4 years ago

Covid-19 and foreign investment: The need for scrutiny


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As a transitioning economy, Bangladesh's growth depends highly on foreign direct investment (FDI). According to the 2019 World Investment Report prepared by UNCTAD (UNCTAD Report), recent FDI flows to Bangladesh rose by 68 per cent to a record level of $3.6 billion (in the year 2018), driven mostly by significant investments in the power generation and labour-intensive sectors, as well as the $1.5 billion acquisition of United Dhaka Tobacco by Japan Tobacco. However, as the Covid-19 pandemic sets in, many of these industries, especially the ready-made garment sector, will be facing a sharp decline in their business. While the pandemic has forced us to stay home, threatening the lives of millions, the economy has also set off towards a depression.

Amidst the crisis emerging from this pandemic, different countries have proceeded towards adopting certain economic, political and legal measures to attract FDI and curb the downturn effects of the Covid-19 pandemic. In order to attract FDI and maintain a consistent flow of income, many countries have placed themselves strategically to exploit upcoming business opportunities, especially those being diverted away from China. It is no longer a secret that many developing countries have decided to relocate their businesses away from China to other parts of the world, and countries like India, Vietnam have already started taking initiatives to take advantage of this situation. For example, India has already initiated to bring substantial changes to its regulatory regime, especially in labour, land and tax laws. Vietnam, cited by global media as having one of the best-organised epidemic control programmes in the world, has helped to gain the trust of foreign investors. While the economies of these countries are also seeing a downfall, their strategic steps to attract FDI will certainly help to boost and strengthen their economies during and after the Covid-19 pandemic.

However, simultaneously with the need for attracting FDI, many countries have also been very cautious to avoid the risk of opportunistic takeovers by foreign investors. The need to protect local companies from being taken over by foreign investors at depressed prices, especially in sectors which may pose a threat to national security, is the most imminent concern now for these countries. Accordingly, many have introduced strict FDI screening guidelines. For example, in March 2020, the European Commission has issued certain guidelines with a view to supporting the industries at risk of being targeted by creditors and opportunistic buyers, more specifically focusing on healthcare and critical infrastructure. The guidelines encourage member states that currently lack FDI screening procedures to introduce necessary measures and highlight the importance of safeguarding EU industries and strategic sectors from FDI. While screening FDI, the European Commission has also called on its member states to assess whether the foreign investment would pose a risk to national security and/or public order. The United Kingdom is also considering changes to its regulatory framework with respect to FDI. Once the changes become effective, the UK government will have enhanced power to scrutinise foreign investments and consider risks that can arise from hostile parties acquiring ownership of, or control over, businesses and assets that have national security implications.

Similar steps have also been taken in Australia, where the country has implemented strict FDI screening procedures. As a result of the new policy, all or any proposed FDI, regardless of the value and/or nature, would require prior approval from their Foreign Investment Review Board. Moreover, FDI in 'critical infrastructure assets' such as ports, electricity, water and gas have also been made subject to approval from the Foreign Investment Review Board. Our neighbouring country India has also taken strong protective measures in a bid to protect its local companies and economy from opportunistic takeovers. For example, the Government of India has amended its Consolidated Foreign Direct Investment Policy to curb opportunistic takeovers / acquisitions of Indian companies due to the current Covid-19 pandemic. Any investment from an entity in a country which shares its borders with India can only be made with the Indian government's approval. Previously, this restriction was applicable only for investments from Bangladesh and Pakistan. Now, with the new policy, all investments (regardless of the amount) from border sharing countries of India will require the prior approval of the Indian Government. This approval requirement also applies to transactions where the beneficial owner of the investment (whether directly or indirectly) is from these countries. Moreover, portfolio investment in India by foreign investors has also been limited as part of its protective measures under this new policy.

Although these screening measures have their drawbacks and is likely to involve an enormous due diligence exercise for the host country, the overriding interest to protect local businesses from being acquired at low valuations in these troubled times and to ensure that FDI is controlled in strategic sectors has influenced the decision of many countries to implement such strict policies. As Bangladesh also sets into this global depression, there will be many foreign investors eagerly waiting to take advantage of this opportunity. This is more so as Bangladesh has been a preferred destination for foreign investment in the recent years, as is evident from the UNCTAD Report. So, it is suggested that, in addition to the various effective steps that have already been taken by the Government of Bangladesh, if the above protective policies are also implemented (if not done already), then such actions will help many local businesses, during and after this pandemic, whilst ensuring that FDI is controlled and regulated in strategic sectors which may affect Bangladesh's national security and/or public interest.

The important issue for us is to now consider, assess and strike a balance between attracting FDI and controlling it in line with the above protective guidelines adopted by many countries. As the world witnesses the largest economic contraction, Bangladesh's economy sees no difference in the downturn. Both export and import have been disrupted, and the precariousness of investments in different sectors is slowing the economy to a halt. The major sectors such as ready-made garment, leather, pharmaceuticals, agro-industries and, even the influx of foreign remittance, will be facing a steady decline. For Bangladesh, like other countries, the investment scenario will change after the Covid-19 pandemic and effective steps will be required to draw a balance between attracting FDI to mitigate the losses that the economy will face in the coming months, whilst maintaining a protectionist scheme to prevent opportunistic takeovers. This will require a holistic approach to be taken by all the key actors in the government, including Bangladesh Investment Development Authority and Bangladesh Economic Zones Authority, to draw promotional plans focusing on target sectors, understanding the need for country-wise investments, improving our laws, and so forth.

Md. Sameer Sattar is the Head of Firm of Sattar & Co. He was assisted by his research associate Anika Bahar Zaima in preparing the write up.

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