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.

Trade Organisations in Sustainable Economic Development

Trade Organisations in Sustainable Economic Development

Md. Joynal Abdin

The Daily Sun on April 26, 2017

There is no alternative of individual and institutional income generation for economic development and poverty alleviation of a country. Ensuring employment is the most effective tool for facilitating individual and institutional income generation. There are about 162 million populations in Bangladesh and about 120.70 million of them are in workable age group. For providing employment to such a huge number of populations government has only 1.7 million positions in civil service, a mentionable percentage of this government positions remain vacant forever; for example 18% of government positions are vacant now in Bangladesh. As per a recent report there are 58.10 million people involved with private sector jobs.

There are no exact data regarding the total number of businessmen in the country but it is stated that, there are about 30 million businessmen in Bangladesh. From the above statements we could find out a summery that there are about 37.20 million unemployed people in Bangladesh now.

Another recent report shows that there are more than 3 million higher educated unemployed populations in Bangladesh with 2.2 million newcomers in the job markets every year. It is easier to manage and employment opportunity for a low educated or uneducated youth but difficult to manage a career opportunity for a higher educated one. Uneducated or lower educated manpower could migrate into Middle East as a labour but higher educated youth could not do so. Thus the number of unemployed higher educated people is rising day by day. If such a trend continues for next few years they could be another burden for the society as well as for the nation.

Before meeting a terrible situation of the above mentioned problem we must have to identify a way out of it. The government has to take the issue as a new challenge and come out with appropriate solutions. The government could mitigate this problem with professional education system, skills development through practical training, creating entrepreneurs through entrepreneurial education, creating entrepreneurship friendly policy regime, creating start-up friendly fiscal and economic policies, self-employment oriented education / training, hands-on training for creating freelancers etc. Such types of projects should get the highest priority in the upcoming national budget of the government.

There are few problems which are impossible to solve by individual or organisational initiative. These problems are subject to be dealt with collective power and unity. To apply that collective power of the business community, effective trade organisation is required. There are about five hundred trade organisations in Bangladesh; among these 101 are chamber of commerce (district chambers, metropolitan chambers, joint chambers, international chambers etc.) and about 379 sectoral associations are mentionable. The Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) is the apex institution that represents all the trade organisations of Bangladesh.

FBCCI used to negotiate, cooperate and support the government in enacting trade related policies on behalf of the private sector of the country. It represents all the trade bodies in different committee forms by different ministries, agencies, departments, and other organs of the government. It assists all the 500 trade bodies of the country in holding election and other regulatory purposes. FBCCI used to negotiate budgetary facilities for different sectors, products and customs structures with the national board of revenue (NBR) on behalf of the private sector.

To perform all of the above mentioned duties an efficient and functional FBCCI is our national requirement. To make it functional and effective its current manpower has to be increased, professional skills of existing manpower has to be improved and financial capacity of the federation has to be uplifted. There are many countries in the world where federation / national chambers are getting budgetary support from the government.

But till now FBCCI has to depend upon its members’ subscription, building rental and donation of business community. It is not sufficient to employ and retain efficient professionals and expand its services to the economy of Bangladesh. FBCCI will get its new leadership through the upcoming election in next month. We are hopeful that the new management will take necessary initiative to take the organisation as well as its member bodies into new height and serve the nation better. Competing business leaders are supposed to declare respective election manifesto soon. We would like to offer few recommendations as follows for their consideration and include into the election manifesto for making the federation as well as other trade bodies (chambers and association) for functional and effective:

  1. Taking necessary initiative to get budgetary support for operating FBCCI from the government.
  2. Pursuing the government to involve district chambers closely with the development project implementing in respective district.
  3. Undertaking projects to ensure hassle-free visa facility for the business community in consultation with all the foreign missions working here in Bangladesh. It will increase movement of our foreign trade into a new destination.
  4. Increasing research based capacity of the federation through undertaking visible interventions along with a time bound action plan
  5. Increasing capacity of the federation to undertake projects for private sector development and pursue government and other development partners for funding.
  6. Making the initiative of establishing Entrepreneurship Development Institute (EDI) a reality (initiated earlier but failed to get finance). Indian model of EDI, located at Ahmedabad, could be replicated here in this regard.
  7. Capacity building of different trade bodies to provide business support services, registrations and licenses. Negotiating with the government to hand over trade license, small and cottage industry registration etc. responsibilities to the trade bodies.
  8. Participating in foreign investment / trade fairs with own stall of FBCCI to facilitate B2B business matchmaking.
  9. Establishment of product research and new product innovation centre, testing laboratory, and undertaking product diversification initiative to enlarge export basket.
  10. Perusing the central bank and other ministries of the government to inspire the corporate houses, banks, NBFIs to support FBCCI development 10fund from respective CSR budget.
  11. Developing a research fund for conducting a certain number of systematic researches by the FBCCI research team every year.
  12. Providing FBCCI Award to the best growing company, most employment creator company, most Donor Company, best exporting company etc. to recognise their contribution to the society and inspire them to donate most at FBCCI development fund.
  13. Establishment of FBCCI’s branches in important business hubs at home & abroad and fixation of an FBCCI contact point in relevant ministries.
  14. Opening a news department in FBCCI and all major chambers and associations to assist local entrepreneurs to get quality certification of respective products from respective international or foreign authorities. It will help to get more acceptances of Bangladeshi products to the foreign buyers.
  15. Establishing business incubation centre to support new entrepreneurs, perusing the government for start-up financing.
  16. Establishing technology and engineering institute to produce skilled manpower as per demand of different business sectors.
  17. Motivating government for creating an environment to commercialise local inventions.
  18. Undertaking regular research on different international trade arrangements under the WTO, RTA or BFTA to make local entrepreneurs aware about our trade benefits under different agreements and facilitating to utilise the benefits in international trade.
  19. Playing more visible role in creating freelancers and adopting outsourcing friendly infrastructure in Bangladesh by the government.
  20. Undertaking projects to facilitate adoption and utilisation of e-commerce and e-business facility to make the digital revolution fruitful.

