The Financial Express

Redesigning incentive package to draw FDI  

Redesigning incentive package to draw FDI   

Bangladesh is likely to get a bigger share of foreign direct investment (FDI) in the days to come as many foreign companies plan to relocate their factories to countries like Bangladesh to bring down cost amid a cash crunch caused by the coronavirus pandemic.

According to Bangladesh Bank statistics, the country saw net inflow of foreign direct investment amounting to $2.88 billion in 2019, down about 20 per cent from a year earlier. Right now, Bangladesh needs to get ready to grab the opportunity as Japan, China, Vietnam, India and Indonesia have already started moving their production lines elsewhere. Factory relocation by those countries will be even faster in the post-pandemic period.

China's comparative advantage in manufacturing relatively simple, low-value products like clothing and plastic goods to more advanced and lucrative pursuits like smart phones, computers and auto parts is peerless, meaning it has gone on to become the world's largest manufacturer accounting for roughly one-sixth of global economic output.

Now, thanks to the unprecedented situation arising out of the outbreak of coronavirus from one of its cities in China, many nations are seriously mulling over cutting down their reliance on Beijing for their material needs. And Bangladesh could grab this opportunity, just like India and Vietnam.

Meantime, with the purchase of the Akij Tobacco two years ago, Japan became the single largest foreign investor in Bangladesh. Very recently, the Japanese embassy in Dhaka sent a list of factories to the foreign ministry seeking to relocate from China to Bangladesh.

However, the fact remains that foreign investors often express their dissatisfaction over bureaucratic tangles that stand in the way of business operations and obtaining various licences. They particularly complain about poor services at the central bank, the commerce ministry and the National Board of Revenue.

The government needs to communicate with the foreign companies that want to move their factories to Bangladesh. A taskforce may be formed to deal with FDI. Dhaka should assess its competitors and offer the best investment regime to the companies interested in relocating their business to Bangladesh. The country should also offer policy and tariff support such as corporate tax incentive, tax holidays, policy consistency, and efficient and professional trade facilitation.

Job cuts and post-pandemic losses would be offset by the new investments as fresh job opportunities are created in the small and medium enterprises and import-substitute industries. Local business organisations have reached out to bilateral and multilateral trade organisations urging them to give Bangladesh the highest priority in the post-Covid-19 investment relocation strategies as the country enjoys competitive advantages on many fronts.

The government should set short-mid-and-long-term goals to attract more investment. The country needs to move beyond apparel, adopt new technologies and look for regional collaborative investment. It should also launch aggressive road shows in strategically important places to bring in more FDI. The country needs tailor-made researches and powerful content to convince the investors.

Many analysts believe there is no ray of hope to widen the periphery of FDI in the next few years as Bangladesh is yet to become an investment destination for foreigners because of poor governance and low ranking in the World Bank's Ease of Doing Business index. Although Bangladesh advanced eight notches to 168th out of 190 counties in this year's ranking, the progress is not good enough to win confidence of foreign businesses. They suggested the government take immediate measures to attract foreign businesses to prop up export earnings, create fresh jobs and resolve the ongoing crisis stemming from balance of payments. 

A good number of businesses are now shifting their operations from China due to its ongoing tension with the US and the rising cost of production in the world's second-largest economy. Dhaka should seize the opportunity. However, many believe that the FDI would increase once the special economic zones start running in full swing.

Another development shows, in order to negate the impact of Covid-19 pandemic, Bangladesh plans to redesign its incentive package to draw FDI, with  special focus on prospective sources in the Southeast. A redesigned incentive package appears crucial for Bangladesh as other FDI seekers in the neighbourhood like India, Vietnam, Thailand and Cambodia have been offering more than what the country is offering. Some of them by now ensured their access to bigger markets under different foreign trade agreements (FTA).

The country is reported to have made a series of recommendations to incorporate new offers in the existing incentive packages to draw FDI during and after the pandemic. The proposed measures include tax waiver for potential foreign investors alongside new offers in incentive package for drawing new foreign investors to negate impact of Covid-19 onslaughts on the national economy.

Several financial analysts and watchdogs are of the opinion that the countries which appeared less-affected by the pandemic, like Japan and Singapore, could be better sources of prospective FDIs for Bangladesh. They suggested hundred per cent waiver on corporate tax for 10 years for all foreign investors and export-oriented manufacturers as well as VAT waiver on land leasing and bonded warehouse facility for all local and foreign investors. Besides, they proposed that companies which would invest US$100 million or create 300 employments may be granted seven years tax benefit.

Despite potentials, Bangladesh could not attract the expected level of FDI due mainly to the regulatory and business hurdles. In fact, FDI is not only important for bringing in the latest technology, innovations and best corporate practices, it also helps create a pool of talented resources locally as a spill-over effect.

If Bangladesh wants to improve its position as a favourable FDI-destination, it has to raise the skill status of its labour force, reduce corruption and excessive regulations, improve infrastructure and ease domestic finance flows. The country needs to draw increased support from foreign investors if it really desires to fully exploit its export potentials.

In the post-pandemic era, efforts should be made to attract large investment. Giving more thrust on more exports is also required. It should be remembered that cheap labour is unlikely to remain a useful tool in future. Hence, skills and technology upgradation are very much necessary.

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