Japanese investors sanguine about business potential in Bangladesh
The relationship between Japan and Bangladesh is a trusted and time-tested one. Bangladesh became Japan's biggest recipient of official development assistance in 2020. Since the Covid-19 pandemic started more than a year ago, there has been a lot of talks and anticipation about Japanese businesses moving base to Bangladesh. In a series of high-profile interviews, The Daily Star tries to understand the increasing interest of Japanese investors in Bangladesh, its growth prospects, barriers to growth, ground realities, and how to attract more Japanese investment. As part of the series, today, we are running the interview of ITO Naoki, Japanese ambassador to Bangladesh.
DS: What lessons can Bangladesh learn from Japan's growth trajectory?
Naoki: Bangladesh at present and Japan in 1971 share almost the same level of GDP per capita (About $2,000). Japan achieved rapid economic growth after the Second World War, particularly in the 1960s and the 1970s. That was based on the improvement of infrastructures, namely, highway and railway networks, airports, and coastal industrial zones, and industrialisation policy focusing on prime sectors, including automobile, steel, electronics, textile, and SMEs.
Bangladesh has been implementing several mega infrastructure projects to accelerate the growth, targeting to graduate from the grouping of the least developed countries (LDC) by 2026 and realise an advanced economy by 2041.
In addition to industrialisation and infrastructure development, Japan focused on human resources development, education, health, and SMEs. I am pleased to note that Bangladesh is now putting its priority on these areas.
DS: As we celebrate the 50th anniversary of Bangladesh, how significant has the contribution of Japanese companies been in the country's journey towards a developing nation? How do you assess Japan's role in developing our economy?
Naoki: Since the independence, Bangladesh has become the largest recipient of Japan's official development assistance (ODA). The construction of the Kanchpur, Meghna, and Gumti second bridges and the existing bridges rehabilitation project are excellent examples of the Japanese ODA. Those bridges have significantly reduced the travel time between Dhaka and Chattogram.
Japanese companies transferred their know-how and skills to the Bangladeshi engineers and workers for future maintenance work and infrastructure construction by themselves.
As a potential hub of the regional economy, Matarbari Port would connect South Asia and South-East Asia. In other words, it could re-shape Bangladesh as a trading nation deeply incorporated in the inter-regional and global value chains.
In parallel to the support for building infrastructures, the investment from the Japanese private sector has also played a significant role. As of September 2020, cumulative direct investment from Japan reached $390.18 million.
Furthermore, as of April 2021, some 321 companies are operating in Bangladesh. The number quadrupled from 83 in 2010. The amount of investment in FY2019-20, even under the Covid-19 pandemic, was $60 million, about three times higher than in FY2009-2010, when it was $22 million.
Currently, Mitsubishi Motors Corporation is exploring the possibility of making a new investment to establish a completely knocked down (CKD) assembly plant for National Brand Cars. This project would be immensely impactful for Bangladesh's industrialisation and the diversification of its economy through technology transfer and the creation of significant employment opportunities.
DS: What are some of the main achievements of the bilateral value-chain of Japan and Bangladesh? What is the bilateral trade scenario? What steps should be taken to strengthen trade relations?
Naoki: Japan is the largest export market for Bangladesh in Asia. Over the last 10 years, the export figures have doubled and reached $1.2 billion. The main export items are textile, ready-made garments, and leather products. I expect these sectors will continue to secure a significant position, and the key is to establish the brand image by increasing productivity and assuring better quality. I firmly believe that is possible.
Pharmaceuticals, agricultural and fishery products, and the food industry have high potential. Your marvellous mangoes are yet to enter the Japanese market. Once exported, Bangladesh's mangoes and lychees will undoubtedly be popular among our consumers.
I reiterate the importance of concrete and early solutions to tax, customs, and foreign exchange (remittance) issues, which have already been raised by Japanese companies operating in Bangladesh. The existing companies will play a critical role in enhancing foreign direct investment, and those steps are necessary to make Bangladesh an attractive destination for future investment. Bangladesh needs to reduce cost and bring ease of doing business.
Following a series of dialogues with the Bangladesh government, areas such as parent companies' loans for working capital, royalty remittance, container round-use for companies at the export processing zones (EPZs), and registration fee of two-wheelers have made considerable advance.
Nevertheless, several remaining business risk factors impede newcomers into a market, such as delay of letters of credit payment, tight regulation on telegraphic transfer for import transaction, cash incentive for RMG exports, and difficulties in customs clearance.
