'Development of supply chain for different sectors is important'

Dr. Khondaker Golam Moazzem, Senior Research Fellow CPD, talks with A.B.M. Shamsuddoja of The Daily Star about the current state of Foreign Direct Investment (FDI) and prospects for the future.

The Daily Star (TDS): How do you evaluate current FDI inflow in Bangladesh?

Dr. Khondaker Golam Moazzem (KGM): FDI inflow in Bangladesh is still at a low level although it has increased in recent years. During 2006-2010, average yearly FDI inflow was $830 million, which was only $470 million in early 2000s and $450 million in late 1990s. In 2011, Bangladesh received $1.1billion as FDI, which is the highest FDI inflow ever. But this inflow is lower compared to those in major competing countries such as India ($32 billion), Indonesia ($19 billion), Vietnam ($7 billion) and even politically turbulent Pakistan ($1.3 billion). Even a number of African LDCs received more FDI compared to Bangladesh. FDI's share was merely 1% of GDP, which was lower than that of the average level of FDI-GDP ratio in LDCs and developing countries. Since 1972, Bangladesh has so far registered $17 billion worth of FDI proposals of which only one-third was finally realised (FDI stock at the end of 2011 was $6.1 billion). Thus, most of the FDI proposals registered in Bangladesh were unrealised due to various reasons.

TDS: What type of investment usually comes to Bangladesh?

KGM: The composition of FDI in Bangladesh has changed over time with the changes in opportunities in domestic and international markets. In mid-1990s, major targeted sectors for FDI were banking, textiles and apparels, and gas and petroleum (about 98% in 1996), which were slightly changed in early 2000s. In mid-2000s major share of FDI was found to be in telecommunication, gas and petroleum, banking and textiles sector (about 83.3% in 2006), and in recent years major FDI flow was concentrated to telecommunication, and banking and textiles (about 86% in 2010). Although FDI in Bangladesh is usually expected more in export-oriented and labour-intensive sectors, major share of FDI so far has been found to be in capital-intensive and domestic market-oriented service sectors. In other words, foreign investors found sectors linked with domestic market more attractive compared to those linked with international market. Likewise, major sources of FDI have changed where share of developing countries has increased over time.
The compositional change is also observed in different components of FDI. Although equity capital usually comprises the major share of FDI in Bangladesh, the share of two other components (reinvested earnings and intra company loan) has significantly declined in recent years -- from 50% of total stock of FDI in 2000 to only 20% in 2010. In other words, existing foreign companies reinvest relatively less of their profit/dividend in recent years.
Most of the FDI projects registered in Bangladesh are joint venture types (about 74% of the total registered projects till 2010) and small scale (about $1 million). Such kinds of FDI indicate various uncertainties and risks considered by foreign investors in case of investment in Bangladesh.

TDS: Why are we lagging behind?

KGM: The choice of a particular location for investment depends on various factors, including policy support, infrastructure facility, availability of supply chain, etc. Bangladesh has a liberal FDI regime under which it allows 100% FDI in all sectors except a few restricted ones, allows 100% repatriation of profit/dividend, safeguards foreign investment under bilateral investment treaties (BIT), avoids double taxation problem (DTT), and provides various kinds of fiscal and non-fiscal incentives and support. Despite the policy support, Bangladesh is not considered an attractive location for investment because of lack of enabling environment, including lack of sufficient physical infrastructural facilities (e.g. power, gas, land and road network), poor logistic facilities, insufficient supply of skilled workers and professionals, poor institutional mechanism to safeguard intellectual property rights and lengthy dispute settlement mechanism. Although a few constraints have been lessened in case of investment in EPZs, most of the constraints are still acute in the DTAs.
Lack of well-developed supply chain in most sectors is considered a major weakness in case of attracting large scale FDI. In the absence of reliable supply chains investors face problems in terms of getting access to reliable suppliers who are ready to supply raw materials, capital machineries at competitive price, maintain quality, ensure commitment for on-time supply, etc. Foreign investors are interested to invest in major segments of the supply chain if they are found to be well developed. Thus, development of supply chain for different sectors is important in order to attract more FDI.

TDS: What incentives could be provided to attract investors?

KGM: Most of the incentives and support offered to FDI are usually applicable at the "post-establishment" phase. These include tax holiday facility, zero import duty on raw materials and capital machineries for export-oriented industries, duty drawback facility, bonded warehouse facility for investment in EPZs, secured land and utilities for investment in EPZs, facility for 100% repatriation of profit and dividend, etc. Such incentive structure lacks focus on various issues related to "pre-investment phase." It is well appreciated that major challenges faced by foreign investors are usually at the pre-establishment phase. Potential investors want to know more about supply chain operates within the country, which includes information related to size of the market, major sources of supply of raw materials, major suppliers, market structure, major market players, etc. In case of possible joint venture investment, investors are interested to know about possible local partners and their market exposure. Considering that investment promotion agencies, such as Board of Investment (BOI), lack the capacity to provide support to the prospective foreign investors. BOI should revisit its role and should capacitate adequately in order to provide required support to the investors. Various business bodies such as FBCCI, MCCI and sectoral trade bodies should provide necessary support to foreign investors, particularly at the pre-establishment phase. The government may consider providing special incentives to existing investors to attract more investment of their profit/dividend in the country, provide special economic zones for investors of important countries such as Japan, South Korea, China and India, and provide necessary institutional support for development of setting up private EPZs like Karnaphully EPZ.