Contemporary FDI environment
Bangladesh gained independence in 1971from Pakistan. During that time of war for liberation, a nationalist movement appeared among the people of Bangladesh that conferred on them the fortitude for freedom. However, the consequence of this nationalistic attitude resulted in a snobbish position in terms of economic policy. At that time, access by foreign companies was viewed negatively by policymakers. Because of this negative view, foreign companies were discouraged; until 1980, FDI in Bangladesh was very insignificant. Then, in the 1990s, this approach changed and the government began encouraging FDI. Since then, a series of policy incentives has been offered to FDI investors from time to time. These incentives include tax holidays for a number of years, 100% foreign ownership, full profit repatriation, duty-free import of capital machinery, reinvestment of profits or dividends as FDI, work permits for foreign executives, export processing zone (EPZ) facilities, special economic zones (SEZs), flexible exit facilities, etc.
FDI has tripled in Bangladesh over the past decade, from USD 1.086 billion in the year 2008 to USD 3.613 billion in 2018. However, this inflow of FDI only represents about 1% of Bangladesh’s GDP, one of the lowest rates among emerging economies. Though the FDI inflow is rising, considering the current growth and size of the economy of Bangladesh, it has still lagged behind the desired level. Possible barriers to attracting foreign investors may include political unrest, scarcity of power and energy, lack of necessary land and infrastructure, lack of comprehensive policies regarding FDI, valuation challenges, repatriation restrictions, lack of institutional capacity to serve foreign investors, an underdeveloped financial market, etc. Despite such regulatory and institutional obstacles, Bangladesh has the opportunity to attract substantial FDI flows. Geographically, Bangladesh is located in advantageous position between India, China and the ASEAN region. In 2018, JETRO’s survey on Business Conditions of Japanese Companies in Asia and Oceania ranked Bangladesh above India and Myanmar. Now, foreign companies are showing interest in investing because of Bangladesh’s large domestic market, high economic growth, low production cost, etc. In addition, Bangladesh currently enjoys duty-free access to the EU and some other developed countries. The government’s current infrastructure development work (power plants, bridges, metro rails, and elevated expressways) and easing of FDI policy will increase the flow of FDI to Bangladesh.
Adopting the strategy of welcoming FDI as a part of export-led development, Vietnam is a booming country. In 1986, through several economic and political reforms, the government of Vietnam opened the country to the global economy in a process known as Doi Moi (renovation). During the Doi Moi period of economic development, Vietnam aggressively sought international trade and foreign investment inflows. Initially, as part of the policy in the early 1990s, the Vietnam extensively strengthened trade relations with Asian countries. In addition, with its available low-cost labor, Vietnam attracted attention from other regional economies as a promising new production site at that time. However, due to Asian currency crisis of the late 1990s, FDI in Vietnam declined (see Fig. 1). After the crisis, bureaucratic and structural problems in its investment environment caused Vietnam to face difficulties in attracting and utilizing FDI effectively. By 2008, Vietnam’s accession to the WTO in the previous year had raised the interest of foreign investors; thus, the country experienced a sharp increase in FDI. The recorded FDI in 2008 included a few large projects, such as a software park, a tourism complex, a petrochemical complex, etc. However, because of the severe 2008 global financial crisis, many of these registered projects were deferred or cancelled. In 2015, Vietnam ranked as the world’s fourth-highest attractor of FDI in terms of total investment capital behind India, China and Indonesia.Footnote 4 Vietnam’s achievement in attracting FDI has had a positive effect on the country’s economic development. The contribution of FDI to its GDP was about 18% in 2015. Moreover, FDI contributed to about 4.2% of Vietnam’s labor force in 2015 (Thuy Nguyen, 2016). This contribution is likely to be even larger if indirect effects are taken into account.
Recent participation in several bilateral and multilateral trade agreements has attracted a large amount of FDI into Vietnam. Its tax incentive framework, transparency and commitments with international trading partners influence foreign investors. The government of Vietnam actively works on market liberalization and other reforms as well. The recent reforms include a state-owned enterprise (SOE) sector, intellectual property rights, government procurement, e-commerce and the digital economy.Footnote 5 These reforms are important to maintaining Vietnam’s economic competitiveness as a lucrative investment destination. Currently, labor is becoming expensive in China. Vietnam is enjoying the benefit of China’s high labor cost as investors are considering Vietnam as the go-to place for manufacturing.
FDI inflows in major sectors
In 2019, the power, gas and petroleum sector attracted a maximum FDI share in Bangladesh. This sector accounted for 36.9% of total FDI inflow, amounting to USD 1.061 billion. This was followed by manufacturing and then by the trade and commerce sector, which contributed 29.6 and 16.4%, respectively, toward total FDI inflows. According to the World Bank and the Bangladesh Power Development Board, the growth of the power sector in terms of capacity addition is notable and increased from 5 to 28% in the period from 2012 to 2018. In South Asia, Bangladesh’s power sector is one of the fastest growing. It is expected that in the near future, Bangladesh’s demand for electric power consumption will increase more in line with its GDP growth and the government’s master plan to generate 24,000 MW of electricity by 2021, 40,000 MW by 2030, and 60,000 MW by 2041. Considering these issues, foreign investment is increasing in the power sector. Among manufacturing-sector industries, the textiles and clothing industry comprises the largest share of inward FDI. Currently, Bangladesh is the second-largest garment exporter in the world. This South Asian country enjoys tariff-free access to the EU, Canada, Australia and other major textile and garment markets. Motivated by the country’s cheap labor, preferential location and government support, many international investors and famous fashion brands are investing in Bangladesh.
In Vietnam’s case, the manufacturing and processing sector accounts for 65% of total registered foreign investment capital, topping the list with a total capital of USD 24.6 billion. This industry is followed by real estate, then by retail and wholesale. As in previous years, manufacturing and processing industries continue to account for the major share of FDI. Industry experts say that Vietnam has gained the advantage due to MNCs shifting manufacturing to Vietnam as costs in China began to increase. This process has accelerated because of the ongoing US–China trade war as well. As in past years, Vietnam’s real estate market continues to catch the attention of foreign and domestic investors. Increased tourism and mega-infrastructure projects are pushing the demand for real estate. Different tourist spots such as Da Nang, Nha Trang, and Phu Quoc Island are becoming popular, and construction of many hotels and residential projects is ongoing. In addition, mega-projects such as the Hanoi and Ho Chi Minh City metros’ construction are further expected to drive the demand for real estate. A fast-growing middle class is the core reason expediting the growth of investment in retail and the wholesale sector in Vietnam. Moreover, relaxation of certain restrictions such as participation in the distribution system by foreign investors has also aided growth.