Finally we could state that the private sector has to play a visible role to achieve SDGs by 2030. This role could be played more effectively from a common platform like trade bodies instead of personal or institutional level. Therefore the government has to play its due role for capacity building of the trade bodies. New elected panel of FBCCI leaders could play the role of catalyst here in this regard. A common vision of the business community, government and the development partners is required to ensure sustainable development of the economy and achieving a developed Bangladesh as per our national target.

For sustainable economic development

For sustainable economic development

Md. Joynal Abdin

The Independent on November 3, 2016

 

Contribution of Agriculture, Industry and Service Sector to Bangladesh GDP in 1972 (soon after the independence) was 59.60 6.06 per cent and 34.32 per cent respectively. In the year 1980 contribution of the same sectors to Bangladesh GDP was 31.55 per cent(Agriculture), 20.63  per cent(Industry) and 47.81 per cent(Service). Similarly in the year 2000 contribution of Agriculture reduced into 23.77, industry increased into 23.31 per cent and Service increased into 52.91 per cent to the Bangladesh GDP. Current contribution (2015) of Agriculture further reduced into 15.50, Industry and Service Sectors increased into 28.14 per cent and 56.34  per cent respectively. From the above statistics we could state that, Bangladesh economy is transforming from an agriculture dependent economy into an industry dependent economy. But till now agriculture is the single largest sector for employment generation, agriculture employed 47.5 per cent of total manpower to contribute 15.50%. That means productivity of agriculture sector is lower than that of the other sectors or manpower employed in agriculture sector are underutilized.

As per Labor Force Survey 2010 conducted by the Bangladesh Bureau of Statistics there are 2.6 million unemployed populations in Bangladesh, at the same time another 2 million workable labor force is coming forward per year into the employment market. Employment generation for this large number of unemployed population is a very hard task for any government. Therefore government emphasized upon private sector development and industrialization as an effective tool for employment generation. Development and promotion of labor intensive small and medium enterprise (SME) lead industrialization could offer a better solution to this unemployment problem. If adequate policy, institutional and monetary support is available a large number of this unemployed population could be entrepreneur and employ others too.

Government of Bangladesh have already initiated few industry friendly policies and support through the SME Foundation, Bangladesh Bank, EPB, BSCIC, BITAC, BCSIR, BEPZA, SEZ authority, Ministry of Commerce, Ministry of Industries, finally NCID etc. institutions. Bangladesh is getting dividend of their activities by this time. As a result Bangladesh economy is growing steadily even during the global financial crisis in recent past. But Bangladesh is one of the lowest performing countries in the doing business index till now. According to a recent report Bangladesh positioned 176 out of 190 countries. Bangladesh performed most miserable at registering property (185th), resolving insolvency (151st), starting business (122nd), and paying taxes (151st) etc. indicators. All of these indicators are controllable by good governance. If there is a political commitment of the government that they will not be involved in corruption and will not allow bureaucrats to be corrupted then these problems will be solved automatically.

Bangladesh has capacity to grow even faster than the projections if good governance could be ensured. Proper implementation of existing policies and some new institutional support could lead us easily to a higher middle income country even before 2041. Following institutional support could boost up current transformation of Bangladesh economy and achieve a middle income country faster than ever:

