Unlocking the potential for foreign direct investment in Bangladesh
Prompt and coordinated measures are essential to prevent Bangladesh from falling behind in the intensifying competition for FDI
Foreign Direct Investment (FDI) serves as a vital catalyst for economic advancement in developing nations, offering essential capital, technology, and access to markets. Bangladesh, characterised by its strategic geographical position and rapidly growing economy, possesses significant potential to draw substantial FDI.
Nevertheless, despite achieving commendable GDP growth rates of approximately 6-7% annually over the past decade, the country has experienced relatively low levels of FDI inflow. In 2022, Bangladesh secured $3.48 billion in FDI, which is only a small fraction compared to the amounts attracted by regional counterparts such as Vietnam ($19.74 billion) and India ($49.97 billion) during the same timeframe.
The landscape for foreign direct investment (FDI) in Bangladesh is hindered by several significant challenges that restrict its ability to attract considerable capital. A primary hurdle is the inefficiency within bureaucratic processes, which complicates the business climate. Bangladesh’s position in the World Bank’s “Ease of Doing Business” index is notably low, with investors often encountering intricate regulatory frameworks, delays in licence acquisition, and sluggish contract enforcement.
These factors elevate both the cost and duration of business operations, discouraging potential investors. Furthermore, inadequate infrastructure, particularly in transportation, energy, and logistics, poses a substantial challenge. The congestion at ports like Chittagong and the unreliability of power supply contribute to increased operational expenses and erode investor confidence.
Additionally, policy volatility and a convoluted tax structure further obstruct FDI, as inconsistent regulations and elevated corporate tax rates (30%) generate uncertainty and lessen competitiveness when compared to regional players like Vietnam (20%). The skills gap within the labour force, particularly in technology-orientated sectors, further complicates the situation by restricting the pool of qualified workers available for advanced industries.
It is prudent to examine global examples before making any strategic decisions. Numerous instances worldwide illustrate this point. For example, Singapore’s success in attracting FDI is largely due to its highly efficient regulatory framework. This system is structured to reduce bureaucracy, featuring fully digital processes for business registration, permit acquisition, and tax filing. “Online Business Licensing System” (OBLS) enables companies to apply for various permits through a single platform.
Similarly, Rwanda has streamlined processes such as property registration, construction permits, and utility access by establishing a “one-stop centre” for investors. This emphasis on administrative efficiency has successfully drawn investments from international firms, including Volkswagen and the energy company Symbion Power.
Additionally, Vietnam’s swift emergence as a favoured FDI destination, especially in the manufacturing sector, can be attributed to strategic investments in infrastructure, including ports, roads, and industrial zones. The government has placed significant emphasis on the establishment of more than 200 industrial parks equipped with comprehensive logistics networks, which has effectively lowered production and transportation expenses for foreign investors.
In addition, Vietnam has adeptly implemented sector-specific tax incentives to draw foreign direct investment (FDI) into high-tech manufacturing, electronics, and renewable energy sectors. Enterprises investing in these prioritised areas benefit from tax exemptions lasting up to four years, followed by a reduced tax rate ranging from 10% to 15% for a period of up to ten years. Consequently, in 2022, Vietnam attracted nearly $20 billion in FDI, with major companies such as Samsung, LG, and Intel establishing significant manufacturing facilities.
Moreover, South Korea has consistently emphasised the importance of STEM education and vocational training, ensuring that its educational framework aligns with industry requirements. This focus has resulted in South Korea possessing one of the most highly skilled workforces globally, which has been instrumental in its leadership in high-tech industries such as semiconductors, automobiles, and electronics.
In light of this context and drawing from global experiences, Bangladesh may consider formulating specific strategies to enhance its FDI inflows. One potential approach for Bangladesh to accelerate FDI attraction is to fully digitise its business registration, licensing, and tax procedures.
Implementing a unified digital platform, similar to Singapore’s Online Business Licensing System (OBLS), would streamline the process of starting and managing a business, thereby reducing both time and complexity. Bangladesh has made progress by establishing the Bangladesh Investment Development Authority (BIDA), yet there remains room for improvement.
BIDA should enhance its processes to ensure that investors interact with a single agency for all necessary regulatory approvals, which encompass land acquisition, utility connections, and environmental clearances. Additionally, fortifying the legal framework to facilitate prompt contract enforcement would instil greater confidence in foreign investors, thereby mitigating the perceived risks associated with conducting business in Bangladesh.
Besides, development of infrastructure is vital. Bangladesh has launched several Special Economic Zones (SEZs), such as those in Mirsarai and Mongla; however, these zones require improved infrastructure to attract high-value investors. The government ought to prioritise the establishment of reliable power supplies, efficient transportation links, and modern logistics facilities within these SEZs. To accelerate infrastructure projects, Bangladesh should promote public-private partnerships (PPPs). Private capital can play a significant role in financing large-scale infrastructure initiatives.
Moreover, it is essential to expand and upgrade key ports, particularly Chittagong and Payra, to alleviate congestion and enhance export competitiveness. By decreasing the turnaround time for vessels, Bangladesh can position itself as a more appealing hub for manufacturing and export-orientated foreign direct investment.
It is essential to prioritise tax reforms. Bangladesh ought to consider lowering its corporate tax rates to enhance its business environment’s competitiveness relative to regional counterparts. A reduction to a range of 20–25% could render Bangladesh more appealing to multinational corporations (MNCs). Implementing sector-specific incentives is also vital.
Providing tax breaks and incentives aimed at high-growth sectors such as information technology, electronics, and pharmaceuticals would draw in higher-value foreign direct investment (FDI). Concurrently, it is important to streamline tax compliance processes and resolve disputes promptly.
Furthermore, it is crucial to focus on skill development. Bangladesh should allocate resources towards technical and vocational training programs that cater to industry requirements. Establishing training centres within Special Economic Zones (SEZs) can ensure that the workforce is equipped with the skills necessary for the specific needs of foreign investors.
Additionally, fostering collaborations between universities and industries will help align academic programs with market demands, thereby creating a consistent supply of skilled labour.
Moreover, Bangladesh could implement nationally recognised skill certification programs in partnership with the private sector to guarantee that the workforce meets international standards, especially in rapidly growing sectors such as IT and electronics.
By implementing global best practices observed in nations such as Singapore, China, and Vietnam, Bangladesh can establish itself as a compelling destination for foreign investors. Through strategic reforms and dedicated execution, the country has the potential to evolve into a centre for global investment akin to its regional counterparts.
Nevertheless, prompt and coordinated measures are essential to prevent Bangladesh from falling behind in the intensifying competition for FDI within an increasingly interconnected global economy.
Source: The Business Standard | Author: Dr. Mohammad Kamrul Hasan | 25 October 2024
