Why is foreign direct investment so low in Bangladesh and how to increase it?
Despite steady economic growth in the country over the past decade, foreign direct investment (FDI) has been comparatively low in Bangladesh compared to regional peers. As compared with USD 2.9 billion FDI inflow in Bangladesh in 2019, FDI inflows amounted to USD 141.2 billion in China, USD 50.6 billion in India, USD 23.9 billion in Indonesia and USD 16.1 billion in Vietnam. The rate of FDI inflow in Bangladesh is only around 1 percent of GDP, one of the lowest in Asia. While even during the pandemic (2020), FDI flows to developing countries in Asia increased by 4 percent to USD 535 billion, according to figures from the UN Conference on Trade and Development (UNCTAD), Bangladesh could not achieve the expected FDI. In 2020, foreign investors invested around USD 17 billion in Vietnam, USD 64 billion in India, approximately USD 18.58 billion in Indonesia, whereas Bangladesh received USD 2.56 billion and of the amount, USD 1.6 billion accounted for reinvested earnings by the already existing foreign companies in the country.
Government agencies in Bangladesh often claim that they are sincere and very keen on promoting investment. They have taken various liberal policies and implemented a number of policy reforms and incentives designed to promote a competitive climate for FDI, and also pursued various promotional activities such as investment summits, road shows, etc. for promoting investment. However, government claims do not often reflect ground reality. A foreign investor generally evaluates a country based on its ease of doing business ranking and overall economic climate. 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 55 days. Existing foreign investors often complain about bureaucratic tangles in Bangladesh that stand in the way of business operations and obtaining various licences. Then there are hidden costs in matters related to procedure, policy, law and infrastructure that seriously weigh upon the cost of doing business.
There are allegations that some investors have gone back to their country after finding long periods of waiting and hassles of overcoming many obstacles a bit too much. Industry experts say, the deterrents that discourage foreign investors include time-consuming bureaucracy, poor socio-economic and physical infrastructure, unreliable energy supply, corruption, absence of good governance, low labour productivity, undeveloped money and capital markets, high-cost of doing business, complicated tax system, frequent changes in policies on import duties for raw materials, machinery and equipment, delays in decision-making, etc.
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. We have made remarkable progress in expanding primary education, especially in raising enrolment of students and reducing gender disparity. But our education system and curriculum do not serve the goals of human development. There is a lack of communication and collaboration between the government, academia and industry, and as such we are not producing quality or skilled persons for modern industry. To cover the shortage, a good number of foreign professionals and technicians have been imported from neighbouring countries to run the industries such as apparel, textile, buying house, telecommunication, information technology, poultry, etc.
Investment (both foreign and domestic) is a key determinant of economic growth and development. It is also considered an engine for job creation. Although Bangladesh has experienced exceptional economic growth in recent years, it has failed to create adequate jobs for the millions of young Bangladeshis joining the workforce every year. At present, about two-thirds of our total population is of working age. Approximately 2 million people enter the labour market every year. Providing employment opportunities to such a huge population is quite a difficult task for the government as well as for the local private sector. Therefore, the government needs to continue to create more investment opportunities for foreign investors in sectors like power, garments, pharmaceuticals, textiles, agricultural processing, manufacturing, infrastructure including roads, highways, flyovers, water treatment plants, hospitals, power etc., which will create more jobs and foster sustainable economic growth. In recent times, the government has taken various steps to attract FDI in the country but it seems those are not enough to gain investors' confidence as Bangladesh severely lacks in two most used global indicators—Ease of Doing Business (EDB) by the World Bank Group and the Global Competitiveness Index (GCI) by the World Economic Forum.
It should be noted that when investors intend to come to a country, the level of convenience of doing business in the host country plays a crucial role in making investment decisions. They assess the clarity in existing policies, reliability of government officials and adherence to rules and regulations, look at the rate of return on their investment and whether they will be able to repatriate their profit or funds, and most importantly, whether there is sufficient security for their investments. Therefore, if Bangladesh wants to strengthen its position in the global marketplace and as a major destination of FDI, urgent policy focus is required to remove the deterrents discussed above that are responsible for the high cost of investment. If implemented successfully, the country will not only become a lucrative investment destination but it will also help to raise our ease of doing business ranking, an important indicator for FDI decisions of foreign investors.
Abu Afsarul Haider is an entrepreneur. He studied economics and business administration at the Illinois State University, USA.