some sectors could have an adverse effect on local employment sector. For better understanding we could imagine a scenario where a large corporation establishes a highly sophisticated readymade garment factory here in Bangladesh, where most of the tasks are completed by robotic technologies instead of human labour. Its productivity is much higher than human labour and product cost is also lower. In such cases, local factories will lose its market share. After a certain period it could be seen that local factories are reducing their manpower to adjust with the situation. Large number of people loses their employment due to that large investment. Similarly extreme competition from an FDI company may be the cause of death to many local SMEs. Repatriation of a large FDI conglomerate could have an adverse effect on foreign currency reserve or balance of payment of a country. Therefore, we must consider all these possible adverse effects of FDI into the local economy and adopt legal framework to mitigate these threats.

Finally, we could state that, Bangladesh needs FDI to functionalise its upcoming SEZs and generate employment for the growing number of job seekers. But we must reserve few product and service sectors for the local entrepreneurs. Welcoming campaign for FDI has to be increased and equipped with enough precautionary measures. Adequate preparations, practical drive and a business friendly local business environment could encourage the investors to invest here in Bangladesh. We have everything to become a middle income country by 2027 if our government, political leaders, decision makers play respective role accordingly. Otherwise piecemeal investment drive will not give us complete output up to the expectation.

Investment: Policy, practice and present scenario

Investment: Policy, practice and present scenario

Md. Joynal Abdin

The Independent, 14 February 2014

Bangladesh is a country with enormous potentials to grow faster than any other least developed countries (LDCs) of the world. Its strategic geographic location made it an attractive destination for the ancient merchants up to the modern multinationals. Bangladesh is located at the middle points of two fastest growing economic superpowers, China and India. These two countries have about 2.6 billion populations with quickly increasing purchasing power. Bangladesh has a domestic market of about 15 million consumers. It would be very much cost effective to produce a product in Bangladesh and market into India and China under SAARC and other international duty free arrangements. Besides, these all Bangladeshi products (other than armaments) enjoy complete duty and quota free access to developed countries like EU, Japan, Canada and Australia. Bangladesh is a signatory to the Multilateral Investment Guarantee Agency (MIGA); Overseas Private Investment Corporation (OPIC), USA; International Center for Settlement of Investment Disputes (ICSID); World Intellectual Property Organization (WIPO). It has bilateral agreements to avoid double taxation with 28 countries.

Foreign investment in Bangladesh is 100% safe and secured by the Foreign Private Investment (Promotion & Protection) Act 1980. We have a large number of young and energetic populations with about 59.3% economically active people. According to a recent study conducted by the Japan External Trade Organization (JETRO) factors of production like land, labour, fuel, vehicles, rental and hiring skilled management people etc. are very much competitive here in Bangladesh in comparison with 29 cities and region of Asia. Comparing cities are Seoul, Beijing, Shanghai, Guangzhou, Dalian, Shenyang, Quingdao, Shenzhen, Hong Kong, Taipei, Singapore, Bangkok, Kuala Lumpur, Jakarta, Batam, Manila, Cebu, Hanoi, HO Chi Minh City, Da Nang, Yangon, New Delhi, Mumbai, Bangalore, Chennai, Karachi, Colombo, Dhaka and Yokohama. Bangladesh is offering hassle free remittance of earning by foreign professionals, repatriation facilities of dividend and capital at exit of foreign investors, permanent resident permits on investing US$ 75,000 and citizenship on investing US$ 500,000. Five years tax holidays package for investment at Dhaka and Chittagong divisions and seven years tax holiday’s package for investment at other divisions of the country. There are eight functioning Export Processing Zones (EPZs) namely Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara–EPZ with all sorts of infrastructural, managerial, utilities and other relevant facilities. Already investors from 32 countries invested in these EPZ’s and operating business successfully.