  1. Establishment of an ‘Entrepreneurship Development Institute (EDI)’: Establishing a new institute for entrepreneurship development while we already have about 132 (One hundred and thirty two) universities in Bangladesh could sound as a stupid proposal. We have about 37 public, 92 private, and 3 international universities in Bangladesh. All of the universities are creating skilled, knowledgeable professionals including business graduates, engineers, and doctors etc. to enter into the job market after completing respective degrees. We are enlarging the list of jobseeker every year but not producing job providers academically. Entrepreneurs are just born is an old concept. It is proven that, entrepreneurs can be created through a systematic training, guidance, support and mentoring. Indian government (Government of Guzrat) has established a completely separate types of institute in 1983 (about 33 years back) to produce only entrepreneurs. The Entrepreneurship Development Institute of India is a name of enormous success into its mission. The model has been replicated by many countries including Vietnam, Cambodia, Myanmar and few African countries to establish entrepreneurship development institute. Bangladesh can easily replicate that model to establish an engine of entrepreneur creation. These types of specialized institute to create entrepreneur is also available in many other countries like, Entrepreneurship Institute of Malaysia, Entrepreneurship Institute Australia (EIA), Institute for Entrepreneurship & Enterprise Development (IEED) in UK, The Entrepreneurship Institute of Canada, and Global Entrepreneurship institute (GEI) in the U.S etc. So it is quite clear that, separate institute is required to create job providers i.e. entrepreneurs. Bangladesh government could establish or inspire relevant organizations like SME Foundation or BSCIC to establish “Entrepreneurship Development Institute of Bangladesh”. Development partners could come forward to establish an entrepreneurship development institute here in Bangladesh to produce entrepreneurs the most essential component for private sector development.
  2. Establishment of ‘SME Cluster Development Authority’: Cluster based SME development could be another vital weapon for boosting up the industrialization of Bangladesh. There are 177 SME clusters identified by the SME Foundation throughout the country, of which 129 fall under SME Booster sector and 48 under Non–booster SME sector. There are 69,902 enterprises operating in these 177 clusters employing a workforce of 1,937,809, of which 74 per centare male and the rest 26 per centare female. Total approximate annual turnover in these clusters has been estimated at 295150.66 millions. Clusters were found in 51 districts of Bangladesh. So development of SME clusters could give us another platform of balanced economic development considering geographical locations of these. Undertaking and implementing massive development interventions in these cluster is required to develop and promote the SMEs located there. Government could establish a separate body namely ‘SME Cluster Development Authority of Bangladesh” or establish specialized wing in SME Foundation with adequate budgetary and manpower support for rapid development of SME Clusters. It will increase GDP growth, make Bangladesh self dependent, increase export earnings, generate more employment and finally alleviate poverty sustainably.
  3. Establishment of ‘Sector Specific Engineering & Technology Institute’: Like my 1st proposal this one could sound stupid too. Establishing sector specific Engineering & Technology institute while we are having a number of engineering universities and polytechnics in Bangladesh. But the ground reality is this; there is a long distance between the graduates of those engineering universities, polytechnics and our industry’s demand. Industry needs operators, troubleshooters, technicians of modern machineries currently using in the sectors. While engineering universities and colleges are producing high profile graduates to deserve 5 digit salaries from the first day at job. Therefore it’s time to establish sector specific engineering and technology institutes as per sectoral needs. Currently the government of Bangladesh is helping to establish Bangladesh Institute of Plastic Engineering and Technology (BIPET), similarly we are in need of Bangladesh Institute of Agro-machinery engineering and technology, Bangladesh institute of ship building technology, Bangladesh institute of leather goods diversification technology, Bangladesh institute of Agar Ator Technology etc as per sectoral demands.
  4. Establishment of ‘Common Facility Centers (CFC) in Every Clusters’: There are 177 SME clusters in Bangladesh. Entrepreneurs in a cluster are producing similar products throughout the year. In some cases there is one or more common process to manufacture several products. Currently these tasks are doing manually as a result product quality become inferior. On the other hand single entrepreneurs cannot afford modern machineries to complete the common process due to high prices of the machines. A single testing is applicable for almost all products of a cluster to ensure products quality. But due to the same reason none can afford it. If government or development partners come forward to establish a common facility center into the SME Clusters with the machinery needed to complete the common process or test the products quality then all the entrepreneurs will be benefited from it. SME Foundation or BSCIC could be the lead organization if government takes this initiative. It will increase overall productivity of Bangladesh; quality of the products will go up. High quality products will be acceptable to the local and foreign buyers.
  5. Establishment of ‘Trade Negotiation Commission’: Till date there is no common body to negotiate bilateral, regional or multilateral trade negotiation of Bangladesh. A group of professionals including WTO Cell of the Ministry of Commerce, Bangladesh Tariff Commission, EPB, NBR etc. represent Bangladesh in different trade negotiation table. Most of them are civil servant performing transferable job. A person being specialized in any particular agreement and got transferred into a completely irrelevant position after three or four years. We can remember many officials of WTO cell get involved with the process and currently serving in totally irrelevant desks. Therefore we need a constitutional body for handling our trade negotiation issues only. It will help the professionals to be specialized with a single issue and handle it efficiently with any counterparts. Otherwise Bangladesh will be completely isolated if proper initiatives are not taken to negotiate bilateral free trade agreement with our existing or potential buyer countries. Similarly we have to maintain our involvement with regional free trade agreements and multilateral arrangement under the umbrella of WTO.
  6. Establishing ‘Product Research & New Product Development Center’: Bangladesh has a very small product basket. To enlarge the product basket and diversify export items we are in need of a product research and new product development center. It will be a separate body to conduct research with existing and potential products producing or could be produced in our industries.
  7. Establishment of ‘Manpower Export and Management Center’: Remittance is the second largest source foreign currency. In true sense it is the single largest sector of earning foreign currency without deployment of all the factors of production. Till now Bangladesh is sending unskilled workers into various destinations. Many workers are experiencing cheating in home and abroad during his migration. If government took initiative to collect visa from demanding countries and distribute these to the manpower exporters in a fixed price then these harassments could be minimized. At the same time this Manpower Export and Management Center will collect demands for professionals like Doctors, Engineers, Teachers, Business Executives, Researchers, Analyst, and Lawyers etc. and take necessary initiative to send them safely. By exporting higher educated professionals Bangladesh could easily earn hundred times more remittance than that of the present earnings.

Finally we could summarize that, Bangladesh economy is moving forward with many limitations due to our resource constraints. We can move faster if the government took timely initiative to establish few institutes which are very essential for industrialization and economic development. Only economic growth may not make us happy without inclusive, balanced and sustainable development. During this transforming period it is time for the policy makers to formulate and implement inclusive economic development policy to ensure every body’s stake into this prosperity. Otherwise social disparity will be higher and create chaos a new threat to sustainability of this development.

