'If local investors think the regulatory framework is uncertain, foreigners would doubly think so'
Recently, there’s scope of new FDI in Bangladesh amounting to more than Tk15,000 crore. The Business Standard spoke to Dr Syed Akhtar Mahmood, former Lead Private Sector Specialist in the World Bank Group about FDI, its impacts, how Bangladesh fares compared to its neighbours and ways forward
Fifty-six multinational companies (MNCs) have applied to the Registrar of Joint Stock Companies and Firms (RJSC) seeking permission to open their branches to import, produce and export various products and market locally.
According to RJSC and Bangladesh Investment Development Authority (BIDA), sources say these companies will invest a combined total of more than Tk15,000 crore.
The Business Standard spoke with noted economist Dr Syed Akhtar Mahmood, former Lead Private Sector Specialist in the World Bank Group to talk about how significant these investments are, how they can impact our economy and more.
Among the 56 MNCs, India's leading chemical company Indokem wants to invest Tk1,500cr. Belgium-based Azelis wants to invest around Tk1,200cr and Japan-based tire maker Bridgestone wants to invest Tk2,000cr. What are your thoughts on this development?
Over the last couple of years, we have received around $3.5 billion FDI on average each year – excluding the Covid-19 years. A major reason behind this recent increase in FDI inflows is the fact that Bangladesh's internal market is now quite substantial, and it is growing at a respectable rate now. This big market, both in terms of goods and services, is attracting FDI.
The information we currently have about the nature of companies looking to invest here certainly points in that direction. The situation can be better understood once we have more data on FDI in the pipeline
Do you think the megaprojects have played any role in attracting these investments? What other factors are at play here?
Yes, that is a possibility. The lack of infrastructure was once considered to be one of the key hindrances to investing in Bangladesh. The current infrastructural endowments, both in terms of quantity and quality, are inadequate given the size of the economy.
Serviced land is another constraint.
In the past, we have seen that foreign investors who wanted to invest in Bangladesh later did not do so because we could not provide them with the land they needed. When it comes to FDI, any piece of land won't do. There needs to be proper infrastructure, utilities and road access. We call this type of land serviced industrial land. We couldn't offer adequate serviced industrial land. We did receive investment wherever we could, for example in the export processing zones. However, export processing zones have more or less run out of the land.
So, yes, mega projects, the benefits of which we have only just started enjoying in some cases, may have played a role in attracting investment, but I believe economic zones have played a more significant role. We could reach a more definitive conclusion when we get more information about the nature of these planned investments.
How important do you think this FDI inflow is for our economy? What kind of FDI best aligns with our economic agendas?
If we want to evaluate the quality of FDI coming into Bangladesh we can't just look at the total volume of FDI. We must also look at the composition. When my colleagues and I at the World Bank used to work on FDI, we distinguished between three types of FDI.
Firstly, there is natural resource-seeking FDI. Here, the foreign investor is primarily interested in exploiting the natural resources of a country. The prime example of this in the Bangladeshi context is Chevron. Chevron came to Bangladesh to exploit natural gas. At the end of June last year, around 20% of the stock of FDI in Bangladesh was natural resource seeking, made up by Chevron and some other similar investments.
The second type of FDI is called 'market-seeking' FDI. Here, the investor is primarily looking to explore the Bangladesh market, hence the term market-seeking.
The third and final type is 'efficiency-seeking' FDI. Such FDI aims to export abroad using Bangladesh as an efficient production base from which to export. There could be many reasons behind this efficiency. In Bangladesh, one major reason is cheap labour, we can efficiently make labour-intensive products. The prime example of this is our garments sector.
There can be many other sectors as well in which we are efficient or could become efficient. In these sectors, we can manufacture efficiently and foreign investors can have their products made for cheap and exported. The market could be our neighbouring countries as well as the United States or Europe.
In Bangladesh we need to diversify our exports, we are too dependent on garments. Around 84% of our exports come from garments. Even within garments, we can go for more sophisticated, higher value-added products. In order to make this diversification possible we need FDI, otherwise, it won't be easy.
Bangladesh's government has the goal of diversifying our exports. However, the FDI we have on the cards won't do much to help achieve that goal. This is because only 25% of FDI received by Bangladesh so far is export-oriented. Within that most of it is also in the traditional RMG sector. If we don't get FDI for new export-oriented products it is not consistent with our development objective. We need to look into this. We should not get excited simply by the volume of FDI received.
