FDI inflow is shrinking. Here's why

Bangladesh has been consistently getting little foreign direct investment (FDI) over the years despite witnessing handsome GDP growth, developing several special economic zones and adopting one-stop services.

Although such moves are designed to encourage FDI, Bangladesh Bank data shows that net FDI inflow fell to $3 billion in 2023, a decrease of 14 percent from $3.5 billion in 2022.

In their recently ended fiscal year, net FDI inflow stood above $40 billion in India and $15 billion in Vietnam.

Naturally, this raises questions about why FDI remains low in Bangladesh year after year.

One major reason is the huge gap between the thinking of policymakers and the actual problems that investors face. So far, the government has done little to solve these problems or address discrepancies.

However, if the sufferings of investors are elaborated precisely, perhaps the question should be why they should invest in the country, especially when they have better options in other countries.

Policymakers believe foreign investors will be attracted to Bangladesh because it has a huge pool of cheap labour and allows easy repatriation of capital. So, they opine, FDI will find its way to the country if they can prepare special zones for investors.

But is that enough? Not at all.

Policymakers should realise that attracting foreign investors by offering only cheap labour is losing its lustre. At present, technology is taking over the role played by labourers in many cases.

On the other hand, many other countries allow full repatriation of capital and also provide land to foreign investors.

Moreover, Bangladesh's port handling facilities are still not up to the mark. If Bangladesh engages in more international trade, handling facilities may face serious challenges.

Sustainable energy supply is also a concern as existing investors are already facing a challenging situation in getting uninterrupted energy supply for their units.

Another headache for investors is frequent policy changes, which ultimately impact their businesses.

Policy chopping and changing is common in the country but the more important aspect is that the government does not even speak with private sector stakeholders before altering them.

As a result, these frequent policy changes not only create unpredictability but also jeopardise profitability, affecting investors' decisions.

Similarly, foreign investors operating in Bangladesh have been demanding consistent and predictable tax rules and measures for several years. However, the government changes the tax policies in almost every fiscal year.

On top of all these factors, corruption plays another major role behind the low FDI. Although corruption is not uncommon in foreign countries, it has permeated every sphere of society in Bangladesh, which has a greater impact.

A top official of a multinational company, preferring anonymity, said the main problem that his company faces relates to the delicate handling of government officials, who seek bribes in many forms.

He added that local politicians also extort the businesses.

He added that a foreign company could not pay anything as a bribe. However, in Bangladesh, bribes and extortion are a bitter reality.

"A lack of governance in every space is a major barrier to FDI," the official said.

Such barriers ultimately create problems for companies and that deters others from investing here, he said, adding that many investors were fed up with corruption and frequent policy changes.

Interestingly, the FDI stock started to fall after at least 17 years in 2022, when it decreased by 3.8 percent. In 2023, the FDI stock fell by 1 percent to $20.54 billion.

At the same time that stocks are falling, disinvestment is rising. In 2023, disinvestment of FDI stood at $965.36 million.

Furthermore, new investment was markedly low.

In 2023, existing companies reinvested earnings of $2.20 billion out of total net FDI inflow of $3 billion. This means that 73.5 percent of FDI came from existing investors.

Zaved Akhtar, president of the Foreign Investors' Chamber of Commerce & Industry, said a trustworthy partner for investment and business-friendly government regulations are essential to attracting FDI.

Honouring alternative dispute resolutions and international arbitration, consistent payment and incentives for tax exemptions in EPZs and hi-tech parks, and progressive and collaborative regulatory frameworks are needed to grow FDI, he said.

Consistency in policy is also required, meaning it should be ensured that policies are steadfast and no sudden changes are made.

The internal revenue mobilisation policy must also facilitate trade and investment so that the effective tax rate falls and it should go for more direct tax instead of high rates of indirect tax, he added.

Akhtar further said capacity-building, in terms of lifting the floor and ceiling of human capital, is also important.

He also said that investors' aftercare services should be better and that the National Board of Revenue should be fully digitalised.

Bangladesh could not only ensure a larger number of jobs but, given the current crisis in the foreign exchange reserves, find great support by attracting higher FDI.

However, the country has been failing to live up to its potential as the proper environment for FDI is yet to be prepared.

It is high time to realise that FDI will not come simply by requesting foreigners to invest in sectors with potential.