 

A sustainable mode of financing for industries

A sustainable mode of financing for industries

Md. Joynal Abdin

The Independent on August 19, 2016

 

The present government of Bangladesh has expanded its vision 2021 into vision 2041 by updating a few targets. Prime Minister Sheikh Hasina is committed to us to reaching into a peaceful, prosperous, happy and developed nation comparable with the developed world by the year 2041. In other word, we could state that, in the year 2041, Bangladesh will become a peaceful, prosperous and developed country after crossing the status of a middle-income country. With these visions in mind government formulated the 7th Five Year Plan and started sincere implementation of the document. On the other hand, Bangladesh Nationalist Party (BNP) chairperson Khaleda Zia announced her plans to ‘elevate Bangladesh to a higher-middle income state by 2030’ during the last council of her party. As per her declaration Bangladesh will become a modern democratic and higher middle-income country with the per-capita income reaching around US $ 4,000 to 5,000 by 2030.  Government’s vision 2021 and 2041 and opposition’s (not in parliament) vision 2030 both the declaration make a consensus that Bangladesh is united for being a higher middle income country by the period of 2030 to 2041. Bangladesh has few remarkable achievements in the Millennium Development Goals during 2000 to 2015. We are more sincere to achieve the Sustainable Development Goals by 2030.

      All the above mentioned targets / goals state that presently Bangladesh economy is passing through a significant phase of preparing us to be a higher middle income country by 2030 – 2041 period. To achieve this vision Bangladesh has to fight with a long list of challenges like providing decent job to a large number of unemployed and under employed population, accelerating economic growth into double digit and maintain a steady upward curve, increasing social safety net, ensuring education, health care, food security, self-sufficiency in food, technological development so on and so forth. Government is unable to meet these targets without private sector development through industrialization. For this reason industrial development is the highest priority of the government to facilitate self-employment, new employment generation, increasing export earnings, fostering economic growth finally building a poverty free higher income Bangladesh.

National Industrial Policy 2016, 7th Five Year Plan, ICT Policy, and Upcoming SME Policy Strategy incorporate specific tasks for each of the organ of the government for promoting industrialization from respective ends.

Currently there are 7.81 million different categories of industrial units / enterprises in Bangladesh; among these 6.84 million are cottage, 0.10 million micro, 0.85 million small and 0.07 million medium enterprises / industrial units. About 87.44 percent  of the enterprises are fully domestic market based, only 1.14 per cent  enterprises are fully export oriented, and 0.82 percent enterprises are involved with local as well as export markets. These industries are employing about 20.50 million people; about 4 million of them are female. Current rate of employment generation of Bangladeshi enterprises is about 3 people per enterprise. It is very low in number, because most of the enterprises are suffering from different types of difficulties. If a congenial business environment could be offered the same number of enterprises could generate employment to 80 million people easily.

Major challenges of the Bangladeshi enterprises are experiencing are; low productivity due to the use of inappropriate technology, smaller investments capacity due to limited access to finance, irregular/inadequate supply of power, high rate of interest on bank loans, inadequate availability of raw materials (in few sectors), absence of clear-cut government policies, lack of skilled technicians and workers, low range of product diversity due to the absence of research and development facilities, poor physical infrastructure and high transportation costs, unofficial cost of doing business,     absence of an effective and transparent legal system, and poor information about market opportunities and requirements of that market etc.

If we would like to draw a frequency table with all of the above mentioned challenges of the industrialization of Bangladesh then the most frequent challenge would be smaller investment capacity, limited access to bank loan, higher rate of interest in one sentence it would be problematic access to finance. Bankers / lenders are arguing that they are searching for qualified investors / entrepreneurs with adequate amount of bank loan but not getting entrepreneurs. But the entrepreneurs are claiming that one of the most important barriers towards further growth of their business is limited investment capacity or unavailability of bank loan. Let’s try to believe that both the parties are right and both the opposition statements are true. Further analysis done by various experts find out that, SMEs limited access to finance is not the disease; but it is a symptom of disease. Most of the SMEs are doing business informally. They do not manage proper written documentation of financial transactions even the transaction of goods / raw materials. They do not maintain business account in any bank just to deposit the cash. As a result,  it is quite difficult to determine their depth of financial ability or eligibility for a bank loan. Whatever is that cause or effect it is quite sure that, doing business with a double digit rate of interest loan is quite difficult.

In such a situation government could promote venture capital for lending in SME sector of Bangladesh. Now come to the point, what venture capital is? Venture capital is financing that investors (lender as partner) provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions that pool similar partnerships or investments. Why venture capital is worthy than that of the bank loan? In case of bank loan the entrepreneurs are bound to repay the lending amount with interest (in a predetermine rate). The risk is taken by the entrepreneur’s only. On the other hand, venture capital is an amount of fund (in a proportionate rate) entrepreneurs are getting against ownership (of that particular portion) of the enterprise. Risk is shared by the entrepreneur as well as the venture capital investor / firm. Entrepreneurs could get relief of higher rate of interest of bank loan by using venture capital funds. On the other hand, banks are reluctant to finance the startups, whereas venture capital is offering funds to the startups only.

The idea of venture capital was originated in 1946 in the USA. Later on it became popular in Europe in 1970s. Statistics states that 1981 – 1987 is the most peak  tenure for venture capital mostly in the US and European economies. Journey of venture capital in Bangladesh is still in an infant stage. A few venture capital firms started their journey during the last five years. Notable Bangladeshi venture capital companies are BD Venture Limited, Venture Investment Partners Bangladesh Ltd, SEAF Bangladesh Ventures (SEAF BV), Athena Venture & Equities Ltd, and  Bangladesh Venture Capital Ltd etc.

