RTAs -- the route to increased FDI for Bangladesh

Dhaka,  Tue,  26 September 2017
Published : 20 Aug 2017, 19:34:11

RTAs -- the route to increased FDI for Bangladesh

M S Siddiqui
Foreign direct investment (FDI) is considered as one of the major sources of employment generation, technology transfer, managerial capacity building and improving market efficiency in any country. Bangladesh invested huge amount of money for "Road shows" of investment through "foreign tour" to tell overseas investors that the labour in Bangladesh is the cheapest and GDP growth is around 7.0 per cent. But the desired FDI is not yet visible.  

Global statistics revealed that FDI is flowing from members of some trade groups to another members or intra-groups. The reasons of this exchange of investment are due to free trade agreements and other facilities extended to member countries.  Their intra-group investment is significant, with some 30 per cent to 63 per cent of these inflows originating from within the group. There is significant cross-membership among these existing and prospective major groups. 

The Group-20 (F-20), Transatlantic Trade and Investment Partnership (TPIP), Asia-Pacific Economic Cooperation (APEC), Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP), and the Brazil, Russia, India, China and South Africa (BRICS) account for a significant share of global FDI. Most of these groups' objectives include fostering more investment-friendly environment to further encourage FDI flows into and within the group. The actual impact of these partnerships on FDI, however, is likely to vary, depending on a number of factors, including specific provisions of the agreements among members, transaction costs, the scale and distribution of existing operations within a group, and corporate strategy. 

 FDI flow among members  of the mega-groupings  in 2015 was trillions of dollars that included countries from regions such as: in Africa-- South Africa; in Latin America-- Argentina, Brazil, Chile, Mexico, Peru; in developed economies -Australia, Canada, France, Germany, Italy, Japan, New Zealand, United Kingdom, United States; and in Asia-- Brunei Darussalam, Cambodia, China, Hong Kong (China), India, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Taiwan, Thailand,  Viet Nam, Republic of Korea,  Singapore.  

The G20 member economies are home to more than 95 per cent of the Fortune Global 500 companies. Intra-G20 investment is a significant source of FDI within the group accounting for an annual average of 42 per cent of inflows in 2010?2014. Intra-G20 investment in 2015 rose by 187 per cent, from $92 billion in 2014 to $265 billion, and are contributing to stronger intra-group investment and corporate connectivity. 

Intra-group investment is significant in APEC, accounting for 47 per cent of the total in 2010?2014 and reflecting increasingly connected economies. Multinational Enterprises (MNEs) headquartered in APEC member economies have been actively investing within the group. MNEs from Japan, the Republic of Korea, ASEAN member economies, China, Hong Kong (China) and Taiwan have a significant presence in other Asian APEC members, while United States and Canadian MNEs are heavily investing in the NAFTA sub-region of Canada, Maxico and USA. Taken together, these MNEs are contributing to a wide production network and to inter and intra-regional value chains across the Pacific. 

The TPP receives a significant share of global FDI inflows (34 per cent), largely in line with its weight in world GDP. In 2015, FDI in the partnership rose by 68 per cent to $593 billion, reflecting a significant rebound of investment to the United States from an a typical low point of $107 billion in 2014 to $380 billion in 2015. Within the group, NAFTA, which accounted for 75 per cent of the TPP's GDP in 2015, remains the largest recipient sub-group, attracting about 80 per cent of FDI flows to the TPP. 

The partnership's FDI in Stock Exchange in 2015 was $9 trillion, about the size of the economies of Australia, Belgium, Canada, France, Germany and Sweden combined. Intra-TPP investment accounted for an average 36 per cent of total inflows to the group between 2010 and 2014 (figure I.10). Unlike in other major groups, however, intra-TPP cross-border sales in 2015 increased by 7 per cent to $113 billion. TPP partner countries acquired 46 per cent more assets in the United States than in 2014. FDI into and within TPP continues to be highly concentrated, with the United States and Singapore both the main recipients and sources. 

The exit of USA from TPP has created a new scenario. If the TPP agreement could get implemented, some MNE production networks could be reconfigured and consolidated, as parts and components become easier and cheaper to source through intra-firm arrangements.

The five BRICS countries are home to 41 per cent of the world population and account for 23 per cent of world GDP but received 15 per cent of global FDI flows in 2015. They held $2.4 trillion FDI stock in 2015 - 9 per cent of the world total. FDI in BRICS is highly concentrated, with China alone receiving more than 50 per cent of the group's total FDI inflows in 2015. 

This reflects the minimal intra-BRICS corporate connectivity. Yet BRICS countries are a growing source of investment in other developing economies, contributing to strengthening South-South cooperation. A significant percentage of outward FDI from BRICS countries is in neighbouring economies. 

Regional Comprehensive Economic Partnership (RCEP) is a mega RTA among 10-member alliance of Association of Southeast Asian Nations (ASEAN) and there are six partners in free trade agreements (FTAs). The RCEP members have a total population of over three billion. Their combined share in global trade is around 29 per cent and combined size of the economy is around $22 trillion. Together, the RCEP countries generated about 31 per cent of world GDP in 2015 but accounted for a much lower 19 per cent share of global FDI inflows. FDI in the RCEP partners is dominated by ASEAN countries and China - the two largest recipients in the developing world - which together held 70 per cent of the group's FDI stock in 2015. Intra-RCEP investment accounts for about 30 per cent of FDI flows to the prospective group and is expected to remain a major source of FDI. Intra-RCEP M&As have been significant - at $18 billion in 2015, representing 43 per cent of total RCEP cross-border M&A sales. The strong level of intra-RCEP M&As is also contributing to a greater interconnection of corporate activities in the proposed partnership. Bangladesh has been offered to join the FTA but the authorities particularly the bureaucrats in different ministries are not willing to let Bangladesh join any trade agreement.

The prospective RCEP member countries are increasingly interconnected through trade, investment and regional production networks: many Japanese, Korean, ASEAN and Chinese MNEs, for instance, have already established a strong presence in other RCEP partner countries. These connections could become stronger when a negotiated RCEP agreement is signed and implemented. The rise in intra-ASEAN investment and regional value chains is further strengthening the connectivity of firms and countries within this subgroup.  

Will Bangladesh for FDI only on the basis of low- cost labour? The FDI will not come only on invitation but on the basis of mutual benefits and facilitation of business. 

Bangladesh declined to join this RTA on the pretext that "it is a big RTA which goes beyond trade in goods and services and we are not going to do so now or in near future," as told by top bureaucrats to the Financial Express (FE). Observers do not consider this a wise decision as Bangladesh will be left alone as there is hardly any prospect to join existing FTA groups or any probable FTA group in future. 

The writer is a Legal Economist . shah@banglachemical.com
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