Exploit the potential gains of outgoing FDI
Bangladeshi businesses are increasingly calling for the easing of draconian restrictions on foreign direct investment (FDI) as they seek to diversify their income. Indeed, FDI can generate financial, intangible and tangible returns, thus complementing the development benefits realized through trade, migration and inward FDI.
Firms in developing countries use FDI as a catch-up strategy by expanding their operations abroad. Samsung was the pioneer in the production of dynamic random access memory, and Mittal Steel became the world’s largest manufacturer of steel.
THE EVOLUTION OF THE IDE LANDSCAPE
Mainstream economic theory predicted that capital would flow from capital-rich developed countries to capital-poor developing countries. Indeed, in 1995, FDI from developing countries represented only 4% of global FDI flows. However, in 2017, the share of foreign direct investment from capital-poor countries reached 27 percent, according to the World Bank’s Global Investment Competitiveness Report 2017-2018.
There were 21,000 multinational enterprises from developing countries – 3,500 from China, 1,000 from Russia, 815 from India and 220 from Brazil. Many developing countries are now engaged in FDI regardless of their level of development. Between 2008 and 2018, developing countries in the Asia-Pacific region (excluding China) provided an average of $ 150 billion in FDI per year. The region has been the largest source of FDI in the world since 2018. Asia was the only region to record an expansion (7%) in FDI in 2020, a pandemic year in which FDI inflows have increased. plunged 35% globally, according to UNCTAD’s World Investment Report. 2021.
Domestic policy choices in developing countries and global economic conditions have shaped these changes. FDI is a natural extension of the process of globalization which often begins with exports. In the late 1990s, firms in high-growth economies embraced FDI in search of efficiency in resource allocation and diversifying the risks associated with economic shocks in any region. The rapid and sustained growth in most developing countries and the surges in commodity prices over the following decades pushed companies to go international.
The market, the strategic asset and the search for efficiency are important motivations for FDI from developing countries. They are a particularly crucial source of FDI for countries in sub-Saharan Africa, Europe, Central Asia and South Asia.
ADVANTAGES, MODES OF ENTRY AND EVIDENCE
Financial returns result from the profits generated by the processing and outlets abroad of goods produced in the host economy. Chinese companies, for example, have invested heavily in sales offices and assembly operations in Europe to boost exports of low-cost products made in China.
Some FDI, such as Taiwanese offshoring to mainland China, improve the sale of intermediate goods to production sites in other countries, thus creating opportunities for locally based suppliers in the national economy. Foreign investments in joint ventures and wholly owned subsidiaries have been essential channels for the promotion of global business by entrepreneurs in developing countries.
Mergers and acquisitions (M&A) and other forms of alliances with companies in host countries are particularly valuable for generating intangible returns such as knowledge, additional skills, technological upgrading, expertise managerial and goodwill of a brand. In 2013, up to 56% of cross-border mergers and acquisitions were carried out by multinationals from developing and transition economies.
Mergers and acquisitions have helped Indian companies gain direct access to newer and larger markets and better technologies, thereby expanding their customer base and global reach.
The extent to which FDI improves development outcomes in countries of origin is an emerging field of study in developing countries. The experience of Southeast Asia from 1981 to 2013 shows that a 1% increase in FDI led to an increase of $ 750 million in exports for the Philippines, $ 72 million for Singapore, 41 million dollars for Thailand and 31 million dollars for Malaysia.
Analysis of the effects of FDI on the performance of regional innovation in China reveals that FDI has a very significant impact on national innovation. The management expertise, exports, quality and costs of Indonesian companies that have invested overseas have improved significantly after their investment compared to other companies and their own past performance. In general, the evidence suggests that the productivity benefits of FDI occur primarily through efficiency gains resulting from the specialization and scale advantages of competing firms in international markets and the indirect importation of knowledge and skills. of technologies.
WINNINGS ARE UNDER NO CIRCUMSTANCES
Bangladesh’s experience to date is mixed.