Government issued Venture Capital Rules “Bangladesh Securities and Exchange Commission (Alternative Investment) Rules, 2015” for that first time in Bangladesh in June 22, 2015 through Gazette Notification. It is the primary guideline for the venture capital firms. Now government shall undertake initiative to make this source of capital popular through different initiatives. Because of it is interest free (based on profit) source of fund for investing by startups or further growth of existing small enterprises. From religious perspective it is more acceptable due to its non-dependency on predetermined rate of interest. Till now only a few SME entrepreneurs hardly know about this source of fund. They are running behind high interest bank loan from one bank to another but never think of going to any venture capital company’s office. It is because they are not aware of it. So existing venture capital firms as well as the government, development agencies could take the role to promote venture capital and make people’s awareness about it.

Till now Bangladeshi venture capital firms are having a very limited amount of funds to invest in comparison of schedule banks or leasing companies. Government is investing the Entrepreneurship Equity Fund (EEF) as venture capital for fostering industrialization in Bangladesh. Previously it was managed by the central bank and currently it is being managed by the ICB. Criticism is available in the market that this is a political fund and many EEF invested firms are not becoming full functioning ever. Therefore, this venture capital amount of the government could be invested through private venture capital companies for better utilization and proper management of the fund. Government could facilitate local venture capital companies to get similar funds from global venture capital companies or investment banks. Low cost multinational funds like IDB, ADB could make available to the local venture capitalists to make the sector stronger and matured. A full functioning venture capital sector could meet up the increasing demand for investment fund of the local SME sector. It could lead us to an industrial revolution in Bangladesh. This industrial revolution is essential for achievement of vision 2021, 2030 and 2041. Thus a dependable financing mechanism could foster the movement of Bangladesh to become a higher middle income country before the projected period.

Selecting appropriate approaches to industrialization

Selecting appropriate approaches to industrialization

Md. Joynal Abdin

The Financial Express on July 30, 2016

Industries are playing a vital role in entrepreneurship development, self-employment, and new-employment opportunity creation and increasing economic growth throughout the world. Therefore governments are keen to promote industrialisation for fostering economic growth, fighting unemployment and reducing poverty. The government used to establish an organisation for promoting and developing industries. But due to lack of specialised knowledge to select an appropriate approach for industrialisation these organisations are becoming less productive or ineffective in this regard.

Bangladesh classified industries / enterprises into five different categories (based on size), namely; Cottage, Micro, Small, Medium and Large enterprises / industries. At the same time Bangladesh segmented up the industries into seven different segments (based on purposes) namely; Handicraft, Hi-tech, Creative, Reserved, High Priority, Priority and Control industries. Size-based classification of industries in Bangladesh is as follows:

Sl. Type of Industry Replacement cost and value of fixed assets, excluding land and factory buildings (in BDT) Number of employed workers
1. Cottage Industry Below 1 million not exceed 15
2. Micro Industry 1 million to 7.5 million 16 to 30
3. Small Industry Manufacturing 7.5 million to 150 million 31 to 120
Service 1 million to 20 million 16 to 50
4. Medium Industry Manufacturing 150 million to 500 million 121 to 300
Service 20 million to 300 million 51 to 120
5. Large Industry Manufacturing More than 500 million More than 300
Service More than 300 million More than 120
Source: Ministry of Industries, Government of Bangladesh, (2016). National Industrial Policy.

Development / promotion agencies are generally categorised as enterprises according to the following approaches:

  1. Classification of industries as per the basic raw materials used: One of the most common approaches of classifying the industries as per their basic raw materials used. For example, the enterprises use primary agricultural crops to produce their products. These crops are known as agro-processing industries / sector; such as producers of jam jelly or chutney, rice, flour etc. Similarly, the enterprises use leather to produce shoes, bags; belts etc. These are known as leather goods industries or sectors.

  1. Clusters-based classification of industries / as per location: Development agencies are often identifying the industries based on their location at any specific pre-determined industrial clusters. This cluster-based approach to industrialisation could be one of the most effective tools for their development for many reasons such as serving maximum enterprises with minimum resources, promoting inclusive and geographically balanced development etc.

  1. Classification of industries based on entrepreneur’s gender: Industries are often getting priority for special treatment based on the gender of the entrepreneurs. For example, women entrepreneurs are usually lagging behind the men-owned enterprises. Therefore, governments are offering special treatment for the women entrepreneurs-owned enterprises to inspire women to become entrepreneurs.

  1. Classification of industries based on owner’s race and ethnicity: Another most important approach to differentiating enterprises to the based on the race or ethnicity of the owners. For example, tribal community or minority group could get special attention to bring them economically forward or to the mainstream.

  1. Classification based on output of the enterprises: Primary classification of the enterprises could be determined based on the output of the enterprises i.e. it is producing a product or performing service. Manufacturing and service enterprises have different attributes, this than that of the others. Therefore, policy makers identify them differently under manufacturing or service sector heads.

  1. Objective-oriented classification of enterprises: Promoters often differentiate the enterprises based on the objective of their products; such as domestic enterprises vs. export-oriented enterprises. Domestic enterprises produce products for the local market. On the other hand, export-oriented enterprises produce products only for export. Mixed types of enterprises could be there but they are not eligible to get special treatment offered by the government for exporters or others.

