The importance of FDI: Constraints and potential

Foreign direct investment (FDI) is recognised as a powerful engine for economic growth. It enables capital-poor countries to build up physical capital, create employment opportunities, develop productive capacity, enhance skills of local labour through transfer of technology and managerial know-how, and help integrate the domestic economy with the global economy.

International investment levels have exploded in recent decades thanks to the financial liberalisation across the world. Technological inventions which made doing business easier abroad, the lure of profits and countries increasingly embracing free market economies model also contributed to these increases in the flows of foreign investment in the era of globalisation. Proponents say FDI has an important effect on economic growth of the third world countries by creating a bridge between the gap of domestic savings and investment, and in the introduction and familiarisation of modern technology and management skills from developed countries.

Studies have revealed that FDI can also help generate domestic investment in matching funds, facilitate transfer of managerial skills and technological knowledge, increase local market competition, create modern job opportunities and increase global market access for export commodities. Inward FDI not only serves the long-term financial interests of foreign investors, it can also play a significant role in the growth dynamics of host countries.

Since the last decade, there has been a considerable change in global flows of trade and finance including a surge in FDI. Despite being a recent phenomenon, several underlying factors have contributed to increasing the FDI inflow in Bangladesh, namely trade and exchange liberalisation, current account convertibility, emphasis on private sector led development, liberalisation of the investment regime, opening up of infrastructure and services to the private sector - both domestic and foreign, and above all the interest of foreign investors in the energy and telecommunication sector.

Inflows of FDI into Bangladesh rose by 24 percent year-on-year to USD 1.6 billion in 2013, according to the United Nations Conference on Trade and Development, although the country witnessed serious political unrest and an anti-business climate during the period. Although the flow to FDI to Bangladesh has gone up substantially in recent years, the country's share is negligible if the foreign money which flowed into Asia in the same year is taken into account: in 2013, FDI inflow to Asia was USD 426 billion, 30 percent of the global share.

But Bangladesh can woo in more FDI as the country is always grouped among a set of countries that have the potential to become a destination for investors who are trying to find an alternative to China. Bangladesh need not go too far to see its potential: Myanmar, which has seen stable economic growth in recent years, has become a hot investment destination, having absorbed foreign direct investment of USD 45.2 billion as of January 2014.

More than USD 2 billion in foreign investment entered Myanmar alone in December 2014. Foreign investment has increased in the neighbouring country since the government allowed investors to rent privately owned land instead of just government-owned land, permitted them to operate independent foreign investment firms without local partners and eased the process of transferring foreign currency for investment. International investors are rushing to Myanmar not only for exploring opportunities within the country, but also in the increasingly integrating ASEAN region, a market with a population of 600 million and annual economic output reaching USD 3 trillion.

The same is also true of Bangladesh. The country's position, both geographically and in respect of its business culture, puts it at the centre of a diverse collection of markets and sectors. Its open market and diversified economy present opportunities for new investors to access a domestic market and to use the location as a gateway to the rest of the world.

It offers the most liberal investment climate in South Asia. The Foreign Private Investment (Promotion and Protection) Act, 1980, which deals with promotion and protection of investment in Bangladesh, ensures equal treatment for local and foreign investors. Bangladesh is historically recognised as a well-established and reputable jurisdiction in which to conduct business. Custom regulations are investment friendly without discrimination between foreign and domestic investors, and attractive incentive packages are available for the foreign investors.

The country offers a competitive location for doing business in terms of costs, inputs, human resources, market access and facilitation. Investing in the chosen sector will yield higher returns than most other competing locations, with lesser risks. Bangladesh owns a trainable, enthusiastic, hard-working and low-cost (even by regional standards) labour force suitable for any labour intensive industry.

Besides, it has one of the largest treaty networks among the Asia Pacific countries and has 30 Double Taxation Avoidance Agreements or tax treaties with almost all major nations.

According to a study of the Japan External Trade Organisation (JETRO), Bangladesh is the most cost-comparative advantageous country for operating business. Despite this advantageous situation, per capita FDI is one of the lowest in the world here. But Bangladesh needs foreign funds dearly, as its tax-GDP ratio has remained stagnant at 11 percent for many years.

Bangladesh's economy needs to grow at 7-8 percent in the next one to become a middle income nation and cut the poverty rate in the process. A growth rate of seven percent would require an investment-GDP ratio of more than 30 percent as opposed to the current level of 27 percent.

Bangladesh needs to undertake effective promotion measures to convince the potential foreign investors that their involvement in business activities in the country is valued, they would be facing friendly regulations, and they can enjoy investment incentives that are competitive with those offered by other countries in the region and the developing world. The country also needs to move forward through implementing investment-friendly policies, simplifying regulatory practices, and removing inefficient bureaucratic procedures.

Bangladesh slipped to number 173 among 189 nations on the Doing Business list 2014 of the World Bank, down from rank 170 a year ago because of slow pace of economic reforms. Bureaucratic control and interference in business and investment activities should be minimised on a priority basis. The law and order situation needs to be improved. Both the government and private sector need to come forward to invest in infrastructure development. Despite recent improvements, the efficiency of port services can be further improved and the custom clearance procedures can be further simplified.

Land is one area that constrains the flow of FDI to Bangladesh. The country does not have enough industrial land. In this case, the government can free up closed-down and non-functioning state-run enterprises and give the land to foreign investors by declaring them as special economic zones. Foreign investors will be particularly interested about those establishments as they are ready to use and already have gas and electricity connections, and some of them are located on the banks of rivers.

Strengthening economic and commercial diplomacy is a key factor in attracting FDI in the present world characterised by rapid globalisation and increasing competition.  Moreover, it is important not only to improve relations with countries that have already invested in Bangladesh, but also to identify potential investors in other countries and undertake appropriate measures to attract them to invest in the country.

Bangladesh must restore political stability, as instability seriously erodes foreign investors' confidence and creates an economic environment detrimental to long-term planning, which reduces economic growth and investment opportunities. What is most important for Bangladesh is that it has to put in place an environment that is generally supportive of investment because when the climate is favourable for domestic investment, it is likely to be favourable for international investment. Getting FDI has to be made a policy priority.

The writer is a senior business reporter, The Daily Star.