A Bangladeshi clothing exporter invested in Jordan in 2007 by forming a joint venture with one of India’s leading clothing manufacturers. They set up the factory to produce high-value clothing for the US market in Jordan’s export processing zone. Their factory affected by the pandemic in Jordan is now recovering.
Another Bangladesh’s leading global outsourcing partner for many of the world’s largest advertising, media and tech companies is doing well after recovering from the adverse pandemic shock. In 2017, a tobacco conglomerate was allowed to invest in Malaysia to co-finance a profitable acquisition.
There are also cases of failure.
The first Bangladeshi OFDI in 2013 in a joint venture in Myanmar turned sour. After making good profits initially, the company suffered massive losses due to growing political unrest and frequent policy changes. Eventually, the company closed its operations in Myanmar in 2020.
Another OFDI at a garment factory in Ethiopia’s Tigray region to take advantage of the country’s duty-free access to the US market, low land prices and cheap labor failed due to conflict in the region in 2020.
Enough Bangladeshi companies have not yet been involved in FDI to generate significant impact at the macro level. When OFDIs are limited, the returns and risks will also be limited. Its increase can divert domestic resources to overseas projects and crowd out other domestic economic activities such as investment, production, exports, employment, income, and tax revenues (the offshoring effect ). Between 1980 and 2018, foreign direct investment from Indonesia had a significant negative effect on domestic investment.
The benefits could outweigh the costs and risks. Most Bangladeshi products are sold abroad under international brands which capture the largest share of the revenue. Bangladeshi investors must start production in the countries they venture into to cross non-tariff barriers and exploit preferential access to third country markets to overcome the challenges of the post-LDC graduation period. The strength of East Asian exports is associated with both FDI inflows and outflows.
TIME TO REVISE THE POLICY
Bangladeshi companies were virtually prohibited from making investments abroad. The government has been relatively more cautious in undertaking the liberalization of foreign investment.
Foreign exchange regulations were amended in 2015 to allow limited investments on a case-by-case basis. Besides crowding out onshore investment, unfettered FDI could have important implications for the sustainability of the current account deficit, the external debt profile and exchange rate stability.
Bangladesh needs a transparent political framework to manage overseas investments. In September 2020, the Bangladesh Bank allowed export-oriented companies to invest abroad up to 25% of their annual net export earnings. Companies must comply with the “2020 Guidelines on Capital Account Transactions (Foreign Equity Investment)”.
The directive requires that 30 percent of the workforce of a company established on board be Bangladeshi nationals. Reinvestment of funds from overseas operations requires prior approval from BB. Companies must return their profits, dividends, and other income within 90 days. The entrepreneur must be financially sound and have a good track record in repatriating export earnings, paying import obligations, repaying loans, and paying taxes.
Selective policies and incentive frameworks are indeed necessary. Different types of FDI promote the development of the national economy in different ways. The policy should encourage foreign direct investment where significant returns on financial and tangible or intangible capacities can be expected in the short to medium term.
Priority should be given to companies with technical knowledge and foreign currency income. The policy should define the priorities for FDI, the acceptable financing modalities and the decision-making procedures on specific FDI proposals.
The government should review existing restrictions on FDI, assess their costs and benefits, and adopt measures that strengthen economy-wide policy coherence and absorptive capacity. Risk management capabilities are essential to cope with the use of multi-layered structures that create unjustifiable opacity for commercial reasons and a non-value-added “round trip” of capital to exploit preferential treatment.
Ministries of Finance and Trade, BB, businesses and professional bodies must pool their collective wisdom to continuously review policies facilitating outward FDI.
As with trade, OFDI will create winners and losers. The resistance of the latter can be countered by attracting more FDI given the current low levels compared to other Asian countries.
Simplifying investment processes to ensure clarity of rules regarding foreign investment and establishing an enabling investment climate will help mobilize investments for sustainable development. The emphasis on FDI should not come at the expense of creating a competitive business environment, building the capacity of domestic enterprises, maintaining national economic stability and accelerating inclusive growth.
The author is an economist.