  1. Special-purpose approach of classification: Enterprises working for rehabilitating any special groups like disabled population or autistic group could be described as special-purpose enterprises.

A country may have a series of policies like, National Industrial Policy, SME Policy, Export Policy, Import Policy, Fiscal policy, ICT Policy, Women Development policy, Education Policy, Investment Policy, Skilled Development Policy, Credit Policy, Different Sectoral Policies on agriculture, handicraft, poultry and livestock etc. The government usually formulates policies to focus on any specific group or problem or purpose. But industrialisation / entrepreneurship development is such an important issue that could address multiple objectives at a time. Therefore, enterprise development agencies usually select approaches to achieve any specific goal of different government policies at a time. For example, one action plan could address employment generation, promotion of any specific sector as well as increasing export earning of the country through a single intervention. Therefore, designing development intervention by addressing multiple objectives requires appropriate selection of perfect approach to industrial development of a country.

India is providing more emphasis on SME development by having a specialised ministry, namely, the Ministry of Micro, Small & Medium Enterprises. This ministry is implementing Five-Year Plan for Economic Development. Indian SME promoters are working with Trade Promotional Programmes, Connectivity with MNCs and Government, Inbound and Outbound Investment, Strategic Business Alliances, Delegations and Study Tours, and Restructuring and Revival of stressed SMEs etc. issues additional to the Bangladeshi practices (SMBDC, 2016). India has several acts namely the Micro, Small and Medium Enterprises Development Act, 2006, Khadi & Village Industries Commission Act, 1956 – March 17, 2008, Re-establishing Khadi & Village Industries Commission dissolved in October’ 2004, July 19, 2006, Notification regarding implementation of provisions of Khadi and Village Industries Commission (Amendment) Act, 2006 and The Industries (Development and Regulation) Act, 1951. India has a long list of sector-specific policies, laws, bylaws etc. for promoting respective sectors, while a single act is missing in Bangladesh for promoting SME development or industrialisation.

Small and Medium Enterprises Development Authority (SMEDA) is the premier institution of the Government of Pakistan under Ministry of Industries & Production. SMEDA is implementing different projects namely; Prime Minister’s Youth Business Loan, Common Facility Centre projects, Cluster Development, and the Multi Donor Trust Fund (MDTF) project ‘Economic Revitalisation of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (FATA)’ etc. for promoting SMEs in Pakistan (SMEDA, 2016).

Iran Small Industries and Industrial Parks Organisation (ISIPO) is focusing more on clustre development as well as development of Industrial Parks and Industrial Areas to promote industrialisation in Iran. They have their specialised approach to SME clustre development throughout the country.

The Small and Medium Enterprises Development and Support Administration of Turkey is generally known as KOSGEB. Their distinguishable programmes for SME development are Entrepreneurship Support Programme, Cooperation Joint Forces Support Programme, R & D, Innovation and Industrial Application Support Programme, International Incubation Centre and Accelerator Support Programme, Emerging Enterprises Market SME Support Programme, Thematic Project Support Programme, Laboratory Services etc. (KOSGEB, 2016). They are working on a much more wider scale than that of the above mentioned institutions.

From the above discussion it is clear that different countries have different approaches to SME development. Some of the above mentioned approaches are quite different from the others. Countries like Bangladesh, Pakistan or Iran has a lot to replicate from the countries like India or Turkey. We would like to recommend few approaches to SME Development for a least developed country like Bangladesh:

  1. Clustre-based development intervention: Clustre is defined in many ways by the experts around the world. There are a large number of homogenous enterprises located at a particular geographical area as a clustre. Therefore, trained manpower, raw materials, buyers and other factors of production are available at that particular place. A development agency could easily implement interventions for promoting and developing entrepreneurs of that clustre with limited resource deployment. Therefore, it could be one of the best approaches for industrialisation in a least developed or even in a developing country.

  1. Objective-oriented classification approach: We would like to offer this new approach for better output within a limited timeframe. For example; an SME promotion agency could identify few promising sectors with export potentials. Special export-oriented intervention could be developed and implemented to make the sector capable of export as well as competitive in the targeted international markets.

  1. Special purpose projects: A development agency shall have special purpose projects to rescue declining local sectors, promoting newly-developed sectors, mainstreaming any particular race or ethnic groups etc. Thus an organisation could contribute to achieving national goals of the country.

  1. Available skill-based enterprise development approach: The government could facilitate new sectors based on the available skills of the general people. For example, currently Bangladesh is producing a remarkable number of computer engineers every year. So IT / ICT-based industries like software development, outsourcing, freelancing etc. could be promoted for the sake of their self-employment or employment generation.

Industrial promotion agencies of a country have a great role to play with. But if any organisation is tagged with a set of predetermined approaches, they may not be capable to face newly-emerging challenges and needs of the sectors. Therefore, such institutions shall have a live, flexible set of targets to undertake newer approaches and interventions as and when required for promoting and development of the industries of that particular country. We must remember that effectiveness of the output and usefulness of the result of an organisation depend upon its approaches to designing, implementing and delivering their services to the clients. Appropriate methodology selection shall get highest priority before devising any strategy, undertaking interventions and implementing the plans.

