FOREIGN direction investment states to direct investment of equity flows in the reporting economy. It is the sum of equity capital, the reinvestment of earnings and other capital. Direct investment is a category of cross-border investment associated with a resident of one economy having control or significant degree of influence on the management of an enterprise that is resident in another economy. The ownership of 10 per cent or more of the ordinary share of voting stock is the criterion for determining the existence of direct investment relationship. Foreign direct investment aims at three broad categories 鈥� natural resources-based, manufacturing and labour-intensive manufacturing. Natural resources-based activities are petroleum, minerals and agricultural production which tends to be large and capital-intensive. Manufacturing services are based on processed food, apparel, steel, chemical, transport, communications, electricity, business services and finance. Labour-intensive manufacturing is based on the export of apparel, electronics, textiles, footwear and toys highly depended on cheap laboul.
Since independence, the inflow of foreign direct investment, in absolute terms, remained minimal until 1995, as seen in Figure 1. The growth curve was relatively flat in this period because of a lack of major structural policy reforms, clear guidelines and innovation, which failed to attract significant foreign direct investment. According to the UNCTAD World Investment Report (1994鈥�2023), foreign direct investment inflow stood at $139 million in 1997, increasing to $280 million by 2000. In 2004, the figure reached $460 million, marking a period of positive growth. Between 2004 and 2008, foreign direct investment inflows showed a noticeable and consistent upward trend, culminating in $1,086 million in 2008. Maintaining this momentum, Bangladesh recorded $2,235 million in 2015, which further increased by $1,149 million over the next seven years. For the first time, the foreign direct investment inflow crossed $3,613 million in 2018, the highest amount recorded in a single year. However, this growth trajectory slowed during the subsequent years of 2019, 2020 and 2021. In 2022, the foreign direct investment inflow stood at $3,480 million. Overall, it is evident that the Bangladesh economy took 37 years to achieve an annual foreign direct investment inflow of more than $1 billion.
A peer analysis, in Figure 2, of the percentage of foreign direct investment inflow to gross domestic product ratio among five Asian countries over the last 40 years, from 1983 to 2023, gives significant insights. From 1983 to 1999, the foreign direct investment to gross domestic product ratio in Bangladesh was less than 0.5 per cent, reflecting minimal foreign investment inflow. In 2000, the ratio reached 0.5 per cent and with some variability, it increased to 1.17 per cent in 2005 and further to 1.45 per cent in 2008. Between 2010 and 2015, the ratio remained stable at more than 1 per cent. However, from 2016 to 2023, it chronologically declined, standing at just 0.32 per cent in 2023. Over 40 years, Bangladesh has never achieved a foreign direct investment to gross domestic product ratio of 2 per cent. In comparison, Sri Lanka surpassed 1.39 per cent in 1992 and had maintained this level for a few years before experiencing a decline in the next eight years. The ratio rebounded to 1.26 per cent in 2005, peaking at 2.85 per cent in 2010 and had remained consistently above 1 per cent for a decade. For Pakistan, the ratio reached 1.19 per cent in 1995, fluctuating thereafter and recorded its highest value of 3.04 per cent in 2007, maintaining a balance until 2010. However, for the last decade, Pakistan鈥檚 foreign direct investment to gross domestic product ratio has been below 1 per cent. From Bangladesh鈥欌�檚 perspective, both Sri Lanka and Pakistan demonstrate relatively better performance in foreign direct investment to gross domestic product ratio.
Indonesia鈥檚 performance showed an early progress, exceeding 1 per cent in the early 1990s and accelerating to 2.72 per cent in 1996. However, the ratio declined to less than 1 per cent that had continued for the next seven consecutive years. It then surged to its highest level of 2.92 per cent in 2005 and had maintained consistency at over 1.5 per cent for nearly a decade and a half. Malaysia has been a significant hub for attracting foreign direct investment. In 1983, the country recorded an foreign direct investment to gross domestic product ratio of 4.15 per cent, the highest among its five peer countries at the time. In 1992, this ratio peaked at 8.72 per cent and had maintained a stable outlook above 4 per cent until 2000. Since then, Malaysia has demonstrated consistent efficiency with robust foreign direct investment figures relative to gross domestic product. Among the peer countries, India has the largest gross domestic product in absolute terms. From 1992, India鈥檚 foreign direct investment to gross domestic product ratio showed an upward trend, surpassing 1.06 per cent in a decade. This momentum continued, reaching a peak of 3.62 per cent in 2008, and had remained relatively stable at around 2 per cent in subsequent years. Overall, in terms of foreign direct investment efficiency, Bangladesh, Pakistan and Sri Lanka fall within a less efficient curve whereas India, Malaysia and Indonesia are positioned on the efficient frontier.