BEPZA is a trustworthy name to facilitate any FDI into the EPZ area. Bangladesh has a diversified potential sectors like agro-based and agro-processing industry, human resource export, ship building, renewable energy, tourism, basic chemicals/dye and chemicals, ICT and ICT based service, readymade garments industry, active pharmaceuticals ingredient industry and radio pharmaceuticals industry, herbal medicinal plant, radio-active (diffusion) application industry (e.g. developing quality of decaying polymer/preservation of food/disinfecting medicinal equipment), development of polymer industry, jute and jute products, leather and leather products, hospital and clinic, light engineering industry, plastic industry, furniture, handicrafts, energy-efficient appliances/manufacturing of electronic goods/ development of electronic materials, frozen fish industry, tea industry, home textiles, ceramics, tissue grafting and biotechnology, jewellery,  toy, container service, warehouse/cold storage, innovative and import substitute industry and cosmetics and toiletries etc. industrial sectors for local/foreign investment. Among the above list the electronics and electricals; software-development; light engineering and metal-working; agro-processing/agri-business/plantation agriculture/ specialist farming/tissue-culture; Leather-making and leather goods; knitwear and ready-made garments; plastics and other synthetics; healthcare & diagnostics; educational services; pharmaceuticals/ cosmetics/toiletries; designer, aesthetically-challenging, personal wear and effects, etc. could be the most promising sectors for investment. Time comes up to analyze with all these attractive facilities how much FDI does Bangladesh get in last five years? What is the trend of local investment at the same period? It is to be noted here that FDI inflow to Bangladesh has traditionally been lower, even compared with other South Asian countries. Considering FY 1996-97 as the base year, the statistics reveals that FY 2011-12 might be a net FDI receipt of USD 806.52 million. Statistics shows that Bangladesh received $1.29 billion inward FDI in 2012. After FY 2008-09, FDI as a percentage of GDP started to decline sharply. In FY 2010-11, the amount of FDI and GDP were Tk. 55.45 billion and Tk. 7874.95 billion respectively against Tk. 63.16 billion and Tk. 6943.24 billion of FY 2009-10. FDI as a percentage of GDP started to decline means our economy is growing based in local investment. It has both positive and negative effects. Therefore we could only state that, FDI brings technical knowledge, technological advancement and managerial excellence into a country.

Bangladesh economic review 2013 shows that, the amount of total investment from 2008-2009 FY to 2012-2013 FY is raising BDT 1498.4 bn, 1695.1 bn, 2003.8 bn, 2436.9 bn and 2786.1 bn respectively. The same statistics show that current growth rate of government investment is higher than that of the private sector investment. Does it mean that the private sector has limited capacity to investment? Many expert opinions say that private sector is taking time to take decision regarding investment due to current political instability, unrest and violence in the country.

Without a stable compromising democratic environment it’s quite difficult to ensure expected return on investment. Therefore both local and foreign investors are observing the situation before investing into Bangladesh. Cost of wages and other factor of production in many developing countries including China, India, Singapore, Korea, etc. are rising rapidly.

As a result investors are considering relocation of factories into a suitable destination. Bangladesh could be the best option if we could overcome few barriers of investment existing in Bangladesh economy. The first and most important barrier of investment in Bangladesh is the violent political condition. Our political parties are fighting with each other to ensure their party interest either to remain in power or go into power. Their current behaviour states that they are doing politics for increasing their wealth by hook or by crook. Political parties are trying to remain in / go into power by themselves without proper mandate of the general people.

Absence of dialogue and compromising tendency between the parties made the situation more complex. Without a stable and truly democratic condition investment climate will not be improved. Foreign investors will not come forward rather rate of repatriation will be increased. At the same time local investors will go for invest their money abroad by any channel. Corruption is the second most important barrier of investment into Bangladesh. The recent corruption cases of Hall Mark, Bismillah, Destiny, etc. may destroy the strength of the economy. Bureaucratic complexity to get regulatory permissions and required certification are frustrating the small and medium entrepreneurs. Large entrepreneurs could manage the bureaucracy through political pressure or offering bribe but small and medium entrepreneurs are getting trouble in this condition. Law and order enforcing agencies, regulatory agencies including police and customs have to be pro-business. Currently small business are being hampered by the dishonest members of those agencies.

