Published on The Financial Express
Unlike many developing countries foreign direct investment (FDI) is not a major source of investment in Bangladesh. Total inward stock of FDI until 2010 was only US$6.1 billion which is accounted for only 6.1 per cent of gross domestic product (GDP) and mere 0.03 per cent of total global stock of FDI (US$19.1 trillion). Since its independence, Bangladesh has been following favourable and consistent policies with regard to FDI and is being regarded as one of the most FDI-friendly policy regimes in South Asia. This includes not expropriating foreign owned assets even at the time of nationalization of private enterprises during 1970s, provision for full repatriation of profit and liquidated investment, fiscal incentives and other benefits, national treatment at post establishment phase, protecting foreign investment under the bilateral investment treaty (BIT) with 29 countries and provide opportunity to avoid double taxation under the double taxation treaty with 28 countries. Bangladesh follows international standard in case of dispute settlement and intellectual property rights as it is a signatory to the Multilateral Investment Guarantee Agency (MIGA), the Overseas Private Investment Corporation (OPIC) of the USA, the International Center for Settlement of Investment Disputes (ICSID) and a member of World Intellectual Property Organization (WIPO) and permanent committee on development cooperation related to industrial property. However, such favourable policies have yet to cater large scale greenfield investment in the country. Since its independence, different kinds of resource-seeking and market-seeking FDIs have targeted to invest in the country. The trend of inward flow of FDI was not consistent. It was almost absent in 1970s and was even negative in some years in 1980s perhaps because of adverse impact of a number of economic and political factors including weak macroeconomic condition, predominance of public sector enterprises, small domestic market, early phase of rise of export-oriented readymade garments (RMG) industry and political instability etc. Since mid-1990s, FDI flow has started to rise mainly in energy and power and RMG sector. In 2000s, major surge in FDIs were in telecommunication, banking and lately in RMG and textile sectors. Development of domestic market, better infrastructural facilities, robust export growth of knitwear and woven wear products under favourable market access to developed and developing countries and availability of low cost workers were perhaps the main contributing factors. While developed countries were found to be major investors in capital-intensive, resource-based and service-oriented sectors (energy, power and telecommunication sectors), the developing countries, on the other hand, were major investors in labour-intensive manufacturing sectors (textiles, RMG, leather, engineering, chemical etc.). There is a growing trend of rising share of FDI of developing countries; however, intra-regional FDI flow still remains at a low level. FDI, though on a limited scale, has contributed to make available of investible funds and generate domestic resources for investment, provide training to local executives, introduce new technologies etc. At the same time, it has been criticized for number of accounts such as huge repatriation of profit, dividend and income by foreign companies (e.g. oil and telecom companies) which left marginal amount of net FDI flow, problems of transfer pricing by foreign companies, limited level of technology transfer etc. There is a huge difference between the projects registered for FDI and those which were finally in operation. If all the registered projects at the Board of Investment (BOI) were realised since 1970s, FDI stock would have been as high as US$17 `billion at the end of 2010. Registration for new investment was mainly for differentiated products and segmented markets particularly in case of well-developed value chain of the RMG sector. The low level of realization of registered FDI projects raises concerns with regard to the efficiency of the BOI and effectiveness of various incentives and support offered to foreign companies etc. At the pre-establishment phase, new firms usually require well understanding with regard to the industry and the location. According to Porter (1990, 2008), new firms assess the potentiality of the industry after taking into account five factors including restraints of existing firms against new entrants, threat of substitute products and services, bargaining power of suppliers, bargaining power of buyers, rivalry among the existing competitors etc. The choice of a particular location, on the other hand, has been identified with regard to understanding of factor conditions, demand conditions, related and supporting industries and firm’s strategy and structure and rivalry etc. Foreign investors perhaps found pre-establishment phase unclear to understand the competitiveness of the industry and suitability of the location. The usual practices in such situation (e.g. initiatives for joint venture, market survey etc.) may not always found to be adequate enough for potential new investors to take decision in favour of investment in Bangladesh. In order to realize more registered FDI projects, the government should review its FDI-related policies with special focus on policies related to pre-establishment phase. Foreign investors may have various kinds of issues and concerns related to pre-establishment phase including standard of treatment, entry and establishment and treatment after admission etc. These issues need to be properly handled by the Board of Investment (BOI), relevant government agencies and related trade bodies.
This is an abridged version of an article by Dr. Khondaker Golam Moazzem to be published in a forthcoming book, ‘Bangladesh at 40: changes and challenges’, to be edited by Prof. Abdul Bayes, Dean of Faculty of Business Studies, Jahangirnagar University, Savar, Dhaka