Cluster Based SME Development: Could be an Effective Tool for Industrialization

Cluster Based SME Development: Could be an Effective Tool for  Industrialization

Md. Joynal Abdin
Published by: the Journal of Socialomics, Vol. 4, Issue. 1, OMICS Group, USA as Editorial.

There are 48 least developed countries (LDCs) in the world. Employment generation, poverty alleviation etc. are the common challenges facing by all the LDCs around the world. They have limitations in terms of technical, managerial, technological and financial resources to overcome the vicious circle of poverty. Industrialization could be a way forward to alleviate poverty in the LDCs. But to be industrialized all the above mentioned resources needs to be deployed adequately in time. But LDCs have limited access to those resources. The small and medium enterprises (SMEs) are the backbone of
industrialization in every economy either it’s in developed countries or in least developed one. SMEs could be defined with different parameters in different countries. For example; in Bangladesh SMEs are defined as; “In manufacturing sector, small industry will be deemed to comprise enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 5 million and Tk.100 million, or with between 25 and 99 workers,” and medium industry will
be deemed to comprise enterprises with either the value (replacement cost) of fixed assets excluding land and building between Tk. 100 million and Tk. 300 million, or with between 100 and 250 workers” (National Industrial Policy 2010, Bangladesh). India defined SMEs as, a small enterprise is an enterprise where the investment is more than Rs.25 lakh but does not exceed Rs. 5 crore; and a medium enterprise where investment is more than Rs.5 crore but does not exceed Rs.10 crore (MSMED Act. 2006, India).

In terms of contribution SMEs are generating about 87% of civilian employment in Bangladesh; about 30% of GDP growth comes from the SMEs in Bangladesh. SMEs are accounts for about 45% of the manufacturing output and 40% of the total exports of India. They are generating about 59 million employments in over 26 million units throughout the country (Annual report of Ministry of MSME 2010-11, Government of India). Similarly SMEs are playing a significant role in terms of GDP growth, employment generation and poverty alleviation throughout the world.

It is quite difficult to undertake and implement development interventions for scattered located SMEs in any country. Therefore one best option could be cluster based approach for SME development especially at the LDCs. Clusters are defined by various scholars, countries, international organizations and practitioners in different ways. For example; Porter (2003) defines a cluster as a “geographically proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field, linked by externalities of various types”. Considering the socioeconomic
condition of Bangladesh SME Cluster is defined as “A Cluster is a concentration of enterprises producing similar products or services and is situated within an adjoining geographical location around 5 km radius and having common strengths, weaknesses, opportunities and threats”.

Generally SME clusters in most of the LDCs are naturally grown based on availability of raw materials, relevant skills, supply chain advantages, markets demands etc. reasons. They are scattered located throughout the country with existing resilience to face adverse condition. Therefore government’s little interventions can result in a massive boom in these clusters. Clusters are creasing self-employed entrepreneurs, generating employment for the workers, technicians, managers, and other relevant professionals. Contributing in increasing GDP growth and poverty alleviation of the country. On the other hand due to a particular geographic location it is easy for the government to supply all sorts of industrial utilities into it. So cluster based SME development could be an effective tool for employment generation, poverty alleviation through industrialization of a country.

Framing a comprehensive policy to spur industrialisation

Framing a comprehensive policy to spur industrialisation

 

Md. Joynal Abdin

The Financial Express on 24 May 2015

Bangladesh adopted free market economy in late 80s. Opening up its market to foreign investment the government is trying to assist the private sector in playing a vital role in industrialisation and employment generation with a view to alleviating poverty. The government and the private sector worked hand in hand in promoting export-oriented readymade garment (RMG) units and it became the largest foreign currency earning sector of the country. The government allowed back-to-back letter of credit (LC), bonded warehouse facility and many more to assist the garment factory owners. But after three decades of the RMG sector’s inception none of the other sectors is coming forward to back it. Experts forecast few sectors were awaiting takeoff during the last decade. For example, we have export potential of our leather goods sector, ceramics products, pharmaceuticals, shipbuilding, jute goods, home textiles, agro-processed products, information and communication technology (ICT), light engineering products, frozen food, handicrafts etc.

Bangladesh has a domestic market of about 160.4 million (16.04 crore) people and the easy access to two largest markets of the world-India with 1.27 billion people and China with 1.36 billion people. Bangladesh has free trade agreements with India through SAFTA, BIMSTEC and negotiating more free trade agreements with India and China under the Asia Pacific Trade Agreement (APTA). India is offering duty-free market access to a long list of Bangladeshi products as a least developed country (LDC). With economic development the local people’s purchasing power is also increasing in the domestic market. Therefore, Bangladesh has every potential to be an industrialised country, if a comprehensive legal framework is developed.

The government of Bangladesh has already enacted and partly implemented a long list of policies to promote local investment and attract foreign direct investment. For example, we have the National Industrial Policy-2010, the National Salt Policy-2011, National Handicraft Policy, Export Policy 2012-2015, Import Policy Order 2012-2015, Policy and Strategy for Public-Private Partnership (PPP)-2010, SME Policy Strategies-2005, Safeguard Rules-2010, Antidumping Rules-2008, Small and Medium Enterprise (SME) Credit Policies and Programmes, ICT Policy-2009, National Livestock Development Policy-2007, National Poultry Development Policy-2008, National Shipbuilding Policy-2012 etc. Objectives of all the policies are to promote industrialisation, ensure a fair competition, attract foreign investments, encourage the private sector to establish manufacturing enterprises so that more employment could be generated.

