Addressing the FDI challenges

The 2019 World Investment Report published by the United Nations Conference on Trade and Development (UNCTAD) paints a mixed picture about Bangladesh's progress in attracting investments. The country recorded the highest growth of 67.9 per cent among the least developed countries (LDCs) in boosting foreign direct investments (FDI) during 2018. But the figure of US$ 3.6 billion is the same as Myanmar, where FDI has shrunk by 18.1 per cent. In the process, Bangladesh has surpassed countries like Pakistan, Cambodia and Ethiopia in attracting FDI and has been ranked third in South Asia behind the giants India and the minnows Maldives. The country is, however, nowhere the US$ 42.88 billion FDI attracted by India, which accounted for 78 per cent of the South Asian total. Besides, the 2018 FDI growth in Bangladesh was mainly driven by a single investment of US$ 1.5 billion made by Japan Tobacco Inc. for acquiring the United Dhaka Tobacco Company of Akij group.
This success of sorts has been achieved by Bangladesh in the backdrop of a slide in global FDI flows, which fell by 13 per cent to US$ 1.3 trillion in 2018. This fall in global FDI for the third year running has been mainly attributed to massive repatriation of accumulated foreign earnings by the US-based multinational enterprises (MNEs) following tax reforms in that country at the end of 2017. Interestingly, FDI flows to developed countries reached its nadir since 2004 with a 27 per cent decline. The flows to developing countries remained stable with a 2.0 per cent increase and their share of global FDI rose to a record 54 per cent. Among the continents, FDI in Africa marked the steepest rise of 11 per cent followed by the developing Asia with 4.0 per cent. Flows to LDCs were back at the level of US$ 24 billion, the average for the decade, following the downslide in 2017.
In fact, the FDI trend has seen feeble growth since the global financial crisis of 2007-08. It recorded an average growth of 1.0 per cent during the following decade, as against 8.0 per cent during 2000-07 and over 20 per cent before that. Much of the expansion of global output is now driven by intangibles, and non-equity modes of production are growing faster than FDI. This is apparent from the relative growth rates of royalties, licensing fees and trade in services. The industrial MNEs are sliding down the rankings and some are even dropping out. The top 100 MNEs cater to over one-third of business-funded research and development (R&D) across the globe and the biggest spenders are from the technology, pharmaceutical and automotive sectors. The MNEs of developed countries also hold a significant share of investments in the developing countries.
The UNCTAD report reveals a more critical stance towards foreign investment in the national investment policy measures. As many as 55 economies introduced at least 112 measures affecting FDI. More than one-third of these clamped new restrictions or regulations, which was the highest since 2000. National security concerns about foreign ownership of critical infrastructure, core technologies and other sensitive business assets have been reflected in these steps. Besides, at least 22 large merger and acquisition (M&A) deals were either withdrawn or blocked by citing regulatory or political grounds, which was twice that of 2017. Screening mechanisms for FDIs are also gaining in importance. However, a majority of new investment policy measures are still moving towards further liberalisation, facilitation and promotion.
Forty international investment agreements (IIA) were signed in 2018, which indicated a dynamic phase in international investment policy-making. However, termination of 24 existing treaties also came into effect during the year. New model treaties and guiding principles are being developed by numerous countries and the new treaties contain many elements of UNCTAD's 'Reform Package for the International Investment Regime'. Its policy tools are also aiding the modernisation old-generation treaties. At least 71 new investor-state dispute settlement (ISDS) cases have been lodged during 2018. New challenges are also being faced in reforming IIAs, as alongside improving balance and flexibility, the new treaties are making the IIA regime less homogenous. Capital market policies and instruments are now moving into the mainstream with the objective of promoting integration of sustainability into businesses and investment practices. Many businesses are integrating environmental, social and governance (ESG) factors in taking investment decisions for improving performance and mitigating risks.
Special Economic Zones (SEZs) are being widely used now in many developing countries for pooling investments, as they facilitate industrial activities through fiscal and regulatory incentives as well as infrastructure support inside geographically delimited areas. The number of such SEZs has risen from 4,000 five years ago to 5,400 in 147 economies today. Besides, over 500 including those in Bangladesh are already in the pipeline. This is viewed by the UNCTAD as part of a new wave of industrial policies and responses to increasing competition for globally mobile investment.
SEZs can contribute to economic growth by attracting investment, creating jobs, boosting exports, building linkages with the broader economy, supporting participation in global value chain, and upgradation-cum-diversification of industries. But these benefits are not automatic and the performance of many zones remains below expectations. The growth stimulus often tends to be temporary and most SEZs grow at the same rate as national economy after the build-up phase. Besides, many zones operate as mere enclaves with limited impact beyond their boundaries. It is critical to regularly evaluate the performance and economic impact of zones, as the recovery of unsuccessful SEZs requires timely diagnosis.
The UNCTAD report underscores the importance of strategic design of the SEZ policy framework and development programme, which should not be framed in isolation from the broader policy contexts, including investment, trade and tax policies. It emphasises on the financial and fiscal sustainability of zones, as their broader economic impact can be uncertain and time-consuming. The report opines that the success of SEZs depends on getting the basics right. Promoting clusters and linkages can maximise growth impact, and solid regulatory framework, robust institutions as well as good governance are crucial factors for success.

Dr. Helal Uddin Ahmed is a retired Additional Secretary and former Editor of Bangladesh Quarterly.
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