Government has to be proactive to overcome other barriers of investment like irregular/inadequate supply of power, higher rate of interest on bank loans in comparison with our major competitor countries, inadequate availability of raw materials, absence of clear-cut government policies regarding many sectoral and cross-sectoral issues, shortage of skilled technicians and workers, limited research and development facilities, poor physical infrastructure and high transportation costs, unavailability of information about market opportunities and requirements, etc.  Finally, we have to remember that Bangladesh is competing in a global system of free market economy. It has to negotiate and maintain a congenial relationship with its major and potential export destination countries to ensure smooth flow of export. Remittance is the second highest source of earning foreign currency into Bangladesh.

It is another most important role of our government to maintain a friendly relationship with major and potential manpower importing countries to ensure proper placement of our human resources into those markets. There are a number of business sectors in Bangladesh waiting to take off like the readymade garment sector. Each of those sectors can earn another USD 20 bn for us very shortly. Therefore we would like to request the government and other political leaders to look forward into the enormous economic potentials of Bangladesh rather than remaining/getting into the power only.

Political stability key to improving investment climate

Political stability key to improving investment climate

 

Md. Joynal Abdin

The Financial Express on February 03, 2014

Bangladesh is a country with enormous potential to grow faster than any other least developed countries (LDCs) of the world. Its strategic geographic location has made it an attractive destination for the ancient merchants as well as the modern multinationals. This is because Bangladesh is located at the middle point of two fastest growing economic superpowers China and India. These two countries have about 2.6 billion populations having increasing purchasing power.

Bangladesh has a domestic market of about 15 million consumers. It would be very much cost-effective to produce a product in Bangladesh and market it to India, China, and other countries under the SAARC and other international duty-free arrangements. Besides, all Bangladeshi products (other than armaments) enjoy complete duty and quota-free access to developed countries including the member-states of the European Union Japan, Canada and Australia. Bangladesh is a signatory to the Multilateral Investment Guarantee Agency (MIGA), the Overseas Private Investment Corporation (OPIC), the USA, the International Center for Settlement of Investment Disputes (ICSID), and the World Intellectual Property Organization (WIPO). It has bilateral agreements with 28 countries to avoid double taxation.

Foreign investment in Bangladesh has been made 100 per cent safe and secure by the Foreign Private Investment (Promotion & Protection) Act 1980. We have a large number of young and energetic people with about 59.3 per cent economically active people. According to a recent study conducted by the Japan External Trade Organisation (JETRO), factors of production like land, labour, fuel, vehicle rental and hiring skilled management people, etc. are very much competitive in Bangladesh, compared to other countries of Asia.

Bangladesh offers hassle-free remittance of earnings by foreign professionals, repatriation of dividend and capital after departure of foreign investors. It also offers permanent resident permits on investing US$ 75,000 and citizenship on investing US$ 500,000. The government has ensured five-year tax holiday package for investment in Dhaka and Chittagong divisions and seven-year tax holiday package for investment in other divisions of the country. There are eight functioning Export Processing Zones (EPZs) namely, Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara with all sorts of infrastructural, managerial, utilities and other relevant facilities. Already 32 countries have invested in these EPZs and are operating businesses successfully. The BEPZA is a trust-worthy organisation to facilitate any FDI in the EPZs.

Bangladesh has diversified potential sectors like agro-based and agro-processing industry, human resource export, ship-building, renewable energy, tourism, basic chemicals/dye and chemicals, Information and communications technology (ICT) and ICT-based service, readymade garment industry, innovative and import substitute industry and cosmetics and toiletries, etc. for local/foreign investment.

