Rethinking our investment strategy
Investment is the lifeblood of an economy. There is ample evidence showing that both domestic and foreign direct investment (FDI) have a significant positive effect on economic growth. Ideally, investment spurs employment, which drives up production, leading to higher consumption and savings. Macroeconomics examines these factors since they influence growth and addresses issues like unemployment, inflation, falling growth rates, and trade gaps, providing policy guidance.
It is commonly believed that investment in consumer goods production is key to achieving higher growth. However, both theoretical and empirical literature recognise that additional investments in infrastructure, energy, industrial plants, and new technology drive economic growth through a ripple or multiplier effect. Infrastructure is built by the public, private sectors, and NGOs, while most new plant and technology investments are made by the private sector. These create jobs and enhance effective demand for goods and services. Furthermore, investments are made to build human capacity by the government, through budgets for education and training, and by the private and non-profit sectors. Investments in healthcare, nutrition, housing, sanitation, agriculture, and clean water are also critical to creating an enabling environment for growth. All forms of quality investment are essential when made according to actual needs and in balance. For instance, high investment in infrastructure like roads and bridges but low investment in education and training will not result in higher growth.
For all latest news, follow The Daily Star's Google News channel. The gross investment as a share of GDP for Bangladesh and India is about the same—slightly over 30 percent in 2024. The level of investment depends on various factors, and many developed countries have lower investment-GDP ratios: 20.7 percent in the US, 18.2 percent in the UK, 26 percent in Canada, while China's ratio is 41 percent. Bangladesh's private investment-GDP ratio was 23.51 percent, with the public sector ratio at 7.47 percent in FY 2024. Investment levels are influenced by factors such as private sector investment, government spending, monetary policy, interest rates, incentives for private investors, FDI, exchange rates, inflation, political stability, and legal frameworks.
Bangladesh has achieved significant industrial growth due to higher investment in the sector. The industrial sector's contribution to GDP increased from about 10 percent in 1990 to 38 percent in 2024, and its share of total exports grew from 86 percent to 98 percent. The services sector now contributes over 50 percent of GDP.
The recent focus on FDI by the interim government requires careful analysis of the factors motivating multinational companies to invest in Bangladesh. Five key factors stand out: i) potential domestic market opportunities; ii) availability of raw materials; iii) labour costs; iv) technological assets; and v) export platforms such as e-commerce. Traditional factors like political stability, government incentives, and social order remain important, but Bangladesh should also focus on technologically advanced trading platforms, people with internationally demanded managerial capacities, green and environmental skills, and increased investment in R&D to boost future FDI.
These factors are equally important for local investors. FDI should not be seen as an alternative to domestic investment. Local investment is responsible for most employment in both formal and informal sectors. It is unrealistic to formalise all informal sector jobs quickly in Bangladesh, but modernisation, skill-building, and formalisation of employment should be long-term goals.
FDI has had mixed results in different countries. In some, it has brought capital, new technology, and decent jobs. But in others, it has been concentrated in industrial sectors with limited impact on employment and economic growth. In Bangladesh, FDI has been mainly focused on manufacturing, power, and gas. However, there is significant potential for foreign investment in sectors like construction, transportation, ports, telecommunications, information technology, healthcare, and tourism, where local and foreign investors could collaborate.
Foreign investment is generally preferable to borrowing. Paradoxically, while FDI inflows to Bangladesh have declined over the last eight years, foreign borrowing has increased sharply. Between 2017 and 2022, the average annual FDI in Bangladesh was $2.92 billion—less than 1 percent of GDP. In 2023, FDI net inflows fell to $1.27 billion, and in 2024, to $1.46 billion. Meanwhile, the country's external debt has doubled from $51 billion in FY2016-17 to $103 billion by December 2024. This decline in FDI is concerning, and it is crucial to assess the reasons behind this trend. A review of the Foreign Private Investment (Promotion and Protection) Act of 1980 and other relevant legal frameworks is necessary to address barriers and improve the investment climate to attract more foreign investment to Bangladesh.
Dr Nawshad Ahmed, a retired UN official, is an economist and urban planner. He is currently working as an independent consultant and can be reached at: [email protected].
Views expressed in this article are the author's own.
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