FDI reform to improve investment climate

Bangladesh is a country with high potential for Foreign Direct Investment (FDI). Large investment inflow in electricity, transport, and telecommunications is creating a strong foundation for business. Other major sectors of foreign investments include readymade garments and textiles, energy and power, infrastructure, healthcare, ICT, agribusiness, leather and leather goods, electronics, light manufacturing, medical equipment, pharmaceuticals, and plastic. Alongside these, the agro-processing industry, light engineering, digital financial services, etc., are emerging sectors with high potentials to bring in more FDI in upcoming years.

Bangladesh offers a range of investment incentives under its export-oriented growth strategy and industrial policy aimed at seeking foreign investment. Net FDI inflow has increased significantly in recent years. But FDI to GDP ratio is still less than one per cent.
LOW FDI INFLOW: Despite being the second-largest economy in South Asia according to the UNCTAD World Investment Report 2023, Bangladesh ranked fourth in the region in terms of FDI inflow as a percentage of gross domestic product (GDP). Net FDI inflow of Bangladesh was USD 3.0 billion during the calendar year 2023, which accounted for only 0.75 per cent of the GDP-- far below the World Bank's required mark.
BARRIERS TO FDI: According to Bangladesh Bank (BB) statistics, net FDI Inflows in the calendar year 2023 were US$3004.40 million, recording a 13.7 per cent decline from $3475.55 million in the calendar year 2022.
Declining readymade garment (RMG) export, rise in energy and food prices, the war in Ukraine, rising commodity prices, and high cost of imports in 2023 resulted in a considerable balance of payments deficit. Sharp depreciation of taka against the U.S. dollar over the past two years created volatility which raised concern among foreign investors about currency risk and overall economic environment.
There are more barriers to FDI inflow in the long run than the temporary economic downturn caused by external factors. Bureaucratic delays, sluggish governance in various sectors, lax enforcement of labour laws and persistence of corruption create an unwelcoming environment for foreign investors, which are critical barriers to attracting FDI.
There have been some improvements in ensuring reliable electricity. But energy supply is still unreliable, affecting production schedules. A number of infrastructure projects have been completed but infrastructure inadequacy still remains a barrier for attracting FDI.
Bangladesh lags behind its competitors in South Asia in developing facilities at the port for handling cargoes and containers, alongside transport and logistic facility.
Foreign investors assess facilities before making any investment decision. When investors come to establish some business, they come on the basis of feasibility study and research. Inconsistency and frequent changes in government investment policies create uncertainty for the investors. Lack of predictability in taxation and regulatory environment makes it challenging for investors to decide on long term business plan.
Limited sector diversification is also a factor for low inflow of FDI. Heavy reliance on the RMG sector, which accounts for over 86 per cent of Bangladesh's export earnings, makes the economy vulnerable to global market fluctuations.
TRANSFORMATIVE POWER OF FDI: In the past decades several sectors in Bangladesh, such as Fast Moving Consumer Goods (FMCG) and Information and Communication Technology (ICT) have benefitted from large influx of investments. Transformative power of FDI inflow significantly leveled up technology, skills, and overall management standard of the industries.
FDI has played a commendable role in propelling the RMG sector to its current position of second top garments producer in the world. According to the FY2023-24 export figures of the National Board of Revenue (NBR), Youngone Corporation owned by South Korea's Kihak Sung topped the list of readymade garment exporters from Bangladesh. Youngone Group first reached near to a billion dollars in exports in FY2022-23 by exporting readymade garments worth US$ 985.3 million. Youngone exported 34.5 million pieces of readymade garments to 52 countries in the last fiscal year.
CREATING A COUNTRY BRAND: Creating a rewarding brand for the nation requires a comprehensive and integrated strategy. Country Branding is not a job that can be accomplished in isolation by the state, state bodies or any other private organisation. Effective country branding requires integrated and concentrated effort of all stakeholders. The government should have a research unit where facts and experience of all the stakeholders can be shared, pooled and analysed with regular exercise of periodic assessment and updates.
ESSENTIAL REFORM FOR GAINING INVESTOR CONFIDENCE: Overall investment climate and business environment play crucial role in attracting FDI. A number of strategic initiatives need to be implemented to improve overall investment climate and business procedures.
ONE STOP SERVICE: Four investment promotion agencies were given the responsibility for attracting foreign investments by the government of Bangladesh through the One Stop Service Act 2018. Investment Development Authority (BIDA) is responsible for screening, reviewing, and approving investments. If the foreign investment takes place in an export processing zone, economic zone, or high-tech park Bangladesh Export Processing Zone Authority (BEPZA), Bangladesh Economic Zones Authority (BEZA), or Bangladesh Hi-Tech Park Authority (BHTPA) may also be involved.
The first and foremost step should be making BIDA's one-stop service for foreign investors fully functional. Registration process, regulatory services and all the related services of BIDA, BEPZA, BEZA, and BHTPA should be integrated through automation and monitoring under a single One Stop facility. This will significantly reduce time and effort required to set up business operations.
TAX POLICY: Intricacies of customs procedures, tariff classifications and valuation methods are cumbersome and daunting for international business. In India, Vietnam, and Thailand, there are no VAT requirements for setting up industries in the economic zone; but in Bangladesh 15 per cent VAT is applicable for such industries.
E-GOVERNANCE FOR TRANSPARENCY: Implementation of e-governance to the full extent would enhance accountability and transparency. Implementation of clear anti-corruption measures is imperative for gaining investors' trust.
INTELLECTUAL PROPERTY RIGHTS: Bangladesh is a member of the World Intellectual Property Organisation (WIPO) and joined the Paris Convention on Intellectual Property. But intellectual property rights (IPR) protection in Bangladesh lacks prioritisation and investment. The government made some progress to bring IPR legislation into compliance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). However, implementation is slack and law enforcement agencies most often lack the training and resources to pay required attention to IPR complaints.
PPP FOR INFRASTRUCTURE DEVELOPMENT: Public Private Partnership (PPP) for infrastructure development can open up fund sources for projects. When necessary infrastructure facilities are in place these will enhance business growth and support foreign investments. Implementation of maiden the Logistics Policy of Bangladesh asks for intensive stakeholder engagements and partnerships.
Above all, creating a stable economic environment is vital for boosting up investor confidence. This includes managing inflation, ensuring a stable exchange rate, and maintaining healthy foreign currency reserves, all of which will encourage foreign investors to commit to long-term investments in Bangladesh.

TIM Nurul Kabir is a business, investment and technology analyst.
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