Time has come to analyse how much Bangladesh could attract foreign direct investment (FDI) in the last five years with all these attractive facilities. What is the trend of local investment at the same time? It is to be noted here that FDI flow to Bangladesh has traditionally been lower, even compared to other South Asian countries. Considering FY 1996-97 as the base year, the statistics reveals that in FY 2011-12, Bangladesh received net FDI to the tune of US$ 806.52 million. Statistics shows that Bangladesh received $1.29 billion inward FDI in 2012.  After FY 2008-09, FDI as a percentage of GDP (gross domestic product) started to decline sharply. In FY 2010-11, the amount of FDI and GDP were Tk. 55.45 billion and Tk. 7874.95 billion respectively against Tk. 63.16 billion and Tk. 6943.24 billion of FY 2009-10. The FDI as a percentage of GDP has started to decline. It means our economy is growing based on local investment. It has both positive and negative effects. But the FDI brings technical knowledge, technological advancement and managerial excellence into a country.

The Bangladesh Economic Review 2013 shows that the current growth rate of public investment is higher than that of the private sector. Does it mean that the private sector has limited capacity to invest? Many experts say that the private sector is taking time to take decisions regarding investment due to current political instability, unrest and violence in the country. Without a stable democratic environment, it is quite difficult to ensure expected return on investment. Therefore, both local and foreign investors are observing the situation before investing in Bangladesh. Cost of wages and other factors of production in many developing countries, including China, India, Singapore and Korea, are rising rapidly. As a result, investors are considering relocation of factories in a suitable destination. Bangladesh could be the best option if we could overcome a few barriers of investment existing in the economy.

The first and most difficult barrier to investment in Bangladesh is political instability. Absence of dialogue and compromising tendency among the parties has made the situation more complex. Without a stable and truly democratic situation, the investment climate will not improve. At the same time, local investors will go for investment of their money abroad.

Corruption is the second biggest barrier of investment in Bangladesh. Recent corruption cases like Hall-Mark, Bismillah, Destiny, etc. have damaged confidence for investment in the country. Bureaucratic complexities in getting regulatory permission and required certification are frustrating the small and medium entrepreneurs. Big entrepreneurs could manage bureaucracy through political pressure or offering bribes but small and medium entrepreneurs are facing trouble in this regard. Law-enforcement agencies, regulatory agencies, including police and Customs, have to be pro-business. Currently, small businesses are being hampered by a dishonest section of these agencies.

The government has to be proactive to overcome other barriers of investment. These are irregular/ inadequate supply of power, high rate of interest on bank loans in comparison with our major competitor countries, inadequate availability of raw materials, absence of clear-cut government policies regarding many sectoral and cross-sectoral issues, shortage of skilled technicians and workers, limited research and development facilities, poor physical infrastructure and high transportation costs, unavailability of information about market opportunities and requirements etc.

Finally, we have to remember that Bangladesh is competing in a global free market. It has to negotiate and maintain a congenial relationship with its major and potential export destination countries to ensure smooth flow of exports. Remittance is the second highest source of foreign exchange earnings by Bangladesh. It is another most important role of our government to maintain friendly relations with major and potential manpower-importing countries to ensure proper placement of our manpower in those markets. There are a number of business sectors in Bangladesh waiting to take off like readymade garment. But such opportunities have to be seized.

Using Diplomacy as an Effective Tool of Economic Development

Using Diplomacy as an Effective Tool of Economic Development

Md. Joynal Abdin

The Diplomacy & Foreign Affairs , New Delhi, India , September 2013

The word diplomacy provides a picture of a group of people wearing official suits, ties, shining shoes and living a prestigious life abroad. They are the hubs to maintain good relationship among states, negotiating conflict or facilitating further deeper relationship.

Use of diplomats to achieve mutual interest started from ancient age. Use and forms of diplomacy in ancient China, ancient India, ancient Greece, Middle East, Europe was different based of aim and objective. Previously (informal diplomacy) a group of negotiators / diplomats were used to send into a particular states / region with a specific task. They used to negotiate the single issue with their counterparts. But today use of diplomatic mission (formal diplomacy) is more popular around the world.