Let me emphasise that a business environment needs to improve from the eyes of existing companies, and to attract further investment to Bangladesh, we must find solutions to their challenges.
I also would like to look at our economic partnership from a different angle. When Bangladesh graduates from LDC status by 2026, it needs to keep or even further expedite the flow of trade in goods and services with other countries. I believe it is vital for Bangladesh to proactively conduct studies and then advance negotiations on bilateral free trade agreements (FTAs) with countries, including Japan.
DS: Japan's contributions have been fundamental in various areas of infrastructure development. What are the other sectors where Japan has made notable contributions?
Naoki: In the Japanese FY2020, the government of Japan provided 373.2 billion Japanese yen ($3.423 billion) to Bangladesh as project loans and financial assistance for Covid-19 countermeasures. This amount means that Bangladesh has become the largest recipient, overtaking India, on a single Japanese fiscal year basis for the first time in the history of the yen loan.
The government of Japan and the Japan International Cooperation Agency (Jica) have contributed to the development of Bangladesh through loans, grant aid, and dispatch of the Japan Overseas Cooperation Volunteers (JOCV) in various fields, including education, health, water/sanitation, and agriculture.
In the past, support in the agricultural sector included the establishment of agricultural research institutes and universities. Notable examples are the establishment of the Citrus and Vegetable Seed Research Centre under Bangladesh Agricultural Research Institute in the late 1970s and the Institute of Postgraduate Studies in Agriculture, which became the first graduate school of agriculture in Bangladesh in 1998.
Japan extended technical cooperation and support for skills transfer through the JOCV. The radishes that were grown on a trial basis were later called Tasaki radish, after a JOCV who popularised them.
In the future, Japan will broaden its contributions to include the IT sector, food value-chains, and human resource and skills development. These are essential for the sustainable and inclusive growth of the economy and society.
DS: Will Japan continue the GSP facility for Bangladesh even after the graduation of the country from the LDC?
Naoki: Japan is now providing the government of Bangladesh with special preferential treatment (SPT), which is applied only to LDCs. Although subject items and applied tariff rates differ from the SPT, Japan will continue to provide the generalised system of preferences (GSP) after Bangladesh's graduation from the LDC group in 2026.
On the other hand, from a long-term perspective, just receiving GSP will neither increase export nor contribute to strengthening Bangladesh's competitiveness in the global market. By concluding FTA or economic partnership agreement, Japan and Bangladesh will be able to form a new partnership of trade and investment. Then, more new investments from Japanese companies could be expected. That would lead the country to expand trade and promote economic diversification.
As a first step, I would urge both Japanese and Bangladesh's companies to share that FTA or PTA (preferential trade agreement) is beneficial in expanding their business between the two countries.
DS: Why are Japanese companies interested in investing in Bangladesh? What are the barriers that Bangladesh need to remove to attract more Japanese investment?
Naoki: Bangladesh exhibits tremendous development potential due to its advantageous geographical location in Asia, linking India and the Asean. The Japanese companies will look at the advantages of Bangladesh, such as labour cost, skills availability, logistics, infrastructure, and benefits of EPZs and special economic zones.
Undoubtedly, Japanese investors have high hopes for the business potential in Bangladesh, in readymade garment, power and energy sectors, and other sectors such as ICT, light engineering, pharmaceutical, and agro-based industry.
DS: How do you look at the Japanese Special Economic Zone in Bangladesh?
Naoki: The development of the Japanese Economic Zone in Araihazar also makes Bangladesh a more attractive destination for Japanese investment. To that end, direct and indirect incentives are required, including corporate tax incentives.
Also crucial is coordinated improvement in investment climate among relevant ministries and authorities. Then, I believe the Araihazar Economic Zone will become the No.1 investment destination among many other economic zones in Asia.
Bangladesh has the advantage of attracting Japanese companies as they intend to diversify their production bases. Besides, the Beza Japan office is eager to assist Japanese companies in enhancing the bilateral business relationship.
The Bangladesh Economic Zones Authority (Beza) and Japanese trading giant Sumitomo Corporation have jointly established a new special purpose company (SPC) to run the economic zone. The Jica has provided 21.1 billion Japanese yen for the SEZ in 2015 and 2019 through a yen loan.
The SPC will commence its own development work and sales activity from the end of 2021 and start its operation before the end of 2022. Once the whole development project is complete, the economic zone will accommodate dozens to 100 companies. Araihazar will soon become a game-changer to accelerate FDI to Bangladesh, particularly Japanese direct investment. This zone by itself will be a $1 billion investment project.