Bangladesh sits at 105 in the Global Competitiveness Report (GCR) by the World Economic Forum. Why do we rank so low and why do we receive relatively lower FDI than our regional peers?
We should not compare ourselves with Pakistan or India. We should look beyond them. If we compare ourselves with Vietnam, we will see how far behind we are. Every year Vietnam receives FDI equal to 5-6% of its GDP, on average. On the other hand, the amount we receive is barely 1% of our GDP.
Thirty years ago our ratios were the same. We had this same ratio back then; Vietnam was probably even slightly lower. In the last 30 years, they have moved ahead, and we can see the reflection of this in both their export amount and composition. FDI has played an important role in expanding Vietnam's export basket and making it more sophisticated over time. We are lagging behind compared to Vietnam and other East Asian countries.
So why do we receive less FDI? There are several factors behind this.
Before going into these factors, let's mention an important fact. The most comprehensive data on FDI inflows come from the Bangladesh Bank. The data disaggregates FDI inflows into three types. First, we have reinvested earnings. Existing foreign investors may reinvest all or part of the profits earned from their investment in Bangladesh. It may do so for a variety of reasons, such as expanding the business, replacing depreciated machinery, introducing new technology, etc.
The parent company may also provide loans to its invested company in Bangladesh. This falls in the category of intra-company loans.
Equity capital means directing fresh equity to ventures. This can come from both new foreign investors, i.e., those investing for the first time in Bangladesh, and from foreign investors already in the country, while reinvested earnings and intra-company loans relate only to existing foreign investors.
According to my analysis based on Bangladesh Bank data, 60-65% of our FDI inflow comes from existing investors. In fact, this number is possibly higher as Bangladesh Bank does not provide a distinction between equity capital from existing and new investors. We can infer from this data that we are not attracting too many new investors. Although on the bright side, this means that investors who have acclimated to the investment climate of the country are feeling comfortable reinvesting here.
So, why do you think we are not being able to successfully attract new investors? What are the issues here?
We have some drawbacks when it comes to strategies and procedures, we are more reactive than proactive. Countries like Vietnam and Malaysia have proactively targeted big organisations like Intel or Samsung and they were very clear about the why and where. Then they approached the investors and found out what they needed.
We are still very reactive. We are arranging roadshows and business summits. People are coming to these events and showing interest but then we are following up adequately. We also have some weaknesses when it comes to following up.
BIDA-like authorities in other countries have a very robust tracking system. If 100 investors have shown up at an event we need to track them. Have they followed up after the event? How far are they along the investment process? Have they stuck anywhere? If yes, why? Which ministry are they facing issues with? As far as I know, there is no such tracking process in place here.
Another big hurdle is regulatory uncertainty. A couple of years back the World Bank conducted a survey where they asked top CEOs about the biggest deterrent to foreign investment. And the overwhelming majority said policy and regulatory uncertainties. During my time at International Finance Corporation, I conducted a survey of local investors on regulatory uncertainties in Bangladesh. Regulatory uncertainty was a big problem identified by them. If local investors think the regulatory framework is uncertain, foreigners would doubly think so.
There are many reasons behind these uncertainties. One law might be inconsistent with another. Or in some cases maybe the ministries in charge are using their discretionary power too liberally. Government officials do need discretionary power but sometimes the decisions they make are not consistent with our policies.
We should also take better care of existing investors. Yes, the recent trend does show that maybe we have started taking better care of them but there might be issues remaining unsolved here, which in turn is deterring potential investors.
What can be done to attract more investment? Especially export-oriented FDI.
First, we need to correct our policy framework. According to our trade economists, we have an anti-export bias. The way our policy framework is set up, instead of competing with foreign companies we just want to focus on the local market.
Secondly, not just BIDA but Bangladesh Bank, NBR and our government as a whole must understand we need export diversification, our manufacturing sector needs to be more productive, and we need to innovate more, and for all these we need FDI.
Thirdly, we must look at the Vietnam model and see how we can proactively go after large investors instead of just smaller ones. We also have this tendency to highlight things about Bangladesh that we ourselves think is attractive instead of finding out what investors look for when they invest. We need a better understanding of the investment process as a whole. We must understand what foreign investors want, otherwise, we can't attract them.