Is FDI a panacea for growth?
Saturday, 10 November 2007
Masih Malik Chowdhury
AS we all know, foreign direct investment(FDI) has changed the fate of many economies. However, FDI has its own characteristics. Not all these characteristics are the same for different economies. FDI requires early pay back and the quicker the pay back the more is the inflow of FDI. FDI is often wrongly perceived as formal inflow of investment from one economy to another. In Bangladesh, investment from overseas is considered as FDI. But expatriate Bangladeshis also invest large volumes of fund in Bangladesh. A large chunk of that fund has so far entered Bangladesh in the form of hundi as well as other means. But these are often taken as domestic investment.
Unhindered inflow of FDI requires a stable economic and political situation. Inadequate infrastructure in the roads and highways, power and telecommunications sectors, less than business-friendly duty structure, unfinished reform in the financial sector etc., are the hurdles to FDI inflow. It has also to be recognised that as elsewhere, there is parallel economy in the country. But unlike other economies, the parallel economy has overshadowed the mainstream economy here.
Growth in the developed economies, on the other hand, is stagnant and the return on investment (ROI) is low and discouraging. The investment needs are saturated there. Bangladesh offers very attractive paybacks, high ROI and excellent incentive package for FDI.
However, FDI does not necessarily and always add value to the economy. Before coming to FDI in details, let us see what other options to private domestic investment are there. The best alternative, however, is private domestic investment followed by public domestic investment.
FDI comes in the form of foreign currency(FCY) in to an economy. When return on FDI in the form of dividends flows out of the economy, we need to account for the fact that the yields or returns on FDI to the investors also similarly outflow from the economy in the form of FCY. The outflow of return on FDI is always FCY, which goes in the name of repatriation of dividends and divisible profit, interest in debentures, withdrawal of capital etc. Investment is not the only solution to all economic problems. Investment generates employment, creates market demand. This demand again creates a continuous supply chain. In other words, the savings generated by employment obviously ends up leaving new investible fund. New employment creates scopes for savings and thereby demands for new consumption. But not all the economies can have sufficient fund for meeting this perpetual demands for investment. In other words, investments create employment, market, consumption, savings and this cycle continuously. This growth is defined as GDP growth. A two or near to two digit GDP growth of China, India, Korea and few other economies have opened up or are soon to create ample scope for them to dominate the whole world market.
In fact globalisation has opened up free journey or movement of investment funds across the world without any significant hurdles as barrier. Thus cross-border outflow of FDI now forms a part of development indeed.
However where parallel or off-stream economies overrule main stream economies which prevail in almost all the developing countries, GDP does not only grow from FDI alone. It is the use of FDI amidst and together with inflow of off-stream economy into main stream along with optimum economic efficiency or macro economic management that have brought forth development potential there. So FDI alone can not ensure development.
Arguments are many both for and against FDI, especially in developing countries like ours. FDI often becomes hegemonistic by controlling the economies it flows into. In other words, FDIs from developed to developing countries are often taken as cushions to maintain the colonial legacy in a new form. FDI in one sector may manifest through enormous growth, even making one sector export oriented. Again, irregularities like over-invoicing of imports and under-invoicing of exports mainly take place through FDI for quick transfer of profit. This makes the FDI as an instrument of, and means for, economic exploitation. More particularly, the countries where FDI flow usually becomes dependent on foreign firms, which delays or defer the mobilisation, growth and development of local investment and industries. Economies thereby become dependent on FDI and their products, as monitoring investment sectors and needs for industrial product from FDI in these countries is poorly equipped to ensure oversight on FDIs. The FDIs, often in the name of Corporate Social Responsibility (CSR) keep people perplexed and blind to there activities.
However, FDI has also lessons for the local investments who constitute the first generation in the investment chain. Exceptions are India, China, Brazil and Argentina which have, however, been well ahead with first generation investments. India has been prospering faster as their access to world is better due to IT efficacy, proficiency in English language and certain industries that are growing faster due to the fact that their domestic market potential is highly positive.