One of the notable reasons for unsatisfactory foreign direct investment is ease of doing business indicators for foreigners. The ranking of economies is included: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
The World Bank had published the Ease of Doing Business report since 2006, which highlighted Bangladesh鈥檚 deteriorating ranking compared with other countries. In 2006, Bangladesh had an optimistic outlook and was ranked 65th among its peer countries. However, the ranking steadily declined, reaching 119th in 2010. In 2011, there was a slight improvement, with the country having been ranked 107th, but the situation worsened again, dropping to 130th in 2014. In 2015, the ranking deteriorated significantly to 173rd, maintaining a stable yet poor position until 2019. In 2020, the ranking slightly improved, reaching 168th. Overall, Bangladesh remains categorised as below average for ease of doing business.
Bangladesh has faced setbacks in attracting foreign direct investment and the situation continues to persist. To boost foreign direct investment inflows, the country must improve its ease of doing business indicators, as foreign investors often prioritise these metrics to assess a country鈥檚 business environment. Unfortunately, Bangladesh still lags significantly behind other Asian countries in this regard. Another critical factor is investor confidence, which depends on a stable political atmosphere and investment-friendly rules and regulations. These aspects have been adversely affected in the past and continue to pose challenges. Political instability, in particular, has been a significant barrier to foreign direct investment since independence.
Additionally, bribery and bureaucratic bottlenecks are other pressing issues that need an urgent attention. At every stage of file processing, investors reportedly face demands for substantial bribes from public servants, a frequent complaint among foreign investors. Red tape, characterised by sluggish administrative procedures and unnecessary delays in file processing, often occurs without major justification and is instead attributed to trivial reasons. These two issues coexist, perpetuating the inefficiency and inertia within the administrative system.
The driving force for boosting foreign direct investment is country branding. Bangladesh urgently needs to establish a strong country brand, and in this regard, the Bangladesh Investment Development Authority should take on the role of chief communication officer to represent the country to the rest of the world. Another crucial aspect for advancing business-friendly policies is the ease of regulatory frameworks. Broad deregulations can serve as a win-win strategy to attract investment by streamlining value-added tax and tax regulations, simplifying new business or joint venture registration processes, and implementing straightforward administrative rules.
Access to physical infrastructure facilities, especially ports, communication networks, customs, the National Board of Revenue and respective secretariat departments must be ensured without obstacles. In this regard, all government departments related to foreign investors should introduce a one-stop service, which must be coordinated by the Investment Development Authority with strong oversight. Furthermore, foreign investors should be authorised to transfer their organisation鈥檚 profits to the host country in foreign currency. Alternatively, options should be provided to reinvest, retain or venture into new businesses using the generated profits. Enabling profit transfers will significantly boost investors鈥� confidence.
Economic diplomacy should be accelerated through the foreign affairs ministry to promote bilateral trade and investment, as it plays a significant role in fostering cooperation. It involves using diplomatic skills combined with economic tools to advance a country鈥檚 economic, political, and investment interests. Economic diplomacy operates at three levels: bilateral, regional and multilateral, with bilateral economic diplomacy playing a particularly vital role in shaping economic relations.
Furthermore, strengthening relationships with ideologically aligned countries of the GCC, particularly Saudi Arabia, Qatar, the United Arab Emirate, Oman, and Kuwait, should be prioritised to attract foreign direct investment. Since independence, Bangladesh has maintained friendly ties with these countries, and these relationships need to be further reinforced for future partnerships. Areas of focus should include the exchange of Islamic culture and heritage, trade and investment, strategic collaboration, and the transfer of technical expertise.
By and large, foreign direct investment is a crucial mechanism for addressing the foreign currency crisis. While Bangladesh has made progress in attracting foreign direct investment in absolute terms over the past few years, the foreign direct investment to gross domestic product ratio remains unsatisfactory compared with peer countries in South and Southeast Asia. To improve this situation, Bangladesh requires a paradigm shift through comprehensive policy overhauls and the establishment of political stability to boost investor confidence. Additionally, strong coordination among key institutions such as the Investment Development Authority, the Bangladesh Bank, the finance ministry, the revenue board, ports and customs is essential for restoring and enhancing trust. Economic diplomacy led by the foreign affairs ministry through bilateral, regional and multilateral cooperation is also a driving factor for fostering partnerships. Lastly, an effective country branding through government initiatives will create a significant value in attracting foreign direct investment.
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Md Mehdi Hasan Khan and Md Kamrul Hasan are pursuing certified internal audit programme with the Institute of Internal Auditors, Bangladesh.
