'Going forward, we need efficiency-seeking investments from the US'

A senior-level US delegation will visit Bangladesh this month – making it the first such visit from the US since the formation of the interim government led by Chief Adviser Professor Muhammad Yunus.

On 3 September, Foreign Affairs Adviser Md Touhid Hossain said "Bilateral issues will be discussed with the US delegation and we will discuss how to take the relationship between the two countries forward in a changed political scenario."

The Business Standard spoke to economist Dr Syed Akhtar Mahmood, a former Lead Private Sector Specialist at the World Bank Group, concerning bilateral trade and investment with the United States, and how the US can support Bangladesh's economic transformation. 

Given Bangladesh's intention to seek financial cooperation from the United States, what specific areas do you believe Bangladesh should prioritise in these discussions?

Going forward, the economic relations between Bangladesh and the US should be guided by the overarching development goals of the country. Bangladesh aspires to reach an upper middle-income status by 2031. That is perhaps too ambitious a goal, but even if we relax that target date by another five years, there is no guarantee that we will achieve that status. 

The sobering lesson from the history of low-middle-income countries is that very few such countries have graduated to the high-income category; even moving to an upper-middle-income status has been more an exception than a rule. Many countries have fallen into the middle-income trap.

If the US is serious about being an important economic partner of Bangladesh, it should focus its attention on substantially increasing the flow of efficiency-seeking FDI to the country. Right now, the US is rather behind on that front.

Bangladesh should avoid falling into such a trap. This would require high rates of productivity growth and much-expanded exports. These, in turn, would require export diversification, moving beyond the cheap-labour paradigm to more sophisticated, higher value-added products or services, such as electronics, automotive parts, or chip design. 

Bangladesh needs to get a foothold in the global value chains of such products. This is the context in which we should think about our future economic relations with the US.

This brings me to the subject of US FDI in Bangladesh. In addition to asking for more trade opportunities, Bangladesh should emphasise the need for a quantum jump in US FDI flows to Bangladesh. 

But that's not all. We need FDI that will help diversify our exports and move into more sophisticated products. These require technological knowledge, market access and brand recognition that our local entrepreneurs do not have. These are long-term agendas, but the conversation needs to start now.

In addition, I would not be surprised if the government seeks US assistance in recovering stolen funds and perhaps also US support on the boards of the IMF, World Bank and ADB when Bangladesh approaches these institutions for additional loans. 

Much of the US FDI in Bangladesh is natural resource-seeking, while other countries like South Korea focus on efficiency-seeking investments. What strategies can Bangladesh employ to attract more efficiency-seeking FDI from the US, particularly in sectors that will integrate the country into global value chains?

That is correct. The composition of the stock of US FDI in Bangladesh is highly skewed. The US is the top investor in Bangladesh if we go by the stock of FDI in Bangladesh, ie the accumulated net FDI flows since independence. 

Thus, at the end of FY2022-23, the stock of US FDI in Bangladesh was $3.95 billion, the highest among all sources of FDI and accounting for one-fifth of the total FDI stock. The UK came next with $2.82 billion.

But what about the composition of US FDI? Given what I said above about the need to diversify our exports, the composition of US FDI leaves much to be desired. About 70% of the accumulated US FDI in Bangladesh is natural resource-seeking as exemplified by companies such as Chevron. 

Another 25% of the FDI is market-seeking, ie it is here to exploit Bangladesh's internal market. Only a very small amount (5%) is efficiency-seeking, ie the US investor is using Bangladesh as an efficient production base from which to export. By contrast, about 80% of the FDI that has come so far from South Korea is efficiency-seeking.

Going forward, we need more such investment from the US. If the US is serious about being an important economic partner of Bangladesh, it should focus its attention on substantially increasing the flow of efficiency-seeking FDI to the country. Right now, the US is rather behind on that front.

To attract such investments, Bangladesh needs to learn from the experience of others. Take, for example, the case of Malaysia. As early as the late 1960s, Malaysia decided to attract FDI to build up the electronics and electrical products industry and enter the global value chains for such products. It approached the agenda with a very proactive investment promotion strategy.

The pioneer was the state government of Penang. Officials from the state's investment promotion body, Penang Development Corporation, went abroad to proactively reach out to leading global firms in the industry and persuade them to come to Malaysia. Their efforts were successful. 

By the early 1970s, eight such firms, dubbed the "Eight Samurai," decided to invest in the electronics and electrical industry in Malaysia. Among them were top US companies such as Intel, Hewlett-Packard and Advanced Micro Devices (AMD).

The government provided the usual menu of incentives, such as land in free trade zones, tax holidays, investment tax credits, and export incentives. But it also did one other thing. It made sure the investors who had come were happy. Not only did the government respond fast to any concerns raised by the investors, but it also proactively reached out to them regularly to check whether they were having any issues. 

Taking care of existing investors also sends a good signal to other prospective investors. We are not good at taking care of existing investors. For example, we often impose huge taxes on such investors with retrospective effect. There have been high-profile legal disputes about such government behaviour, for example, in the mobile phone industry.