We can classify diplomacy based on the objective and nature of tasks like peace-making, peace keeping; trade negotiating, war, partnership in economic development, cultural exchange, environment, and human rights etc. issues. From other aspect we are observing aggressors / allies to boycott aggressors, soft power diplomacy based of relationship and respect, gun board / military power diplomacy, public diplomacy and nuclear diplomacy in practice. From all the above types and forms of diplomacy we would like to discuss with the economic diplomacy and how it can be used as a tool of economic development.

Least developed countries (LDCs) like Bangladesh are suffering from scarcity of resources, over pressure from population growth, unemployment, extreme poverty etc. Existing internal resources are not enough for developing these nations by themselves. But without further economic development it is impossible to ensure basic needs of human life (food, cloths, shelter, education and health care). The goal of foreign policy of an LDCs country like Bangladesh may be shifted from existing “is to develop and maintain friendly relations with other States and foster cooperation with developed, developing and least developed countries, and various regional, sub-regional, political and economic groups” (goal of Bangladesh foreign policy) into ” is to develop and maintain friendly economic / trade relations with other States and foster cooperation with trade, commerce and manpower placement to developed, developing and least developed countries, and various regional, sub-regional, political and economic groups”.

That means the goal would be developing and maintaining friendly economic / trade relations with other states. It is necessary to deploy trade and business related professionals for better achievement in economic diplomacy. Usually LDC countries like Bangladesh use same set of negotiators in every platform. As a result they become hub of everything but master in none. Time have to develop different set of negotiators specialized in different field like (1) bilateral trade negotiators, (2) regional trade negotiators, (3) multilateral trade negotiators master in different WTO agreements, (4) separate set of negotiators for negotiating with development partners / donors, (5) trade promoters in the missions in aboard, and (6) supreme council of negotiators for coordinating all these platforms and harmonizing and directing uniformity with the national foreign policy.

To get a strategic platform to exploit the coming multilateral regime countries like Bangladesh has to priorities country promotion and branding, trade promotion, investment attraction, obtain and utilize new technology, besides managing better external economic assistance.

For attracting foreign investment countries needs to project a positive image in abroad. Country Branding would be essential, because without a brand image it would not be easy to get foreign investment. The government should promote the country at abroad, which is a primary action of economic diplomacy. The image of a country affects its trade, global politics, and international relations.

Economic diplomacy has to promote to mobilize investment, promote tourism and better management of national image. Investment mobilization would call for a global presence of the competent companies or internationalization of the local companies. Develop its tourist spots and their infrastructure to attract foreign tourists. For projecting a positive national image abroad, the political leaders have to be responsible about what they say regarding the country. They should know that the world media report what they say. Their statements can and do damage the image of the country. To build a good image country may need promotional activities in the world media.

The ministry of foreign affairs, the embassies and diplomats of the country are responsible for the projection of a ‘correct’ image of the country abroad. But their capacity to project a positive country image or change the undue negative perception may be limited. The diplomats abroad have to be proactive rather than reactive. The foreign ministry has to give importance to promote trade and development by organizing trade fairs, participating foreign exhibitions, organizing investors’ conferences and holding up B2B dialogues etc. The missions abroad have to be facilitators of joint business councils, joint chambers, joint trade facilitator taskforce etc. between the countries.

A positive national image can better promote products and services abroad and help to create a brand image of the products in the consumers’ mind. It would facilitate better market access, salesmanship, networking and regulatory (customs & procedural) management would facilitate the export of commodities, services and projects. Value creation of products is essential.

The missions abroad have to identify the demand for his country products in the host market and facilitate B2B interactions to promote export to that country. A leading least developed country (LDC) like Bangladesh should go for economic diplomacy to attract foreign investment.

Large unemployed population is a major problem in most of the LDCs. But this burden may be transform into resources if proper arrangement can be done through manpower export. Remittance is one of the main sources of foreign currency in many countries. Population growth of many developed countries is negative. Over populated countries like Bangladesh could negotiate with those countries to send professionals and semi-skilled workers to those markets. Diplomatic missions in the respective country has a great job to collect demands for professional / workers and making arrangement of proper placement of native people there. Thus economic diplomacy could increase manpower export as well as foreign remittance earnings of a country.