FDI often involves import of some technologies that are not appropriate for the country concerned. Yet it fetches high cost for the nations as it is tied with FDI. One such case is TATA & Asia Energy. TATA demanded access to cheaper gas but ensured consistent supply to set up an industrial park for only three to four billion dollars as FDI.
The popular belief about FDI regarding its success in development financing is a hype originating from the western world experience. But it may not always be replicated with the same outcome. This is because circumstances of the western world and those of the developing world are different.
FDIs often are attracted to profitable sectors and are hardly found to be in education, health, research and developments in basic industries, infrastructures, etc.
FDI inflow in Bangladesh during 2005-Distribution by Regulatory Agencies
In 2005, FDI originated from 30 different sources dominated by the developed economies (51.45%). Interestingly, a significant share of FDI also came from developing economies (43.23%) also. The top-five FDI sources are: UK (18.08%), USA (16.78%), Singapore (11.53%), UAE 6.55%) and Norway (6.33%).
Year-wise details of the Private Investment Projects registered with BOI from FY 1991-92 to FY 2005-2006
Industries under Bangladesh Export Processing Zone (EPZ) and their Performance in terms of Investment and Employment Generation (up to June 2006)
The total FDI was US$ 845 billion in 2005. On the other hand, Private Investment Project in 2005 was for Tk. 20.3 billion which was about 3,177 billion dollars.
FDI will not flow in unending quantum. Firstly, we may think of local investments, which should be followed by FDI only in selected thrust sectors. Strategically vital sectors like Power, Irrigation, Communication, Energy, Gas, IT, SME etc., should be reserved for local investments.
India did choose FDI on the basis of its merit and its own economic priorities. In a similar fashion, we should also choose our own course of development and take decision, especially regarding FDI. To conclude, FDI itself would not change our lot.
It is necessary to develop appropriate policies to ensure economic development from the FDI and domestic investment. We need to limit the access areas for FDI and allow domestic investment to replace it in the near future. FDI alone will not take us along a sustainable development path.
The author is Senior Partner Masih Muhith Haque and Co, Chartered Accountants
AS we all know, foreign direct investment(FDI) has changed the fate of many economies. However, FDI has its own characteristics. Not all these characteristics are the same for different economies. FDI requires early pay back and the quicker the pay back the more is the inflow of FDI. FDI is often wrongly perceived as formal inflow of investment from one economy to another. In Bangladesh, investment from overseas is considered as FDI. But expatriate Bangladeshis also invest large volumes of fund in Bangladesh. A large chunk of that fund has so far entered Bangladesh in the form of hundi as well as other means. But these are often taken as domestic investment.
Unhindered inflow of FDI requires a stable economic and political situation. Inadequate infrastructure in the roads and highways, power and telecommunications sectors, less than business-friendly duty structure, unfinished reform in the financial sector etc., are the hurdles to FDI inflow. It has also to be recognised that as elsewhere, there is parallel economy in the country. But unlike other economies, the parallel economy has overshadowed the mainstream economy here.
Growth in the developed economies, on the other hand, is stagnant and the return on investment (ROI) is low and discouraging. The investment needs are saturated there. Bangladesh offers very attractive paybacks, high ROI and excellent incentive package for FDI.
However, FDI does not necessarily and always add value to the economy. Before coming to FDI in details, let us see what other options to private domestic investment are there. The best alternative, however, is private domestic investment followed by public domestic investment.
FDI comes in the form of foreign currency(FCY) in to an economy. When return on FDI in the form of dividends flows out of the economy, we need to account for the fact that the yields or returns on FDI to the investors also similarly outflow from the economy in the form of FCY. The outflow of return on FDI is always FCY, which goes in the name of repatriation of dividends and divisible profit, interest in debentures, withdrawal of capital etc. Investment is not the only solution to all economic problems. Investment generates employment, creates market demand. This demand again creates a continuous supply chain. In other words, the savings generated by employment obviously ends up leaving new investible fund. New employment creates scopes for savings and thereby demands for new consumption. But not all the economies can have sufficient fund for meeting this perpetual demands for investment. In other words, investments create employment, market, consumption, savings and this cycle continuously. This growth is defined as GDP growth. A two or near to two digit GDP growth of China, India, Korea and few other economies have opened up or are soon to create ample scope for them to dominate the whole world market.
