C T Online Desk: The venerable Indian think-tank, the Centre for Policy Research (CPR), recently organized a series of podcasts featuring different countries in South Asia.
I was the guest last week in the podcast featuring Bangladesh.
The host was Sushant Singh, senior fellow at the Centre.
A former deputy editor of the Indian Express, Sushant has also been a visiting lecturer in political science at Yale University.
I went in expecting Sushant to ask me not only about Bangladesh — its economy, politics and society — but also about how we, Bangladeshis, view our large neighbour.
I had a feeling that he will also ask about our relations with China; after all, that is a major subject of interest in India. My hunch proved right.
I responded saying that a major driver of our China relationship is economic with a current focus on infrastructure, but, going forward, there was likely to be another important dimension to our economic relations with China.
I expressed the hope that, in the coming years, there will be a quantum jump in FDI from China, and that a large part of this will be FDI that helps diversify our exports.
But that is China. What about India?
I argued that on both fronts, i.e., infrastructure and export oriented FDI, China can only partially meet our needs.
There is thus considerable scope for other countries, India included, to step in and help Bangladesh achieve its infrastructural and export diversification objectives.
Our economic relations with China should not be seen by others as a zero-sum game but a positive-sum one.
While I understand that the world does not revolve around economics alone, I pointed out that these economic relationships are important for us and that geopolitics should not unduly cloud the discussion on this.
Thus, what India should worry about is not our economic relations with China but how Indian FDI can help Bangladesh achieve its economic upgrading and diversification objectives.
Current context
This brings me to the Prime Minister’s recent trip to India where investment must have been one of the important subjects on the agenda.
The PM’s delegation included a large contingent of business leaders and she had meetings with Indian private sector organizations.
It is likely that there was a call from the Bangladesh side for more Indian FDI.
We also know that land is being allocated for constructing an economic zone dedicated to Indian investment.
So, what kind of investment are we likely to get from India?
FDI experts distinguish between three kinds of FDI:
- a) Natural-resource seeking FDI where the foreign investor is primarily interested in exploring and exploiting natural resources (such as Chevron’s investment in Bangladesh)
- b) Market-seeking FDI where the investor is seeking to operate in a country in order to serve the local market (such as the FDI that has come to the power or mobile telecommunication sectors in Bangladesh)
- c) Efficiency-seeking FDI where the investor seeks to produce in a country in order to sell abroad (for example, Bangladesh may be viewed as a cost-efficient production base — hence the term efficiency-seeking; an example is investment in garments.)
Often, the market-seeking foreign investor has a history of selling certain products to a country from a production base in its home country or elsewhere.
It then decides to manufacture the products in the recipient country itself.
Within this category of market-seeking FDI, we may make a distinction between investment in tradable and non-tradable goods.
A motorcycle or a TV is an example of a tradable good because such goods can be exported from one country to another.
By contrast, power generation will be considered largely non-tradable because power is usually sold within the country in which it is generated, although there are some exceptions.
The same is true for banking.
In the early years of Bangladesh’s existence as an independent country, much foreign investor interest was confined to exploiting natural resources and in providing traditional services such as banking.
Later, with the domestic economy expanding, FDI inflows were dominated by market-seeking investment in infrastructure, such as power generation and mobile telecommunication.
Where the FDI goes
As of March 31, 2022, exactly half of the FDI stock was in gas and petroleum, banking, power, and telecommunications sectors.
The only other sector with substantial FDI is textiles and apparels, which have received about 18% of all FDI since independence.
Going forward, a key objective of FDI should be to help diversify our exports in order to reduce our dependence on garments and gradually shift towards more skill-intensive, complex products, a theme on which I had written earlier in this column.
So far, very little of the FDI inflow has gone into export-oriented industries and much of that too in the traditional sectors such as garments and leather goods.
Thus, while the move away from natural-resource seeking FDI to investments in infrastructure is welcome, the strategy going forward should be to attract more FDI inflows towards efficiency-seeking FDI that can help diversify our export basket.
Will Indian FDI help us meet that objective?
I don’t have much information on the activities/sectors that Indian investors are showing interest in.
This is an area where government agencies such as The Bangladesh Investment Development Authority (Bida) and Bangladesh Economic Zones Authority (Beza) should have some information.
However, I do have some data on the investment that has already come in.
This is from the Bangladesh Bank and is available on its website.
The data shows the stock of FDI as of March 31, 2022, i.e., the cumulative total of all FDI that has come into Bangladesh since independence (minus any disinvestment.)
A sectoral breakdown is provided which allows me to categorize the FDI from various countries into the three categories I mentioned above.
Before going into the results for Indian FDI, let me mention that the categorization is a little arbitrary since the data is for broad sectors (such as textiles and apparels, oil and gas, telecommunications, etc) and not for specific activities within each sector.
Thus, for example, the data for the pharmaceutical or food sector FDI may include some market-seeking FDI and some efficiency-seeking FDI.
I was not able to make that distinction within each sector.
Thus, the categorization is not perfect, but I think the big picture is valid.
For those interested in details, I have categorized FDI in the gas and petroleum sector as natural-resource seeking, those in the textile and apparel, leather and leather products, food, chemicals and pharmaceuticals, and agriculture and fishing, as efficiency-seeking, and the rest as market-seeking.
The chart below shows the results for India with China, Hong Kong and South Korea as comparators.
I have left out the category “natural-resource seeking” because this is either absent or very negligible for these countries.
What we see is interesting.
Much of the Indian FDI that has come in is of the market-seeking type and not efficiency-seeking.
This is similar to the composition of Chinese FDI but very different from the type of investment that is coming from Hong Kong or South Korea.
A sizable part of FDI coming from these two jurisdictions is efficiency-seeking.
This is particularly true for Korean FDI.
As I said, this categorization is not perfect (we need more granular data) and this does not cover future FDI.
What I wanted to do is start a conversation that will lead us to an important question: what is the type of FDI that we are getting in the near future and how consistent is it with our needs and development goals?
The investment decisions of foreign investors — whether to invest in a country and, if so, in what sectors — are shaped by their own motivations.
The role of public policy in the recipient country is to steer FDI towards activities that are desirable from the view of the country.
In some cases, the two sets of interest may match well without any public policy intervention.
However, in most cases, some policy intervention is required to create the match.
But first, we must have granular data on where the investments are going, or likely to go.
The government needs to go beyond just talking about investor roadshows, general meetings with investors or about economic zones being developed for investors from specific countries.
We would like to see some data on the specific type of FDI that is being discussed.
Both Bida and Beza should come forth with such data.
We need public discussion on whether the planned FDI is aligned with our needs.
At the same time, countries seeking to forge closer relations with us, such as India, should be asking how much the FDI coming from their countries is aligned with Bangladesh’s development aspirations.