A large number of organisations, corporations and boards are working to implement the policies under different ministries. For example, the Ministry of Industries is working with the Bangladesh Chemical Industries Corporation (BCIC), Bangladesh Sugar & Food Industries Corporation (BSFIC), Bangladesh Steel & Engineering Corporation (BSEC), Bangladesh Small and Cottage Industries Corporation (BSCIC), Bangladesh Standards and Testing Institution (BSTI), Bangladesh Industrial Technical Assistance Centre (BITAC), Bangladesh Institute of Management (BIM), Department of Patents, Designs and Trademarks (DPDT), National Productivity Organisation (NPO), Office of the Chief Inspector of Boilers (Boiler), Bangladesh Accreditation Board (BAB) etc. The Ministry of Commerce is working with the Office of Chief Controller of Imports and Exports (CCI&E), Export Promotion Bureau (EPB), Bangladesh Tariff Commission (BTC), Bangladesh Tea Board, Registrar of Joint Stock Companies and Firms, Trading Corporation of Bangladesh (TCB), Bangladesh Foreign Trade Institute (BFTI), Business Promotion Council (BPC), the Institute of Cost and Management Accountants of Bangladesh, Institute of Chartered Accountants of Bangladesh (ICAB), Directorate of National Consumer Rights Protection etc. The Ministry of Finance is working with National Board of Revenue (NBR), Bangladesh Bank, Investment Corporation of Bangladesh (ICB), Bangladesh Securities and Exchange Commission (BSEC), Microcredit Regulatory Authority etc.  Not only these, the government of Bangladesh has established several ‘not-for-profit’ organisations registered under the Companies Act 1913/1994 to assist the government in promotion of industrialisation, employment generation and poverty alleviation through their respective activities. They include the Palli Karma-Sahayak Foundation (PKSF), Small and Medium Enterprise Foundation (SME Foundation), Social Development Foundation (SDF) and Bangladesh NGO Foundation.

All these organisations can be divided into two major categories. Some of them are regulators and some are facilitators. But there are some others playing the role of both regulator and facilitator. There are few facilitators trying to play the role of regulator as well. There are few areas of overlapping in the scope of more than one organisation. These areas of overlapping create confusion in the event of development interventions by concerned organisations. Sometimes the organisations cross their jurisdiction of work. But all of these are for wellbeing of the country. But today we are living in the age of specialisation. Without clearly distinct professionalism none can perform their duties accordingly. Therefore, it is the time to let the organisations play their role from their respective professional views. For example, over 90 per cent of Bangladesh’s business entities are small and medium enterprises (SMEs). The SME Cell of the Ministry of Industries, BSCIC, SME Foundation, SME and Special Programmes Department of Bangladesh Bank all are working with the SME Development. All these institutions are implementing their respective action plans for promotion and development of SME organisations. Therefore, any overlapping or look-alike work is undertaken by these institutions. There is a scope for better coordination among these institutions for reaping better results from their interventions.

Let us come back to the starting point that the government has so many policies and organisations to facilitate and promote industrialisation. All these policies are framed by the ministries or agencies without any hand-in-hand coordination with others. As a result, everybody is following their own policy or act without bothering about the other policies adopted by another organ of the same government. For example, the industrial policy offered a special facility or tax waiver to a particular sector for increasing their competitiveness in local or export market. But due to noncompliance with the tax, VAT or customs duty act, the National Board of Revenue (NBR) is unable to allow the same facility to that particular group. On the other hand, policies are the results of newer visions of the government while old laws and acts are hindering implementation of these policies, because policies are not equally mandatory for all organs of the government to comply with. Policies have a limited scope to prevail over a law or act.

Similarly, industrial development depends upon many factors of business environment. All the factors are not relevant to a particular ministry or agency of the government. For example, to develop an industrial cluster we need at least the following things like electricity, gas, water, roads, security, technology, raw materials and other support services. Supply of electricity, gas and water, construction of roads and security are the headaches of different organisations under different ministries. Therefore, it is very tough to maintain coordination among the concerned departments or organisations and and get their support to accomplish the single task of industrialisation.

On the other hand, all those policies have been framed from macroeconomic perspectives without taking into account distinctive strategies or any specific action plan or timeframe. If all the policies have the microeconomic versions with specific timeframes and the agencies responsible are identified, then the policies could be implemented in a better way.

But to get optimum results out of the long list of policies, we could think of a comprehensive act. The title of the act can be “Industrial Development Act of Bangladesh”. All the policies can be addressed in separate chapters of the act. The act could have both macroeconomic and microeconomic versions with time-bound duties and responsibilities of the concerned organs of the government. SME development, cluster development, low-cost labour-intensive industries, import substituting industries, cluster-based SME development, maximum value addition product, export-oriented industries, next generation business enterprises etc. could be the main pillars of this industrial development act.

A special secretariat under the supervision of the Prime Minister could take the lead in maintaining coordination among the relevant organisations, agencies and ministries to implement the industrial development act. A strong monitoring and evaluation team can be there to ensure transparency in implementing each component of the act by the organisations concerned by following predetermined timeframes. As the act is supposed to prevail over any other conflicting act, all government agencies will be bound to implement it on a priority basis. Thus the objective of industrialisation can be achieved within the shortest possible time. Without such comprehensive and coordinated efforts our dream would remain a dream even after another 43 years of Independence.