In fact globalisation has opened up free journey or movement of investment funds across the world without any significant hurdles as barrier. Thus cross-border outflow of FDI now forms a part of development indeed.
However where parallel or off-stream economies overrule main stream economies which prevail in almost all the developing countries, GDP does not only grow from FDI alone. It is the use of FDI amidst and together with inflow of off-stream economy into main stream along with optimum economic efficiency or macro economic management that have brought forth development potential there. So FDI alone can not ensure development.
Arguments are many both for and against FDI, especially in developing countries like ours. FDI often becomes hegemonistic by controlling the economies it flows into. In other words, FDIs from developed to developing countries are often taken as cushions to maintain the colonial legacy in a new form. FDI in one sector may manifest through enormous growth, even making one sector export oriented. Again, irregularities like over-invoicing of imports and under-invoicing of exports mainly take place through FDI for quick transfer of profit. This makes the FDI as an instrument of, and means for, economic exploitation. More particularly, the countries where FDI flow usually becomes dependent on foreign firms, which delays or defer the mobilisation, growth and development of local investment and industries. Economies thereby become dependent on FDI and their products, as monitoring investment sectors and needs for industrial product from FDI in these countries is poorly equipped to ensure oversight on FDIs. The FDIs, often in the name of Corporate Social Responsibility (CSR) keep people perplexed and blind to there activities.
However, FDI has also lessons for the local investments who constitute the first generation in the investment chain. Exceptions are India, China, Brazil and Argentina which have, however, been well ahead with first generation investments. India has been prospering faster as their access to world is better due to IT efficacy, proficiency in English language and certain industries that are growing faster due to the fact that their domestic market potential is highly positive.
FDI often involves import of some technologies that are not appropriate for the country concerned. Yet it fetches high cost for the nations as it is tied with FDI. One such case is TATA & Asia Energy. TATA demanded access to cheaper gas but ensured consistent supply to set up an industrial park for only three to four billion dollars as FDI.
The popular belief about FDI regarding its success in development financing is a hype originating from the western world experience. But it may not always be replicated with the same outcome. This is because circumstances of the western world and those of the developing world are different.
FDIs often are attracted to profitable sectors and are hardly found to be in education, health, research and developments in basic industries, infrastructures, etc.
FDI inflow in Bangladesh during 2005-Distribution by Regulatory Agencies
In 2005, FDI originated from 30 different sources dominated by the developed economies (51.45%). Interestingly, a significant share of FDI also came from developing economies (43.23%) also. The top-five FDI sources are: UK (18.08%), USA (16.78%), Singapore (11.53%), UAE 6.55%) and Norway (6.33%).
Year-wise details of the Private Investment Projects registered with BOI from FY 1991-92 to FY 2005-2006
Industries under Bangladesh Export Processing Zone (EPZ) and their Performance in terms of Investment and Employment Generation (up to June 2006)
The total FDI was US$ 845 billion in 2005. On the other hand, Private Investment Project in 2005 was for Tk. 20.3 billion which was about 3,177 billion dollars.
FDI will not flow in unending quantum. Firstly, we may think of local investments, which should be followed by FDI only in selected thrust sectors. Strategically vital sectors like Power, Irrigation, Communication, Energy, Gas, IT, SME etc., should be reserved for local investments.
India did choose FDI on the basis of its merit and its own economic priorities. In a similar fashion, we should also choose our own course of development and take decision, especially regarding FDI. To conclude, FDI itself would not change our lot.
It is necessary to develop appropriate policies to ensure economic development from the FDI and domestic investment. We need to limit the access areas for FDI and allow domestic investment to replace it in the near future. FDI alone will not take us along a sustainable development path.
The author is Senior Partner Masih Muhith Haque and Co, Chartered Accountants