Ensuring proper education and training up people on latest technical know how is also important for proper growth of a country. Many developed countries are providing scholarship in higher education / short training / diploma facilities to the LDC citizen. A sincere diplomatic mission can facilitate more representative of respective country in affording these options. Thus he can play a vital role in technology transfer and up gradation and transfer of latest knowledge.

It needs technology for rapid development and industrialization. When TRIPS agreement will come into force on LDCs, then absorbing foreign technology will be costly and difficult to achieve. Before mandatory enforcement the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) LDCs should concentrate on obtaining it (technology) for industrialization.

A major problem of LDCs country’s product quality is inferior; as a result they failed to compete with superior qualitative products in local or export market. This is because they do not have upgraded technology. So facilitating technology up-gradation may boost up production. There are several international bodies working to facilitate technology transfer and technology up-gradation. Diplomatic mission to those countries can play a vital role to tie up local bodies with that international technology transfer organizations.

Industrialization would need infrastructure development, better utility services and other logistics support. All these require money. The government has to mobilize resources from domestic as well as foreign sources. The World Trade Organization’s (WTO) Aid for Trade to the LDCs could be a good source. Inviting foreign investment in major local infrastructure project may be another approach to build industrial infrastructure like deep sea port, sea port, highways, collocated industrial park etc. Maintaining good relations with the donor agencies / countries is a major task on the negotiators in this regard.

Replicating best practices could be a good means for development. It is quite easy to replicate any development models rather than inventing the same. Collecting best practices and disseminating to concern native agencies may be significant tasks of the diplomats. Ambassadors particularly to the countries developed with similar background could be careful to know best practices there and facilitate replication in his home country.

From the above discussion it is quite clear that, the diplomatic missions of a country have so many important roles to play for quick sustainable economic development of the country. Economic diplomacy could be a very effective tool to foster development of a nation.

Pursuing economic diplomacy for development

Md. Joynal Abdin
Published by the Financial Express on 31 August 2013
 
The word ‘diplomacy’ usually provides a picture of a group of people wearing official suits, ties, shining shoes and living a prestigious life abroad. They are the agents to maintain good relations among states, negotiating peace in a state of conflict or facilitating further mutually beneficial relationship.

Use of diplomacy to achieve mutual interests started since ancient times. Its use and forms in ancient China, India, Greece, Middle East and Europe were different on the basis of aims and objectives. Previously in informal diplomacy, negotiators/diplomats were used to be sent to a particular state/region with a specific task. They used to negotiate a single issue with their counterparts. But today use of diplomatic missions (formal diplomacy) is more popular around the world.

We can classify diplomacy on the basis of the objective and nature of tasks like peace-making, peace keeping, trade negotiation, partnership in economic development, cultural exchange, environment, human rights and other issues.

Least developed countries (LDCs) like Bangladesh are suffering from scarcity of resources, pressure from population boom, unemployment, extreme poverty etc. Existing internal resources are not enough for developing these countries. But without further economic development it is impossible to ensure basic needs of human life (food, cloths, shelter, education and health care). The goal of foreign policy of Bangladesh may thus be shifted to develop and maintain friendly economic/trade relations with other countries and foster cooperation in the field of trade, commerce and manpower placement in developed countries through various regional, sub-regional, political and economic groups.

It means countries like Bangladesh should pursue economic diplomacy more vigorously and for this to click, we need trade- and business-related professionals. Usually LDCs like Bangladesh employ the same set of negotiators in every platform. As a result, they become masters of none. The country needs to develop different sets of negotiators, specialised in different fields like bilateral trade, regional trade and multilateral trade conversant with different WTO agreements, experts for negotiating with development partners/donors, trade promoters in missions aboard, and form an apex council of negotiators for coordinating all these platforms and harmonising keeping uniformity with the national foreign policy.

