Wooing foreign investors

In Asia China is the champion by far, sucking in about US$57 billion for the year 2003, and that is without adding Hongkong's share of US $ 14 billion. A very distant second is India, which is purported to receive around US$ 3.5 billion. What China and India have achieved are exemplary, and from anecdotal evidence there is lot more money in the pipeline waiting to enter the two countries. China is transforming to be the numero uno manufacturing backbone for the world, whilst India the equivalent in services. However as services require smaller capital investments, mainly in infrastructure and people, the gross FDI number for India is likely to remain relatively smaller than China. The numbers therefore belie the revolutionary change that India is also undergoing along with China.

It would be unfair to compare Bangladesh to either of the two countries as they are clearly in a league by themselves and have raced ahead leaving rest of Asia behind, let alone Bangladesh. But could Bangladesh have done more in its effort to attract larger foreign direct investment? The answer has to be yes. Offshore outsourcing is the primary driver of FDI for both China and India, but we forget, Bangladesh was one of the earlier forerunners of offshore outsourcing in the garment sector. This activity in Bangladesh dates back to early seventies-nineteen when garment buyers from mature economies in their relentless search for cheaper production started to source also from Bangladesh. The industry subsequently thrived and has done well under the protection of the Multi-Fibre Agreement (MFA). However, not surprisingly the industry largely grew by drawing on scarce domestic capital, very little equity came from overseas. Admittedly given that Bangladesh is at the lower end of the production spectrum, there is very little incentive for foreign investors. Financial margins are incredibly thin at this low end production. Had Bangladesh being able to move up the value chain, then perhaps there would have been lot more interest from overseas. The other glaringly obvious is the lack of world class infrastructure and higher level trained workforce. Bangladesh has more than three thousand garment factories but without a single integrated industrial park to house them. There is also no attempt to step up workforce proficiency through modern training methodology. If you go and see India today, their industrial parks both for software services and business process outsourcing (BPO) are state of the art. Foreign investors there have to only make the financial decisions, the rest, namely infrastructure and labour are best of class and readily available.

Surely Bangladesh can learn from all the success stories that abound in Asia which is not just confined to China and India. Attracting FDI driven by offshore outsourcing is a trend that is here to stay and Bangladesh is well placed in the textile and clothing sector to benefit from it. It is all about creating the right enabling environment and building a strong economic case that makes choices easy for investors.

Whilst FDI is the more stable foreign money that Bangladesh should strive to attract, the other foreign institutional investment (FII) which flows into the listed stock markets is also of equal importance. This is of a less stable variety but of great significance to the growth of the domestic capital market. FII investment, unlike FDI is not always driven by economic returns, risk diversification can also be a reason for investment decisions. One can recall the good days of early to mid nineteen-nineties when Bangladesh was showered with FII money. But things have changed since, and FII money seems to have dried up. There could be several reasons for it. One of the primary causes may be that the local market lacks the liquidity that is needed to attract FIIs. Institutional funds have a much shorter-term outlook, principally driven by its quarterly performance that is measured against a variety of global stock indices. Fund managers therefore favour markets where they can execute predictably, that is buy and sell, sometimes very large amounts at short notice which is not always possible in smaller markets like Bangladesh.

Global institutional fund flow into Asia is again beginning to grow reflecting the region's higher GDP growth rate than western mature economies. It would be a pity if Bangladesh is not ready to take advantage of this welcoming trend. To make the country FII friendly it has to create the right enabling environment. In very broad terms, that means creating the right financial infrastructure, encompassing corporate governance, quality research by stockbrokers to smooth and efficient payment and delivery mechanism. Corporates should understand their responsibility toward their shareholders and function in a transparent manner. Laws should safeguard shareholders from malpractices and hold CEOs and auditors responsible. The Enron debacle in the US has led to the draconian Sarbanese Oxley Act covering regulation from the composition of board members to duties of CEOs and auditors. This may be an unlikely comparison here, but the underlying spirit of the law is what should be noted. The stockbrokers on the other hand should earn their commission by providing unbiased quality research and not just market gossip. Regrettably self regulation in this industry has not worked anywhere in the world, even in the most mature economies. Given a chance, self-greed takes over, and this is not just typical of Bangladesh. To have strong capital market infrastructure that will attract foreign capital, Bangladesh needs to have tough laws and cleaner than clean and whiter than white policing institutions like the SEC.

In today's globalised world, economies are inter-linked not only through trade but in actual delivery of products and services through supply chain integration. It is indeed a different world -- when you punch an order for a computer in the US, the instruction lands up in China for production of that computer to begin. The world is getting more and more integrated and investment capital also tends to flow beyond boundaries to regions where it can get the best returns. In many ways capital is more easily accessible provided there is an economic case and an enabling environment. Nations that see this new reality and act will benefit whilst others will continue to struggle.

Ghalib Chaudhuri, a former investment banker, is managing partner of Octavian Associates, an independent consulting practice based in Singapore.