Merits and Demerits of Foreign Direct Investment | daily-sun.com

Merits and Demerits of Foreign Direct Investment

Md. Joynal Abdin

    26 May, 2017 12:00 AM printer

Merits and Demerits of Foreign Direct Investment

Md. Joynal Abdin

There are significant reserves of foreign currency in Bangladesh. It is mounting up during the last few years.

At the same time we have a good amount of unutilised money in the banking system. It seems good to listen that we are becoming a wealthy nation with handsome cash in hand.

 

But till now our investment in percentage of GDP is about 29%. It is 56% in Bhutan, 33.25% in India. Bangladesh’s investment in percentage of GDP is increasing day by day but the growth rate is too slow.


It is a matter of investigation whether foreign currency reserve and unutilised cash in banking system is mounting because of this poor performance in investment or not. In terms of attracting foreign direct investment (FDI) we are performing even poorer than the neighbouring or competitor countries. Bangladesh earned USD 1191, 1726, 1432, 1830 and 2001 million during the last five fiscal years. It is only 0.98, 1.19, 1.74, 1.47 and 1.73% of the GDP whereas India earned FDI of 2.00, 1.31, 1.52, 1.70 and    2.11% of its GDP during the last five years. Vietnam got FDI 5.48, 5.37, 5.20, 4.94 and 6.10% of its GDP. The Maldives received FDI 17.29, 9.05, 12.91, 10.77 and 8.70% of its GDP during the last five years.


Let’s have a look at the benefits of receiving FDI into a developing country like Bangladesh. FDI could offer the following benefits to its host country:


1    Increasing supply of foreign currency and channelise international sources of industrial funds;
2    increases employment opportunity and help to reduce unemployment rate;
3    increases skills of the host country’s labour and facilitate technology transfer;
4    increases managerial knowledge of the host country’s professionals;
5    foster economic growth, export earnings;
6    introduces products standardisation and international exposure of other products;
7    provides corporate tax to the government and contribute in revenue growth;
8    creates a competitive business environment and productivity improves with the competition;  
9    develops international channel of distribution;
10    assists in adopting international standard policies and creates a global business regime;
11    contributes to development of backward and forward linkage local enterprises and
12    assists in improving living standard of the stakeholders through different social responsibility measures.


Bangladesh is fighting with the development barriers like unemployment, poverty reduction, enlarging product basket, enlarging export basket etc.

since its independence. It achieved significant economic advancements but till we have scope to grow further. Therefore, the government attaches the highest priority to industrialisation of the economy by any means. Already we have eight Export Processing Zones (EPZ), 78 Industrial Estate developed by BSCIC to host investment. Furthermore, the government is progressing to establish 100 Special Economic Zone (SEZ) in Bangladesh. All these arrangements are to host investment either from local or foreign sources. Bangladesh Investment Development Authority (BIDA) has been restructured by merging the Board of Investment (BoI) and Privatisation Commission together. BIDA is organising conferences, seminars, road shows abroad to draw attention of the foreign investors. The government declared a long list of fiscal and non-fiscal incentives to boost up the investment movement. But till now Bangladesh’s performance in FDI attraction is considered poor. It is because a number of other factors like good governance, political stability / understanding among the political parties, security and safety of investment, law and order situation, availability of industrial logistics, hassle-free business registration and licensing etc. are involved with an investment decision making.
Now Bangladesh has to go for a comprehensive investment services like one stop service, approaching foreign investors with specific project proposals, justification of investment policies and revision (if necessary), establishment of sector specific technical and engineering institute, establishment of sector specific testing laboratories, signing free trade agreements with existing and potential export destinations, reducing business licenses and registration requirements, activating BIDA with own manpower instead of the cadre officials deployed in deputation to activate the investment attraction measures.


Bangladesh has everything to be a good destination for foreign investment. It is located at the heart of South Asia, corridor between SAARC and ASEAN countries. It has a large number of domestic consumers. Purchasing power of local people is increasing day by day with economic growth of the country. Bangladesh has a good number of sectors to invest profitably with supply of enough manpower in competitive cost. The government keeps assisting the investors with a long list of fiscal and non-fiscal incentives. Finally export items of Bangladesh are enjoying duty-free and quota-free market access to most of the export markets other than the USA. All the LDC facilities under the WTO arrangement are enjoying by an entrepreneurs while doing international trade with Bangladesh. Therefore, Bangladesh could be considered as one of the most attractive locations to relocate global business corporations to the EPZs and SEZs being developed by the government.


It is for sure that Bangladesh needs foreign investment to boost-up its economy but we must remember that there are some adverse effects of FDI too. For example, FDI in some sectors could have an adverse effect on local employment sector. For better understanding we could imagine a scenario where a large corporation establishes a highly sophisticated readymade garment factory here in Bangladesh, where most of the tasks are completed by robotic technologies instead of human labour. Its productivity is much higher than human labour and product cost is also lower. In such cases, local factories will lose its market share. After a certain period it could be seen that local factories are reducing their manpower to adjust with the situation. Large number of people loses their employment due to that large investment. Similarly extreme competition from an FDI company may be the cause of death to many local SMEs. Repatriation of a large FDI conglomerate could have an adverse effect on foreign currency reserve or balance of payment of a country. Therefore, we must consider all these possible adverse effects of FDI into the local economy and adopt legal framework to mitigate these threats.


Finally, we could state that, Bangladesh needs FDI to functionalise its upcoming SEZs and generate employment for the growing number of job seekers. But we must reserve few product and service sectors for the local entrepreneurs. Welcoming campaign for FDI has to be increased and equipped with enough precautionary measures. Adequate preparations, practical drive and a business friendly local business environment could encourage the investors to invest here in Bangladesh. We have everything to become a middle income country by 2027 if our government, political leaders, decision makers play respective role accordingly. Otherwise piecemeal investment drive will not give us complete output up to the expectation.


The writer is a Development Researcher and the Deputy Manager of SME Foundation, Bangladesh. Email: mdjoynal@gmail.com


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