A debate has often been waged that we are not getting enough foreign investment. However, many statistics provided by various government agencies say Bangladesh has bagged lots of investments over the years. Many will put up opposition to such claim by citing figures of neighboring countries. Breakdown of those investments will offer a different picture than what we have in our minds.
In terms of reporting investment figures, there are differences. Many government organizations have predilection for proposed investment projects to show them as investment figure. Meanwhile, others report inflows of foreign investment as real investment. It is obvious that what has been pledged at a certain point is not often matched by what has been implemented at a later date. This mismatch writs large on the following graph. In 2017, foreign investors pledged to invest $10756 millions. But the real foreign investment was $3038 million. (Source: BIDA and Bangladesh Bank) Obviously, bigger the number bigger the projection of success.
True debate may revolve around whether $3038 million is enough for a country like Bangladesh. Compared to our GDP, should we be contend to this amount of investment? Our investment-GDP ratio has been increasing since 2005-06. Back in 2005-06, it was 26.14% and it has increased to 32.04% at the end of 2015-16. What will attract more investment is a matter that we are less concerned. If we empathize an investor, we will see discounted cash flows of a project, marginal product of output against rental cost, inventory-to-sales ratio , inventory management etc are very dear to him. Some may argue that political stability is also important for attracting investment. To what extent it is true that needs to be examined. For instance, many authoritarian countries bag huge amount of investment. In these countries, there is political stability and concerns crucial to an investor are also being addressed in these countries.
I did a little analysis on the victims of political instability and FDI. First I ran a Vector Autoregressive (VAR) model on victims of political violence and foreign investment that took place between 2002 and 2018. Then I ran a causality test between the two. Despite the ups and downs in the number of victims in the said period and a steady rise of FDI , statistical results show neither political stability causes more FDI, nor more FDI causes a stable political environment. There is no causal relationship between the two. Certainly, it does not mean that descamidos will dominate the street and strikes and siege will cripple the country. The bigger truth is political instability hurts the economy. Political stability helps to maintain homeostasis of a state that is conducive to bring more investment by sowing trust among the investors.
Trust of an investors hinges on lots of factors.World Bank in its "Doing Business 2019" report ranked Bangladesh 176 among 190 countries. Though the country did well in getting electricity and registering property, it scored bad in starting a business, getting credit, protecting minority shareholders, dealing with construction permits and trading across borders. Perhaps better governance at home could secure Bangladesh an improved position by signalling positive things to a foreign investors.
Now what kind of investment we are getting and its sector wise composition call for a closer scrutiny. Bangladesh Bank survey for July-Dec 2018 says that both reinvested earnings and intra-company loans account for 64% of net FDI inflows in the given period. Equity capital accounts for the rest 36%. Bangladesh Bank defines reinvested earnings as amount of profit shelved for reinvestment , intra-company loans as borrowing and lending between parent companies and subsidiaries, and equity capital as ordinary shares,capital reserves, share money deposits and other reserves. At first glance it appears that all the reinvestment of profits and intra-company loans are good things. It sounds good when it means production capacity will be increased, expansion of operation, automation, backward linkage, forward linkage, introduction of new technology and managerial services etc. However, how transparently they are being done that has never been taken into account. Because the reinvested amount and the loans will go back to the investors later. And we may end up paying more if the calculation is overestimated. And another note of caution is like our public external debt , our private external debt is also increasing.
Sector wise composition reveals that in 2018 Power attracted more investment(28.01%) ,followed by Food(20.19%) and Textile and Wearing(11.29%). According to a monthly report by BIDA, in 2012-13 the Service sector accounts for 92.76% of the proposed foreign investment. It is more or less clear that the Power, Telecommunications and Services sectors led the way in terms of getting FDI. Apart from Textile and Wearing, these sectors are heavily capital intensive and employment generation in these sectors is infinitesimal. So $1012.01 million of investment in Power sector may obviate the shortcomings of Power sector but did little to create employment opportunities in this sector.
To see FDI as a real game changer for our economy, we should focus on sectors that are labor-intensive and where there is more room for value addition. For instance, tourism and agroprocessing industry could be potential destinations for FDI. Unlike Power and Telecommunications sectors, the two do not require astronomical amount of investment. Every penny invested will fetch benefits worth couple of times more than the amount invested. It is high time that our policy makers seriously ponder about where we truly need FDI.
