Constraints on the way of foreign direct investment

Foreign direct investment (FDI) plays an important role in developed, underdeveloped and least developed countries (LDCs) in providing employment to the millions of people. It increases and sustains gross domestic product (GDP) growth, develops the technology and interchanges the technologies from one country or another. With the globalization and rapid industrialization around the world, FDI flows have been multiplied in many countries. Many developed countries are also taking steps to attract and to captivate FDI. Some industrially developed countries like South Korea, Malaysia, China have developed many Export Processing Zones (EPZs), Special Economic Zones (SEZs), built up adequate and congenial infrastructures for manufacturing and other industries. There are some procedures, rules and regulations required for establishing industries by local investors or by the foreign investors; in addition to adequate facilities, infrastructures including good communications, information technology (IT) facilities, skilled manpower, power and energy, materials and capital. Every country has its own systems and procedures for FDI. The procedures, rules and regulations vary from country to country but there are some common facilities those are very much important for establishing industries by the foreign investors. These are infrastructures, adequate power and energy supply, better roads, highways, railways, airways, airport and sea port facilities. Special Economic Zones (SEZ) were founded by the Central Government under Deng Xiaoping in the early 1980s in the People's Republic of China (China). The most successful SEZ in China is Shenzhen that has developed from a small village to a large industrial city with a population of more than 10 million within a span of 20 years. Following China's successful example, SEZs, which some countries call Export Processing Zones(EPZ), have been established in many countries notably Angola, Bangladesh, Cambodia, India, Iran, Jordan, Kazakhstan, Malaysia, North Korea, Oman, Pakistan, the Philippines, Poland, South Korea, Russia, Ukraine, the UAE, and some economies in Africa and Latin America. According to World Bank (WB) report, there are more than 3,500 SEZs in 135 countries around the world. The main objective of establishing special zones is to attract investment from local and foreign entrepreneurs. To attract FDI, different types of industrial zones have been established by different countries. We found six special zones are basically established to attract FDI investments. These are: namely, (1) Free Trade Zone (FTZ), (2) Export Processing Zones (EPZs), (3) Enterprise Zones, (4) Freeport's Zone, (5) Single Factory EPZ and (6) Specialized Zones. Bangladesh has six EPZs specially earmarked for FDI. Many export-oriented industries have been grown up in these EPZs; government has taken programmes to establish some more EPZs and is trying hard to attract FDI. But due to some constraints, FDI inflows to Bangladesh have not been increased as it should have been and there are adverse effects and impact on FDI. The constraints on the way of FDI flows can be categorized as procedural, infrastructural, financial and political. If any foreign investor wants to establish an industry in Bangladesh in the specified EPZ, he has to meet up and follow some procedures. These may be are summarized as; (a) to get an allotment of industrial plot at EPZ, (b) to get registration with Board of Investment (BOI), (c) to prepare Memorandum and Articles of Association, (d) to get registration from the Registrar of Joint Stock Companies & Firms (RJSCF), (e) to get certificate of Incorporation and certificate of commencement of Business from RJSF, (f) to get trade license (g) to get Tax Identification Number (TIN) from National Board of Revenue (NBR), (h) to get customs bond license from Customs authorities, (i) to get certification from Ministry of Forest & Environment, (j) to get registration with the Ministry of Labour (Chief Inspector of Factories & Establishment), (k) to get utility certificates from gas and electricity service providers, and (l) to get membership from Bangladesh Garments Manufacturers (BGMEA) and Bangladesh Textile Mills Association (BTMA) (for investment in apparels and textile industries). In short, 12 formalities are required to be followed for FDI by any foreign investors. As a matter of fact, it is a long list to follow and it is not an easy job to accomplish. The procedural formalities, we believe stand on the way of FDI and the concerned authorities especially the Board of Investment (BoI) should review the system, minimize and simplify the procedures and make it for easier so that they can make plan and make investment within a short span of time. Another big hindrance on the way of FDI is arrangement of loans and other credit facilities from the banks and leasing companies. To get loans from any commercial bank, one has to followobserve 21 steps as per the printed checklist from any commercial banks. In addition, the finance charges for borrowing from banks and leasing companies are very high; we believe the rate is the highest in the world. The interest rate for borrowings from banks and leasing companies varies from 14% to 18%; in addition, letters of credit (LC) commission, LC margin is also very high in comparison with other countries where FDIs have taken place. Many countries provide easy terms and conditions for FDIs and export-oriented industries for borrowing and in the international competitive investment market, investors will invest in those countries. Structural constraints are the biggest constraints for FDI. Adequate power, energy, gas, water, good communication facilities and IT facilities are the prerequisite for any investment. In Bangladesh, new industries cannot be established due to non-availability of power and gas. There are local and foreign industries which cannot start production for shortage of gas and electricity. Structural constraints act as a deterrent to new industries in the form of FDI and need to be addressed, giving top most priority in the investment policies. There are lots of seminars, symposia; road shows and so on that are conducted or organized by some trade promotion bodies in the private sector and also by some governmental organizations at "five star hotels" at local and international levels to help attract FDIs to Bangladesh. This appears to be a funny and futile exercise; because if you do not have power and gas, how would you establish industries and go for production? This looks like you invite world-class football team to play football in Bangladesh without preparing a football playground and the question comes where the football game will be played. The concerned authorities, trade bodies should, for obvious reasons, first of all, be pro-active on building up infrastructure including power and energy that are conducive to attracting FDIs and then make or organize road shows, seminars and so on to attract and allure FDIs. Otherwise it would be mere wastage of money in the name of inviting FDI. Political instability is an important hurdle for FDI, especially in Bangladesh. It has become a tradition in Bangladesh that with the change of a government, the policy, planning, etc., get changed quickly and as a result, lots of changes take place in the industrial and investment policies, rules and regulations. In turn, the foreign investors lose confidence and become worried about their investments and, thus, create a negative impact on FDI. Shortage of skilled manpower is another big hurdle to attracting DFIs. Although Bangladesh has to large number of unskilled and semi-skilled labourers, but there is always shortage of skilled manpower; there are many expatriates technicians, marketing managers working in the foreign invested and locally invested industries, especially in apparels and textile industries. China, Malaysia, Singapore and the UAE have diversified their investment, both local and FDIs, from low-value items, such as apparels and textile industries to value-added items like electronic items, electrical, IT-related and telecom items. There are about 5,500 apparels industries and 2,000 textile industries in Bangladesh and there are lots of FDIs in these sectors; the government and the private business organizations should divert the local investments and FDIs from low-value items like apparels and textile industries to value-added items like electronics, electrical, IT and telecom items. Some business professionals genuinely opined that the BGMEA and BTMA have recently opposed and discouraged FDI in apparels and textile sectors rightly. There is another lucrative area for investment which has remained unnoticed or overlooked by the investors; that is industry for poultry and dairy-products. Bangladesh, with the present economic scenario, cannot afford to abandon the idea of FDIs or give less priority on FDIs. It is a labour-oriented country and for the sake of employment of millions of unemployed and under-employed people, FDIs are a must for it. It will be increasingly difficult to maintain the pace of GDP growth rate without much inflows of FDIs. The constraints, hurdles and hassles should be removed, procedures should be minimized and simplified, congenial infrastructures have to be built up, and finance charges should be reduced to an economic level in order to attract FDIs. The government and private organizations should make decisions correctly and efficiently, organize themselves effectively and concentrate and mobilize limited resources to harness the benefits from FDI inflows. The writer is Group Financial Controller of a Private Group of Industries and may be reached by email at: m.jalal.hussain@gmail.com