Home ›› 18 Nov 2021 ›› Editorial
The net inflow of the Foreign Direct Investment (FDI) declined by 1.94 per cent to $1.51 billion during the first half of 2021 at a time when the global FDI increased to $852 billion during the same period, according to the latest report of the UNCTAD.
FDI in the Least Developed Countries (LDCs) including Bangladesh contracted by 9 per cent in the first half of the year against a 30 per cent rise for middle-income countries.
Bangladesh's historically low foreign direct investment, which had dropped by 10.8 per cent to $2.6 billion last year, is unlikely to pick up in the near future as investment commitments remain lukewarm, forecast the UNCTAD.
Of the $2.6 billion received in 2020, reinvested earnings by the already existing foreign companies accounted for the lion's share: $1.6 billion, which is an increase of 6.7 per cent from a year earlier, according to data from the Bangladesh Bank.
In South Asia, FDI inflows rose by 20 per cent to $71 billion in the same period, thanks mainly to India. FDI increased 27 percent to $64 billion in India driven mainly by strong mergers and acquisitions. In Pakistan, FDI was down by 6 per cent to $2.1 billion, cushioned by continued investments in power generation and telecommunication industries.
FDI fell in other South-Asian economies that rely on export-oriented garment manufacturing, as orders from the US and the EU dropped substantially in 2020.
Global FDI flows have been severely hit by the pandemic: they plunged by 35 per cent in 2020 to $1 trillion.
Although Bangladesh advanced eight notches in the World Bank's ease of doing business 2020 ranking to 168 out of 190 countries, there are still significant bottlenecks in doing business. For instance, transferring a property title in Bangladesh takes an average of 271 days, almost six times longer than the global average of 47 days. Resolving a commercial dispute through a local first-instance court takes an average of 1,442 days, almost three times more than the 590 days' average among OECD high-income economies.
According to the World Bank, to get electricity connection in Bangladesh, a new business needs 150.2 days, whereas in Vietnam it takes 31 days, in Singapore 30 days, in Malaysia 24 days and in neighbouring India it takes 55 days.
Existing foreign investors often complain about bureaucratic tangles in Bangladesh that stand in the way of business operations and obtaining various licences. Besides, there remain hidden costs in public offices, weighing upon the cost of doing business badly.
According to the World Economic Forum's Global Competitiveness Index (GCI) 2019, Bangladesh's position slipped two notches to 105th among the 141 countries surveyed. As per the report, the country's competitiveness declined in 10 out of 12 pillars, where significant deterioration in ranks was observed in macroeconomic stability, labour market, ICT adoption and infrastructure. Beside poor infrastructure, lack of land, acute shortage of power and gas for new industries, finding the right people and getting them to work productively are the biggest problems of Bangladesh today.
It is pertinent to note that when investors intend to invest in a country, the level of convenience of doing business in the host country plays a crucial role in making their investment decisions. Investors assess the clarity in existing policies, reliability of government officials and adherence to rules and regulations, consider at the rate of return on their investment and fund repatriation procedures.
According to a recent report of the United Nations Conference on Trade and Development (UNCTAD), uncertainty about the ongoing Covid-19 pandemic and the global investment policy environment will continue to affect foreign direct investment in the entire 2021.
Last year’s low level of FDI has not been seen since the 1990s and is more than 30 per cent below the investment dip that followed the 2008-2009 global financial crisis. Despite economic projections that the global economy will recover in 2021, UNCTAD forecasts FDI flow to remain “weak” due to the uncertainty surrounding the ongoing pandemic.
Each and every country in the globe tries to woo FDI, although they have different and separate priorities towards attracting overseas investment. For countries like Bangladesh, FDI does not bring only foreign fund, but many indicators to power its economy and economic infrastructure. The development of our human capital resources is a big advantage of FDI, as the traditional education system, including those of tertiary ones, also fail to keep pace with the first evolving global industrial landscape riding hugely on the fourth industrial revolution. Skills gained by the workforce through training increase the overall education and human capital within a country. Countries with FDI are benefiting by developing their human resources while maintaining ownership.
While our education system lags behind global and even regional standards, FDI which brings knowledge with the capital will help our workforce with the latest manufacturing knowledge. The knowledge could be termed technology transfer as the industrialisation in the global arena is based on the latest technology.
Foreign direct investment will allow resource transfers and the exchanges of knowledge, technologies, and skills. It will also promote competition in the domestic input market as well.
In UNCTAD’s 2020 World Investment Report, the organization had projected a 5 to 10 per cent FDI slide for 2021. In January’s Investment Trends Monitor, UNCLAD says the FDI decline was concentrated in developed countries, where flows fell by 69 per cent to an estimated $229 billion. Flows to Europe dried up completely and a “sharp decrease” was recorded in the United States (-49 per cent to $134 billion). FDI in China ended the year with a small increase at four per cent.
Foreign direct investment is made when a business takes controlling ownership in a company, sector, individual, or entity in another country. Through FDI, foreign companies are directly involved with day-to-day tasks from the other country, resulting in a transfer of money, knowledge, skills, and technology.
In general, FDIs are made in open economies that have a skilled workforce and the potential for growth. Foreign direct investment takes place when an investor establishes foreign business operations or acquires foreign assets including initiating ownership or controlling interest in a foreign company.
With the cut down of our trade and loan benefits from developed nations and multi-lateral lending agencies after Bangladesh’s graduation to a middle-income country in 2026, only rate of return out of investment will be the major booster and effective tool to woo foreign investment here. Huge unemployment curse and wobbly balance of payment situation could be reversed through enhanced inflow of FDI in Bangladesh. Only the ‘cheap labour’ slogan can no longer attract foreigners to park their money here. Better law and order environment, recreational facilities, holidaymaking spots, better infrastructure and faster movement are some of the basic criterion Bangladesh needs to ensure without delay.
So far, we have invited FDI to take advantage of duty-free market access to developed nations due mainly to our least developed country status which will be no longer in place after 2026. Bangladesh has to provide conducive business environment, ensure better return under a pro-business government regime and freedom from bureaucratic bottlenecks to attract overseas investment here.
Bangladesh has a low tax structure, but not a friendly tax administration. We have a huge local market, but not smart market intermediaries. Bangladesh has huge cheap labours, but suffers from a lack of talent pool. We have millions of university graduates, but a small portion of them have foreign language skills. Our youths are practical, but not technically educated which is urgently needed to cope with the latest industrial direction.
Bangladesh has political stability, but lacks enough security for individuals. Our legal and regulatory environment is complex; access to land is difficult and bureaucratic inertia often impedes foreigners.
In the positive side, the country has a large domestic market, with maintaining macroeconomic stability and favourable exchange rate.
Global flows of foreign direct investment have been severely hit by the Covid-19 pandemic. In 2020, they fell by one third to $1 trillion, well below the low point reached after the global financial crisis a decade ago. Greenfield investments in industry and new infrastructure investment projects in developing countries were hit especially hard.
After the pandemic, the traditional focus on FDI should be refocused on the basis of enhanced productivity, better business environment and attractive rate of returns.
The writer is Executive Editor at The Business Post