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  • Writer's pictureSyed Akhtar Mahmood

At the summit …. on the ground

Over the past few days, Dhaka has been host to an ambitious business summit. Opened by the Prime Minister and attended by ministers, business leaders and other dignitaries from home and abroad, the summit is intended to brand Bangladesh and attract foreign investment.

These events are useful. But what you see from the summit is one thing. What you experience on the ground is another. Thus, after many such events at home and abroad – events that are quite costly in terms of monetary expenditures and the valuable time of the participants - FDI inflows are still much less than what we aspire to. According to Bangladesh Bank data, net FDI flows in FY22 (July 2021 to June 2022) was only 0.74 per cent of GDP, slightly better than the 0.71 per cent in FY21 and almost the same as in FY20 (0.73 per cent). As we bask in the glory of such glamorous events, it may be useful to ask why this is so.

My brief answer is that we are more focused on events than on processes. We count the number of investors who attend such events but, after the speeches and dinners are long over, we don’t bother to track how many followed up on the initial leads. We take pleasure in signing Memorandums of Understanding with prospective investors, but don’t address the many misunderstandings that happen between them and government officials later in the journey. We are enamored by the large size of our economy and how this is supposedly attracting foreign investors, but often forget that it is the global market that we should focus on and look for investors who can help us make an entry there.

Let me elaborate on these themes. I have written about these issues on the pages of the Dhaka Tribune and in other places. But these are so important, they are worth repeating.

Follow up on your leads

Successful investment promotion agencies in the world have one thing in common: they keep track of the investors who show up at the business summits or investor road shows. They have systems to find out how many of the potential investors followed up after the event and, if they didn’t, why not. If they did follow up, how far have they progressed? Are they stuck somewhere? If so, where, and why? Armed with such intelligence, the agencies take steps to address the bottlenecks. If it is something within the agency, they will take action in-house. If the problem lies elsewhere in government, they will reach out to the relevant agencies to have the bottleneck removed.

It is important to note that many investors silently withdraw their plans in the face of problems. The sooner we can track this, the better we can retain investor interest. Successful investment promotion agencies work hard to ensure that the initial investor interest is sustained and, one day, turns into actual investment.

The absence of such a system has been an Achilles Heel for us. This is a manifestation of a deeper malaise – the lack of a strong performance culture in government. Our focus is on inputs (such as events), less on outcomes (such as actual foreign investment flows), and even less on impact (diversification of exports or increases in productivity).

Reduce regulatory uncertainty

Foreign investors don’t mind if a government says “No”. But they get really irritated when a government says, “May be”. A clear negative answer is useful for investors; they can move on to other things. But when governments are indecisive or opaque, this creates uncertainty. Investors don’t like that.

A few years ago, the World Bank Group surveyed about 2400 CEOs of multinational companies which have invested across borders. The survey findings were presented in the World Bank Group publication, ‘Global Investment Competitiveness Report 2017/2018: Foreign Investor Perspectives and Policy Implications’. It was found that policy and regulatory uncertainty was one of the top reasons why foreign investors are discouraged from investing in a country.

This is true of Bangladesh too. A few years ago, I did a survey of businesses in Bangladesh and found something similar. The survey revealed that regulatory uncertainty is a major reason why many businesses do not make investment plans or do not fully implement plans that they have made. If local investors are discouraged by regulatory uncertainty, foreign investors will be even more so. Afterall, they have other places to go to.

Government functionaries in Bangladesh characterize our FDI policy framework as very conducive and urge foreign investors to take advantage of it. I am sure they also did so at the just-concluded business summit. They may have pointed to the tax concessions and other benefits offered to investors.

But good FDI policies are of little use if there is regulatory uncertainty. Investors take decisions based on actual decisions on the ground, not on what is written on paper. Thus, if regulations are ambiguous, if there are inconsistences between different rules and regulations, and if there is too much discretion in enforcing regulations, investors think twice.

An important source of policy and regulatory uncertainty in Bangladesh is inadequate coordination between different parts of government. Bangladesh Investment Development Authority, the country’s investment promotion agency, has the word ‘authority’ in its name.

But, in reality, its authority is quite limited.

Many important decisions that shape investor attitudes towards Bangladesh are taken by other parts of government, such as the Bangladesh Bank, National Board of Revenue, or different line ministries. These decisions are usually taken with other objectives in mind, such as protecting foreign exchange reserves or raising tax revenues. But, sometimes these may militate against the objective of increasing FDI inflows. When a customs officer imposes unusually high customs duties on the import consignment of a foreign investor or a Bangladesh Bank officer creates unnecessary delays in approving a foreign exchange transaction, the last thing he or she has in mind are the promises made by government at the recent business summit or the last investor road show.

Take care of those are already here

Attracting new foreign investors is, of course, important. But we must remember that the first person a prospective foreign investor will often call after returning from business summits are people who have already invested in the country. If they don’t make such calls immediately, they will do so at some stage. And if the story they hear is not good, they will be discouraged.

This is another area of weakness for us. We are not particularly good at taking care of investors who are already here. We tend to take them for granted. Since they are already here, we feel we don’t have to worry about them. But this is a wrong approach for at least two reasons. First, about 60 per cent of the net FDI flows to Bangladesh are reinvestments by foreign investors who are already here. Second, as mentioned above, prospective investors who are exploring Bangladesh as an investment destination will always check things out with the investors already on the ground.

Effective investment promotion agencies typically have a good investor grievance system in place. Such systems help governments identify issues faced by existing investors and trigger corrective actions, often by bringing other government agencies to the table. Countries that have set up such systems have managed to preserve investments that would otherwise have been lost. One of the most effective of such agencies is the Office of the Foreign Investment Ombudsman in South Korea, established in 1999. The Bangladesh government often addresses problems faced by individual investors when they are made aware of these. But we need to move away from such ad-hoc resolution of individual investor problems to a more systematic approach.

Worry about the composition of FDI, not just the volume

My final point is about the composition of FDI. Bangladesh has a huge economy. Hence, it is natural that many foreign investors will want to come here to take advantage of the local market. Some of these investments will indeed be useful for us. Consumers in Bangladesh do deserve to have good quality goods and services, something that foreign investors can bring to the country. So, I have nothing against the market-seeking foreign investors, i.e., those primarily targeting the domestic market in Bangladesh.

My concern is that we may not be doing enough to encourage the so-called efficiency-seeking FDI, i.e., one where the investor seeks to produce in Bangladesh in order to sell abroad. Such investors would view Bangladesh as a cost-efficient production base for export abroad. An analysis of the existing FDI stock in Bangladesh suggests that market-seeking FDI is the dominant form in Bangladesh. So far, a modest amount of FDI has gone into export-oriented industries, and much of that too in the traditional sectors, such as garments & leather goods.

Going forward, a key objective of FDI should be to help diversify our exports. We need this to reduce our dependence on garments and gradually shift towards more skill-intensive, complex products. We need to be more strategic. Instead of welcoming any FDI that comes our way, we should proactively seek FDI that helps us gain a strong foothold in global value chains.

Unless we can work on all these areas, we will not get the FDI we are dreaming of getting. We may have sponsored programs on CNN to brand the country, we may get the likes of Richard Quest to come and moderate sessions, we may have ministers coming with large business delegations and signing MoUs. But all this may not translate into real results on the ground unless we have in place the systems and approaches that I have discussed here.

The view from the summit may be breathtaking. But we now need to get to the ground and do the real job.

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