Foreign direct investment (FDI) in Bangladesh

FDI in Figures

Global foreign direct investment (FDI) flows in 2021 were USD 1.58 trillion, up 64 per cent from the exceptionally low level in 2020. The recovery showed significant rebound momentum, with booming merger and acquisition (M&A) markets and rapid growth in international project finance because of loose financing conditions and major infrastructure stimulus packages. However, the global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine – on top of the lingering effects of the pandemic – is causing a triple food, fuel and finance crisis in many countries around the world. Investor uncertainty has put significant downward pressure on global FDI in 2022, and new investment project numbers, including greenfield announcements, international project finance (IPF) deals, and cross-border mergers and acquisitions, all shifted in reverse after the first quarter of 2022 to start declining. Cross-border M&A sales were 6% lower and IPF values more than 30% lower in 2022. The outlook for global FDI in 2023 appears weak, with a significant number of economies around the world expected to enter a recession. Negative or slow growth in many economies, further deteriorating financing conditions, investor uncertainty in the face of multiple crises and, especially in developing countries, increasing risks associated with debt levels will put significant downward pressure on FDI (UNCTAD Global Investment Trends Monitor, January 2023). The negative trend reflects a shift in investor sentiment due to the food, fuel and finance crises around the world, the Ukraine war, rising inflation and interest rates, and fears of a coming recession.

According to the UNCTAD’s 2022 World Investment Report, FDI inflows to Bangladesh increased by 12.9% to USD 2.89 billion in 2021 (compared to USD 2.56 billion in 2020). The total stock of FDI was estimated at 21.58 billion USD in 2021 by UNCTAD. In Bangladesh, FDI inflows will take a long time to recover as investment commitments in this country have remained weak. For instance, greenfield investment projects announced in 2020, an indication of FDI trends in the coming years, have contracted significantly by -87 per cent in Bangladesh. This decline is driven by weak investment interest in garment production, one of the major export industries and recipients of FDI in these countries. Investment and garment production struggled badly in 2020, with no sign of recovery in early 2021. Garment factories in Bangladesh had to deal with about USD 3 billion of cancelled export orders in 2020. Notwithstanding, the export-oriented clothing industry is still an important recipient of FDI, with major investors from the Republic of Korea, Hong Kong and China. Central Banks data shows that the textile sector was the biggest gross FDI recipient, netting 1.166 billion USD in 2021, with an annual growth of around 81%.

At least 29 industrial units have begun their production in some of the country's economic zones, and another 61 units are scheduled to go into production. The investors have come from countries such as Japan, China, India, Australia, the Netherlands, the US, the UK, Germany, Singapore, South Korea and Norway. However, the government plans to establish about 100 economic zones across the country (Dhaka Tribune, October 2022)

Despite steady economic growth in the country over the past decade, foreign direct investment (FDI) has been comparatively low in Bangladesh compared to regional peers. Bangladesh suffers from a negative image: the country is seen as being extremely poor, under-developed, subject to devastating natural disasters and socio-political instability. However, the country has the advantage of being in a strategic geographical position between South and Southeast Asia. In addition, its domestic consumption potential and the wealth of its natural resources make the country a good candidate for investment.  The government promotes private sector-led growth, foreign currency is abundant due to remittances, and the central bank respects the transferability of foreign currency. A number of more developed Asian countries have outsourced their factory production, mainly textile, to the country. Moreover, in 2020, the government simplified a set of laws as part of its efforts to reduce barriers to foreign investment.

Foreign Direct Investment (FDI) increased by 1.2 billion USD in September 2022 (CEIC Data, 2023).

What to consider if you invest in Bangladesh

Strong Points

The main assets of Bangladesh's economy are:

• Good macroeconomic stability characterised by a high growth rate of 8.2% in 2019 and 3.8% in 2020 (IMF) as well as a satisfactory level of the public debt of 39.6% in 2020 (IMF)
• An open and diverse economy
• A very low-cost workforce
• A strategic geographic position as a gateway to countries in the Asia-Pacific region
• A strategic and competitive position in the value chain of the global economy
• An economic and legislative environment globally favourable to business
• Favourable biodiversity and weather conditions

Weak Points

The main obstacles to attracting investment include:

• A business environment complicated by the country's weak infrastructure, burdensome bureaucracy, high risk of corruption, lack of transparency and the slow pace of the judicial system
• Exports that are not sufficiently diversified and highly dependent on the textile sector
• Fragile political stability threatened by recurrent social movements;
• Weakness of the financial sector
• Vulnerability to natural disasters (cyclones, severe floods) that result in substantial income losses
• An economy dependent on the garment industry and characterised by a weak per capita income
  

Government Measures to Motivate or Restrict FDI

The Bangladesh government is actively seeking to attract foreign investment, particularly in the areas of energy and infrastructure. Many incentives have been implemented through industrial policy, growth strategy through exports and a public-private partnership (PPP) program launched in 2009. Although there is little discrimination against foreign investors, the government often favours local industries. For example, the importation of drugs that compete with locally manufactured pharmaceuticals is tightly controlled, and local majority ownership in new shipping companies is required.

In order to mitigate the risks of being too dependent on industrial production in the textile sector (over 86% of Bangladesh's exports earnings come from textiles according to Bangladesh Textile Mills Association's latest data available), the government is seeking to develop certain sectors by granting companies involved in these areas with incentives and favourable conditions. These include agricultural and agro-industrial products, light engineering, leather footwear and leather goods, pharmaceuticals, software and ICT products, as well as shipbuilding.

In recent years, the government has also launched numerous infrastructure projects: the project to build a road and rail bridge over the Padma River and the Dhaka metro, for example.

Bilateral investment conventions signed by Bangladesh

Bangladesh has signed 30 bilateral investment agreements. For more details, visit the site of the UNCTAD.