To get a strategic platform to exploit the multilateral regime, the country has to prioritise branding Bangladesh.

For attracting foreign investment, the country needs to project a positive image abroad. Branding Bangladesh is essential because without a brand image it would not be easy to get foreign investment. The government should promote the country abroad, which should be the primary part of economic diplomacy. The image of a country is very important in the field of trade, global politics, and international relations.

Economic diplomacy can be used to mobilise investment, promote tourism and focus better on the national image. Investment mobilisation would call for a global presence of competent companies or internationalisation of local companies. We need to develop its tourist spots and their infrastructure to attract foreign tourists. For projecting a positive national image abroad, the country’s political leaders have to be responsible about what they say regarding their own country. They should know that the world media report what they say. Their unguarded statements can damage the image of the country. To build a good image, Bangladesh may also need promotional activities in the world media.

The Ministry of Foreign Affairs, the embassies and diplomats of Bangladesh are responsible for projection of a ‘correct’ image of the country abroad. But their capacity to project a positive image or change the undue negative perception may be limited. The diplomats abroad have to be proactive rather than reactive. The Foreign Ministry has to give importance to promote trade and development by organising trade fairs, participating in foreign exhibitions, organising investors’ conferences and holding up B2B (business-to-business) dialogues etc. The missions abroad have to be facilitators of joint business councils, joint chambers, joint trade facilitator taskforces etc. between the countries.

A positive national image can better promote products and services abroad and help create a brand image of our products in the consumers’ minds. It would facilitate better market access, salesmanship, networking and regulatory (customs and procedural) management would facilitate export of commodities, services and projects. Value creation of products is essential.

The missions abroad have to assess demand for Bangladeshi products in the host markets and facilitate B2B interactions to promote exports to those countries.

Ensuring proper education and technical training of people on latest technical know-how is also important for proper economic growth of the country. Many developed countries are providing scholarships in higher education / short training / diploma facilities to the LDC citizens. A diplomatic mission can facilitate more participants from Bangladesh in these opportunities. Thus they can play a vital role in technology transfer.

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.

Why incentives fail to attract FDI?

Why incentives fail to attract FDI?

Md. Joynal Abdin

The Daily Independent on June 22, 2010

Bangladesh is a land of opportunity with cheap hardworking labour force, low utility charges, two sea ports, long-term tax holiday, 100 per cent repatriation facility, and easy access to largest regional market to India and China. Besides, there are monetary and non-monetary incentives available in Bangladesh for foreign direct investment.

There are many investment incentives in the country such as:

Tax exemptions: Generally five to seven years’ tax exemptions are available for many business investments. However, for electric power generation tax exemptions are provided for up to 15 years.

Duty: No import duty is applicable for export-oriented industry. For other industries it is 5 per cent ad valorem.

Income tax: Double taxation can be avoided in most cases as the country benefits from many bilateral investment agreements. Exemptions of income tax up to three years for the expatriate employees in industries are specified in the relevant schedules of the income tax ordinance.

Remittances: Facilities for full repatriation of invested capital, profits and dividends are the norm in most situations.

Exit: An investor can wind up an investment either through a decision of an annual or extraordinary general meeting. Once a foreign investor completes the formalities to leave the country, he or she can repatriate the net proceeds after securing proper authorization from the central bank.

Ownership: Foreign investors can set up ventures, either wholly owned or in joint collaboration with local partners.

Investing in the stock market: Foreign investors are allowed to participate in initial primary offerings (IPOs) and rights issues without any regulatory restrictions. Also, incomes from dividends are exempted from payment of tax.

Incentives and facilities for the investors: Industries are eligible for tax holidays for the following periods according to the location of the establishment. The period of tax holiday is calculated from the month of commencement of commercial production or operation of the industrial undertaking.

The eligibility of a tax holiday is to be determined by the National Board of Revenue (NBR). The tax holiday facility is applicable to industries set up in Bangladesh before June 30, 2000.

