Though the overall global foreign direct investment (FDI) witnessed an increase in the past year in gross terms, the real flow indicates a decline due to the diversion of fund flows by several European countries. These countries, known as 'conduit economies ', are used to facilitate the diversion of financial flows for tax avoidance. Ireland, Luxembourg, the Netherlands, Switzerland and the United Kingdom (UK) are the major conduit economies as these countries allow diversion of income to other countries. Thus, FDI statistics are significantly affected by conduit financial flows. As a result, there has been a large fluctuation in flows and negative numbers over 2023 and 2024, according to the UN Trade and Development (UNCTAD).
The latest Global Investment Monitor Trend, released by the UN agency early this month, said that less negative numbers in 2024 than in 2023 exert a net positive effect on global flows of about $270 billion. Now, by excluding financial flows through European conduit economies, global FDI is estimated to decline by 8 per cent in 2024 from the previous year. UNCTAD, however, added that, including these economies, global FDI reached an estimated $1.4 trillion in 2024, which is 11 per cent higher than the annual FDI in 2023.
Bruno Casella, in his paper titled 'Looking through conduit FDI in search of ultimate investors: a probabilistic approach' (Transnational Corporations - Volume 26, Issue 1, 2019), explained the conduit FDI. According to the paper, conduit FDI arises when a multinational entity (MNE), investing from home country A in host country B, establishes an intermediate step through a third country C. The investment transits first from A to C, and only then, from C to B, where it is deployed as a productive investment (for example, a plant). The intermediate step through C is merely financial, as in country C, no real 'productive' investment takes place, and it is generally qualified as conduit FDI. This type of FDI is also known as 'pass-through capital', 'indirect FDl', or 'offshore FDI'. The conduit FDI leads to double counting, which inflates the actual figure of FDI. This inflation can create a misleading scenario of FDI, where the amount of FDI may increase without adding any actual or physical value addition or production. Moreover, it also hides or undermines the ultimate investors.
Over the years, there has been a rise in conduit FDI. UNCTAD has pointed out the issue and tried to estimate the gap between ultimate and reported investors. The main reason behind the increase in conduit FDI is either tax evasion or tax avoidance by the MNEs. That's why offshore jurisdictions, offshore financial centres (OFC), and tax havens are used to reroute FDI. There is, however, a difference between tax haven and conduit economy, though both terms are sometimes used interchangeably due to some overlapping characteristics. A' tax haven' is a jurisdiction that combines 'no or very low taxes with secrecy' and is used to attract and retain foreign capital. On the other hand,' Conduit economies 'are jurisdictions that act as intermediate destinations to 'sink-OFCs,' meaning funds or investments are diverted to a third destination through these jurisdictions.
The bottom line is that conduit FDI can inflate the amount of FDI without contributing to actual or physical value addition or production, creating a misleading scenario. It is crucial to address this issue to better review and assess FDI globally, regionally, and bilaterally.
The UNCTAD report said that transactions by multinational enterprises (MNEs) in conduit economies continue to affect FDI flows in developed countries. Excluding conduit economies, FDI in Europe fell by 45 per cent in the last year. While the problem of conduit FDI is currently more prevalent in the developed world, it could potentially become a significant issue in the developing nations. This potential should prompt proactive measures, as many countries in the global south are beginning to reroute their investments through tax havens, which could lead to a similar problem in these regions.
The latest report also mentioned that FDI in developing countries fell for a second year and by two per cent, with declines in Central and West Asia and South America. However, FDI increased marginally in ASEAN and more significantly in Africa, South Asia, and central America and the Caribbean last year.
In South Asia, FDI is estimated to have increased by 13 per cent in India, while in Bangladesh, it declined by 28 per cent in the first nine months of the past year. The full-year projections in UNCTAD's latest investment monitor report are based on the actual figures for the first three quarters. Available monthly project data for the fourth quarter has also been used to calibrate the estimations.
The net inflow of FDI in Bangladesh in the January-September period in the past year stood at around $790 million against $1098 million in the same period of 2023. The decline in FDI was predictable as the country passed through heavy political turmoil in July-August due to a mass uprising against the autocratic Hasina regime. The mass movement, led by students and supported by people across the country, ultimately forced Sheikh Hasina to step down from the post of prime minister and flee to India on August 5 last year. Before fleeing, the regime took repressive measures, leading to the death of at least 1,400 students and people, and the injury of more than 20,000. During the days of the movement, economic activities were severely disrupted, leading to a sharp decline in domestic and foreign investments. After the regime's ouster, the country has yet to recover from the socio-economic disruption. So, it is not unlikely that the past year ultimately witnessed a big drop in FDI in Bangladesh.
As the country also witnessed a large outflow of financial assets in the last decades by cronies and oligarchs, some round-tripping of FDI may also be there. To put it simply, some of these oligarchs might have rerouted financial assets through tax havens in Bangladesh. So, the possibility of conduit FDI flowing into the country cannot be ruled out.
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