Prefer green field FDI, equity capital investment

Dhaka,  Tue,  26 September 2017
Published : 26 Aug 2017, 00:37:33

Prefer green field FDI, equity capital investment

MCCI Editorial suggests
FE Report

Bangladesh should prefer green field investment type of FDI and focus on foreign investment in the form of equity capital, said Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI).

These types of Foreign Direct Investment (FDI) would help generate more employment, bring positive trade effects, including boosting export earnings, and keep financial stability in the country.

The chamber also said that Bangladesh should prefer these types of FDIs instead of merger and acquisition (M&A) type, and FDI in non-tradable service sectors and reinvested earnings.

The leading chamber made the suggestions in an editorial titled 'World Investment Report 2017: Investment and the Digital Economy' in the August 2017 issue of its bulletin -- 'Chamber News'.

The editorial highlighted findings of the World Investment Report (WIR) 2017, published by UNCTAD.

MCCI said M&A type FDI does not generate employment and new production facilities like green field  investment. It may lead to lay-offs, as the acquired firm is restricted.

Bangladesh should prefer FDI in the form of equity capital instead of reinvested earnings, as the latter can be a source of considerable financial instability, it said.

A prominent feature of FDI inflows into Bangladesh is that bulk of the FDI gets concentrated in non-tradable sectors. It hardly contributes anything to export earnings, but generate repayment obligations in the forms of profits, dividends and repatriation of capital, MCCI also said.

"It is worth noting that in 2016 the telecom sector, a prominent service industry, attracted the highest amount of FDI in Bangladesh."

Profit remittance and profits retained (profit re-investment) by the subsidiaries are highly volatile, and indeed can be just as volatile as portfolio investment flows, especially during an economic crisis, it added.

The composition of FDI in Bangladesh has been undergoing a shift away from equity capital in the direction of reinvested earnings, it said.

As revealed in WIR 2017, reinvested earnings were the most important source of FDI in the country in 2016.

"Bangladesh has set a GDP growth target of more than 7.0 per cent in the coming years. An essential pre-requisite for high economic growth is, however, a high rate of investment, which unfortunately has remained low and stagnant in the country during the recent years," MCCI noted.

According to provisional data of Bangladesh Bureau of Statistics (BBS), the ratio of private investment to GDP in fiscal year (FY) 2016-17 was 23.01 per cent, which is only 0.02 percentage point higher than the previous FY.

But attaining 7.0 to 8.0 per cent GDP growth will call for a considerable increase in private investment, perhaps worth almost an additional 2.0 per cent of GDP every year, it opined.

However, since available domestic savings will be insufficient to meet the increased investment needs, the country will need larger doses of FDI to bridge the resource gap.

The government has put in place an elaborate incentive package to attract foreign investors, but without much success.

FDI inflow has remained low and proved insufficient to meet the country's investment needs. It is generally believed that the low volume of FDI in Bangladesh is essentially the result of the country's poor investment climate.

According to the UNCTAD report, FDI inflow to Bangladesh rose to $2.33 billion in 2016, growing by a negligible 4.3 per cent from $2.23 billion in the previous year.

The country's share of the inflow within the South Asian countries was as low as 4.0 per cent in 2016, like the previous years, and only 0.10 percent within the globe.

The UNCTAD report found huge decline in global FDI in the past year, and it also forecasts a very weak recovery in global investments this year and in the next.

According to the report, global FDI flows, after declining by 2.0 per cent in 2016, to $1.75 trillion, are expected to rise by 5.0 per cent to $1.8 trillion in 2017 and to $1.85 trillion in 2018.

However, this increase still puts global FDI below the all-time peak of $1.9 trillion in 2007.

UNCTAD warned that cross-border investments by businesses around the world have still not returned to their pre-crisis peak, almost a decade after the 2008 financial crisis.

The report noted that FDI flows to the developing countries declined 14 per cent, to $646 billion.

Flows to developing Asia fell by 15 per cent to $443 billion, with double-digit drops in most sub-regions, except South Asia.

FDI in the structurally weak and vulnerable economies remained fragile. Flows to the LDCs fell by 13 per cent, to $38 billion, and those to Small Island Developing States fell by 6.0 per cent, to $3.5 billion.

The FDI inflow in South Asia rose by a modest 6.0 per cent, to $54 billion, while the inflow to India, the largest country in the region, was stagnant at $44 billion.

The UNCTAD report has termed these developments - large declines in FDI flows to the developing and structurally weak economies and their modest recovery prospects - as quite troublesome, as companies invested less in the developing world and more in the US and other developed economies.

The report suggested that the global policy environment should remain conducive to investment in sustainable development.

The poor investment climate in turn is caused by many factors, such as problems of governance, like - policy discontinuity, red-tapism, administrative hassles, poor condition of infrastructure (roads, ports etc), inadequate and erratic supply of power and gas, shortage of skilled labor, and trade policy-related impediments.

These problems are largely endogenous, which affect both domestic and foreign investment alike. In order to encourage foreign or local entrepreneurs to invest in the country, the government will need to adopt appropriate measures to solve these problems.

"While acknowledging the overriding need for obtaining larger flows of FDI, it should be understood that FDI is not an unmixed blessing. There are benefits and costs accompanying foreign investment."

"The task for the policy-makers is to devise policies to increase the benefits and reduce the costs, with the aim of maximising the net benefits," it said.

In fact, FDI should not be treated indispensable for economic progress. Empirical studies on the effects of FDI conclude that successful growth in the developing countries is premised essentially on raising the domestic savings rate to a high level and productively investing these savings.

The East Asian growth success is based mainly on high domestic savings rather than FDI. Countries like Taiwan, Korea, Japan and China did not rely much on foreign investment. Economic progress in these countries was actually always laid by domestic ventures.

Foreign investment was used just to temporarily supplement domestic savings and gain access to certain foreign markets or certain fast changing technologies, it added.
Editor : A.H.M Moazzem Hossain
Published by the Editor for International Publications Limited from Tropicana Tower (4th floor), 45, Topkhana Road, GPO Box : 2526 Dhaka- 1000 and printed by him from City Publishing House Ltd., 1 RK Mission Road, Dhaka-1000.
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