How to attract FDI
National policies and incentives
Bangladesh has adopted a number of policies and provides generous incentives to attract FDI. These include tax holiday for 5 to 7 years, full repatriation of profit and dividend by the foreign companies, and so on. Bangladesh is also a signatory of the Multilateral Investment Guarantee Agency (MIGA) insuring investors against political risk.
According to a recent UNCTAD report: on World Investment: foreign affiliates of some 64,000 trans-national corporations (TNCs) generate 53 million jobs; FDI is the largest source of external finance for developing countries; one-third of global trade is intra-firm trade.
For all latest news, follow The Daily Star's Google News channel. However, recent trends in global FDI flows indicate that despite the best tax reliefs and other incentives compared to neighbouring countries, a country's FDI potential may still be low.
Economic determinants of FDI
FDI can be resource-oriented or market-oriented. The resource-oriented determinants include availability of raw materials, low-cost skilled/unskilled labour and technology-created or innovation-created assets. Market-oriented determinants generally refer to the market size and marketability of the field products for which FDI is sought.
Why foreign firms look abroad
Caves (1981) argues that plants in different countries under common control of an MNE tend to have lower costs than if they operate under different managements due to some peculiar characteristic of the MNE which may be in the form of a special skill (technology, know-how) or special skill in marketing a product. This characteristic enables it to overcome the costs it is put up with which are not faced by the local firm, such as unfamiliarity with the environment (including language, culture, etc.), sources of raw materials, etc. Once a company has decided to look abroad, it tries to make information available on issues such as the general political atmosphere, administrative practices such as tariffs, import quotas, etc., government assurances regarding remittance of profits and repatriation of capital, existence of investment guarantee agreement, and so on.
FDI Potential Index
UNCTAD constructed a FDI Potential Index, using a set of structural variables to assess the potential for countries to attract FDI. According to its index, Bangladesh is an under-performer when it comes to attracting FDI.
The Inward FDI Potential Index captures factors such as the rate of GDP growth over the previous 10 years, the share of exports in GDP, the average number of telephone lines and mobile telephones per 1,000 inhabitants, commercial energy use per capita, the share of R&D spending in GDP, the availability of high-level skills, country risk, etc.
FDI situation in Bangladesh
According to an UNCTAD report, FDI to Bangladesh averaged $7 million annually from 1990-1996, but increased to an annual average of $196.8 million from 1997-2000, primarily due to foreign investment in Bangladesh's energy sector. However, after declining to $52 million in the next two years, FDI jumped to $120 million in 2003.
Bangladesh has very often sent trade delegations abroad to explore trade opportunities as well as highlight opportunities for investing in Bangladesh to the foreign would-be investors. A number of foreign business delegations have visited Bangladesh to explore trade and investment opportunities, including from India, France, Turkey, Malaysia, Taiwan, China, and Korea.
View from the other side
How do foreigners see investment prospects in Bangladesh? A survey of reports on the issue including a recent Investment Climate Statement on Bangladesh by the Bureau of Economic and Business Affairs of the US Government found that foreigners often find that ministries request unnecessary licenses and permissions. Added to these difficulties are such problems as corruption, labour militancy, poor infrastructure, inconsistent respect for contract sanctity, and policy instability and to a lesser extent, from Bangladesh's image as an impoverished and undeveloped country subject to frequent and devastating natural disasters.
Imperatives for Bangladesh
To be competitive in international markets, and to upgrade its potential in the foreign investors' eyes, Bangladesh needs to adopt urgent plans for the short run and the medium term. While indices as increase in the GDP per capita, share of exports in GDP and increasing the share of FDI in the services sector are medium term goals, the government should take initiatives to immediately develop those sectors directly under its control, such as the infrastructure, specifically port infrastructure and ICT.
Developing infrastructure
Chittagong port handles nearly 85 percent of the country's exports and imports. Besides, Bangladesh is located at the centre of the South Asia Regional Economic Co-operation (SASEC) countries, having borders with India and Mynmar and with close proximity with land-locked countries -- Nepal and Bhutan. Problems like outdated machinery, inadequate storage space, etc. make it one of the costliest ports in Asia. The port is heavily congested and ship turnaround time needs 4 to 5 days compared to 1 to 2 days in Singapore and Bangkok. Container handling costs around $600 as against $150 to $300 in neighbouring ports.
Under government initiative four gantry cranes were commissioned at the port on January 30, 2006 to make cargo handling more efficient. But due to absence of skilled operators they are being used up to only a third of their capacity. Additionally, the Government may opt for leasing of equipment for port handling and leasing of floating crafts from the private sector.
Similarly, Bangladesh Railway too is incapable of carrying and delivering the container cargoes efficiently and timely due to poor capacity, and lack of operational efficiency. Bangladesh Railway currently accounts for less than 15 percent of container trans-shipment in the Dhaka-Chittagong Economic Corridor (DCEC), which provides potential sub-regional linkages to northeastern states of India as well as Nepal and Bhutan.
Road infrastructure: although there has been a rapid expansion of road network, there is hardly any significant trans-shipment through road transport because it cannot handle container lorries due to capacity constraint.
Information and Communication Technology (ICT): the country is at an emerging stage and lacks behind other Asian countries in comparison. However, a mentionable initiative is that the government has taken up programs to train fresh graduates in ICT subjects for six months to one year as internees in different IT organizations/companies for acquiring practical experience and on-hands training.
In conclusion, it may be asserted that to attract FDI in a significantly large way it is important for Bangladesh to look beyond offering lucrative incentive packages and inculcate the criterion leading to increasing its FDI potential, as analysed above, within a short time.