It is important to note how things evolved in Malaysia over time. The first phase in the rise of Malaysia's electronics and electrical industry lasted for about two decades, from the early 1970s to the late 1980s. During this phase, the focus was on the labour-intensive, low-value-added parts of the global value chain. 

The second phase of the industry, from the late 1980s to the early 2000s, saw substantial upgrading in the industry. The foreign companies gradually shifted into higher-value-added activities, for example, moving from simple assembly to automated assembly, and into process and product design.

The US can play a role in bringing regulatory good practices to Bangladesh. What specific regulatory reforms do you think would be most beneficial for attracting FDI, and how can these be effectively implemented in the current political landscape?

It may be noted that the FDI and regulatory governance agendas are complementary. Bangladesh needs to work on at least three aspects of regulatory governance, ie the quality of regulations as they are written, fair and transparent enforcement of the regulations, which requires simplified administrative procedures, and filling in regulatory gaps. 

We often talk about the first two, but the third is also important. 

There are areas, especially those that involve new technologies or innovative business models, that may not be covered by the existing rule book of the government. Investors, including those from the US, who seek to bring such technologies or business models may shy away if the rules of the game are not clarified. Thus, in some areas, new regulations will also be needed. 

The US has several good practices in regulatory governance that we can learn from. The US government has well-structured processes for stakeholder consultation on proposed regulations. Taking input from a wide range of people helps improve the quality of the regulations. The US also conducts regulatory impact assessments regularly. These analyse the likely costs and benefits of enacting a new regulation and thereby also help improve the quality of new regulations. 

Finally, the US has well-established procedures for periodic reviews of the existing stock of regulations.

These reviews look at the existing stock of regulations and identify regulations that are no longer relevant or duplicative and need to be eliminated, problematic regulations that need to be reformed, and areas where there are regulatory gaps that should be filled by the enactment of new laws or regulations. This is another area where we can learn from the US. 

USAID can be asked to provide technical assistance in these areas.

China is increasingly becoming a major source of FDI in Bangladesh. How does Bangladesh balance its relationships with the US and China, especially when their investment foci differ? What role can the US play to ensure its investments remain competitive?

If you analyse the sources of FDI globally, you will see the primacy of China and the US as sources of FDI. From 1990 to 2022, 18% of all global FDI came from the US, while the proportion for China (including Hong Kong) was just over 10%. 

But if you focus on a more recent period, such as 2010-2022, you will see a rise in China's importance, with its share of FDI outflow (including FDI from Hong Kong) rising to 16% while that of the US dropping slightly to 17%. So, these are the two most important sources of FDI in the world today.

Bangladesh currently gets a minuscule part of the FDI flows originating in these two countries. For example, in FY2023, Bangladesh received about $290 million FDI from the US and about $275 million from China plus Hong Kong. This may be compared to the $375 billion and $250 billion of FDI that flowed out globally from the US and China-Hongkong, respectively, in 2022. 

In other words, we typically receive less than 0.1% of the FDI outflows from these countries.

What does this mean? It means that we need not look at these countries as competing sources of FDI. Each country can afford to increase substantially its FDI flows to Bangladesh. There may be a question about the composition of that investment. 

For example, China may be a good source of investment in the infrastructure sector, while US FDI may help us get a foothold in various global value chains. This is not an either/or question. US investors can also come into infrastructure, while Chinese investors can also come in with some global value chain in mind. I am just thinking about relative shares. 

How important is US involvement in sectors like electronics or automotive parts manufacturing or cutting-edge technology development to strengthen the country's position in the 4th industrial revolution?

I would also add the semiconductor industry to your list. 

A small number of Bangladeshi companies have already made an entry into the global market, primarily the US market, in state-of-the-art chip design services and are gradually trying to move towards other parts of the semiconductor value chain, such as prefabrication services. This includes test programme development, chip testing and packaging.

The semiconductor market is expected to grow to $1 trillion by 2023, and Bangladeshi players in the industry believe that, with the right actions, we can grab about 3–4% of that market. We are talking here about exports worth $30-40 billion, just a little less than what we get from garments now. 

How do we get there? One way is to get US FDI into the sector, including through joint ventures with the Bangladeshi firms already active in the industry. As you know, foreign investors often look for reliable local partners who know the law of the land well. 

Five to six of the top 10 semiconductor companies in the world are based in the US. Thus, US investment can play a pivotal role in helping Bangladesh grab a chunk of the semiconductor market. 

A similar logic holds for the electronics industry. Six of the top global companies in the electronics industry are in the US – examples include Apple, Nvidia, Dell and AMD.

So, yes, US investment can help us acquire cutting-edge technology, gain from the 4th industrial revolution, and expand and upgrade our export basket.

But to attract US investment, we need to get our act together. Proactive and targeted investment promotion backed by a modernised and predictable regulatory environment is the place to start. Longer-term actions would include improving the education system and skill base of the country.

Dr Syed Akhtar Mahmood. Illustration: TBS