Accelerated depreciation in lieu of a tax holiday is allowed at the rate of 80 per cent of actual cost of machinery or plant for the year in which the unit starts commercial production and 20 per cent for the following years. The rate of depreciation is 100 per cent for years specified by the NBR.

Concessionary duty on imported capital machinery Import duty at the rate of 7.5 per cent ad valorem is payable on capital machinery and spares imported for initial installation or BMR/BMRE of the existing industries. The value of spare parts should not, however, exceed 10 per cent of the total cost and freight value of the machinery. Out of this, 7.5 per cent rate of duty payable, export-oriented industries and industries in the underdeveloped areas, may enjoy a further concession of the import duty in the following manner:

Value Added Tax (VAT) is not payable for imported capital machinery and spares. Duties and taxes on import of goods which are produced locally will be higher than those applicable to import of raw materials for producing such goods.

Special incentives are provided to encourage non-resident Bangladeshis for investment in the country. Non-resident Bangladeshi investors will enjoy facilities similar to those of foreign investors. Moreover, they can buy newly issued shares/debentures of Bangladeshi companies.

A quota of 10 per cent has been fixed for non-resident Bangladeshis in primary shares. Furthermore, they can maintain foreign currency deposits in the Non-resident Foreign Currency Deposit (NFCD) account. Encouraging export-oriented industries is one of the major objectives of the Industrial Policy in place, and as such the government ensures all support and co-operation to the exporter as per the export policy.

Industrious low-cost workforce Bangladesh offers a well-educated, highly adaptive and industrious workforce with the lowest wages and salaries in the region. 57.3 per cent of the population is under 25, providing a youthful group for recruitment. The country has consistently developed a skilled workforce catering to investors needs. English is widely spoken, making communication easy.

Strategic location Bangladesh is strategically located next to India, China and ASEAN markets. As the South Asian Free Trade Area (SAFTA) comes into force, investors in Bangladesh will enjoy duty-free access to India and other member countries. Bangladesh has proved to be an attractive investment location with its 144 million populations and consistent economic growth leading to strong and growing domestic demand. Energy prices in Bangladesh are the most competitive in the region. Transportation on green compressed natural gas is less than 20 per cent of the diesel price.

Bangladesh enjoys tariff-free access to the European Union, Canada, Australia and Japan. In Europe, Bangladesh enjoys 60 per cent of the market share and is the top manufacturing exporter amongst 50 least developed countries. Bangladesh offers the most liberal FDI regime in South Asia, allowing 100 per cent foreign equity with unrestricted exit policy, easy remittance of royalty, and repatriation of profits and incomes. Bangladesh offers export-oriented industrial enclaves with infrastructural facilities and logistical support for foreign investors. The country is also developing its core infrastructures, including roads, highways, surface transport and port facilities for a better business environment.

A largely homogeneous society with people living in harmony irrespective of race and religion, Bangladesh is a democratic country enjoying broad bi-partisan political support for private investment.

The legal and policy framework for business is conducive to foreign investment. Special incentives & facilities in EPZ area Fiscal incentives:

1. 10 years tax holiday

2. Duty free import of construction materials

3. Duty free import of machineries, office equipment and spare parts etc.

4. Duty free import and export of raw materials and finished goods

5. Relief from double taxation

6. Exemption from dividend tax

7. GSP facility available

8. Accelerated depreciation on machinery or plant allowed

9. Remittance of royalty, technical and consultancy fees allowed

10. Duty & quota free access to EU, Canada, Norway, Australia etc.

With all these features why Bangladesh is performing poorly, a question often asked by many. This is because bureaucratic red tapes, poor infrastructure, extortions, power and energy crisis and long complex procedures of starting a business.

The offer of wholesale incentives to multinational companies (MNC) for investment in the country is actually disserving the country’s interest and undermining the essence of a policy that should attract higher foreign direct investment.  So, we should change the existing policy prioritizing the areas of national interest for offering incentives.