In terms of reporting investment figures, there are differences. Many government organizations have predilection for proposed investment projects to show them as investment figure. Meanwhile, others report inflows of foreign investment as real investment. It is obvious that what has been pledged at a certain point is not often matched by what has been implemented at a later date. This mismatch writs large on the following graph. In 2017, foreign investors pledged to invest $10756 millions. But the real foreign investment was $3038 million. (Source: BIDA and Bangladesh Bank) Obviously, bigger the number bigger the projection of success.
True debate may revolve around whether $3038 million is enough for a country like Bangladesh. Compared to our GDP, should we be contend to this amount of investment? Our investment-GDP ratio has been increasing since 2005-06. Back in 2005-06, it was 26.14% and it has increased to 32.04% at the end of 2015-16. What will attract more investment is a matter that we are less concerned. If we empathize an investor, we will see discounted cash flows of a project, marginal product of output against rental cost, inventory-to-sales ratio , inventory management etc are very dear to him. Some may argue that political stability is also important for attracting investment. To what extent it is true that needs to be examined. For instance, many authoritarian countries bag huge amount of investment. In these countries, there is political stability and concerns crucial to an investor are also being addressed in these countries.
I did a little analysis on the victims of political instability and FDI. First I ran a Vector Autoregressive (VAR) model on victims of political violence and foreign investment that took place between 2002 and 2018. Then I ran a causality test between the two. Despite the ups and downs in the number of victims in the said period and a steady rise of FDI , statistical results show neither political stability causes more FDI, nor more FDI causes a stable political environment. There is no causal relationship between the two. Certainly, it does not mean that descamidos will dominate the street and strikes and siege will cripple the country. The bigger truth is political instability hurts the economy. Political stability helps to maintain homeostasis of a state that is conducive to bring more investment by sowing trust among the investors.
Trust of an investors hinges on lots of factors.World Bank in its "Doing Business 2019" report ranked Bangladesh 176 among 190 countries. Though the country did well in getting electricity and registering property, it scored bad in starting a business, getting credit, protecting minority shareholders, dealing with construction permits and trading across borders. Perhaps better governance at home could secure Bangladesh an improved position by signalling positive things to a foreign investors.
Now what kind of investment we are getting and its sector wise composition call for a closer scrutiny. Bangladesh Bank survey for July-Dec 2018 says that both reinvested earnings and intra-company loans account for 64% of net FDI inflows in the given period. Equity capital accounts for the rest 36%. Bangladesh Bank defines reinvested earnings as amount of profit shelved for reinvestment , intra-company loans as borrowing and lending between parent companies and subsidiaries, and equity capital as ordinary shares,capital reserves, share money deposits and other reserves. At first glance it appears that all the reinvestment of profits and intra-company loans are good things. It sounds good when it means production capacity will be increased, expansion of operation, automation, backward linkage, forward linkage, introduction of new technology and managerial services etc. However, how transparently they are being done that has never been taken into account. Because the reinvested amount and the loans will go back to the investors later. And we may end up paying more if the calculation is overestimated. And another note of caution is like our public external debt , our private external debt is also increasing.
Sector wise composition reveals that in 2018 Power attracted more investment(28.01%) ,followed by Food(20.19%) and Textile and Wearing(11.29%). According to a monthly report by BIDA, in 2012-13 the Service sector accounts for 92.76% of the proposed foreign investment. It is more or less clear that the Power, Telecommunications and Services sectors led the way in terms of getting FDI. Apart from Textile and Wearing, these sectors are heavily capital intensive and employment generation in these sectors is infinitesimal. So $1012.01 million of investment in Power sector may obviate the shortcomings of Power sector but did little to create employment opportunities in this sector.
To see FDI as a real game changer for our economy, we should focus on sectors that are labor-intensive and where there is more room for value addition. For instance, tourism and agroprocessing industry could be potential destinations for FDI. Unlike Power and Telecommunications sectors, the two do not require astronomical amount of investment. Every penny invested will fetch benefits worth couple of times more than the amount invested. It is high time that our policy makers seriously ponder about where we truly need FDI.
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