Why foreign direct investment is falling when Bangladesh needs it most

Foreign direct investment (FDI) is more than just capital coming in from abroad. It reflects the confidence of global investors in the policies, institutions, and future prospects of a country. For Bangladesh, FDI has always been considered as an important driver of economic growth since its independence.

However, the recent pattern of FDI is concerning. After performing relatively well in earlier years, inflows have started to decline steadily. This is not only because of global shocks such as the pandemic and wars in different parts of the world but also due to deeper and long-standing structural problems of the country. 

These concerns are reflected in the most recent investment data. If we look at the World Investment Report 2025 by UN Trade and Development (UNCTAD), we can see that net FDI inflows to Bangladesh declined by 13.2% in 2024 and it dropped to $1.27 billion from $1.47 billion a year earlier. This was the fourth year in a row that FDI had declined. 

What makes this trend particularly concerning is the global and regional context. In 2024, global FDI flows increased by 4% and reached around $1.5 trillion. We can also notice a moderate growth in greenfield investments for the South-Asian region.

If we look at the bigger picture over the past few years, the story of FDI in Bangladesh becomes even clearer. Bangladesh recorded its highest FDI inflow of the past six years in 2019 before the Covid-19 pandemic, amounting to $1.86 billion. Inflows fell sharply to $1.47 billion in 2020 following the Covid-19 shock. Although there was a small rebound to $1.57 billion in 2021, this improvement proved short-lived. FDI declined again to $1.52 billion in 2022, slipped further to $1.46 billion in 2023, and dropped to $1.27 billion in 2024, the lowest level in this period. 

The numbers tell a story of lost momentum, leaving Bangladesh with nearly $600 million less investment than at its peak just five years earlier.

A comparison with regional peers makes the weak performance of Bangladesh more apparent. In 2024, the country attracted only $1.27 billion in FDI, much lower than India ($27.56 billion), Vietnam ($20.17 billion), and Indonesia ($24.21 billion). Even countries that are often considered smaller or less developed such as Pakistan ($2.57 billion) and Cambodia ($4.40 billion) drew significantly higher inflows. To put it in perspective, India, Vietnam, and Indonesia attracted roughly 15 to 20 times more FDI, while Pakistan and Cambodia still received two to four times more. This implies that Bangladesh is gradually losing ground as a competitive destination for foreign investment in the region.

We can see the same scenario when we look at FDI in relative terms rather than headline inflows. FDI currently accounts for less than 1% of gross fixed capital formation in Bangladesh, signalling that it is playing a shrinking role in financing domestic capital formation. At the same time, rising FDI stock figures can mislead common people. 

Although UNCTAD data show that FDI stock increased from $2.16 billion in 2000 to $18.29 billion in 2024, this largely reflects investments accumulated over earlier decades rather than a strong pipeline of new projects. In other words, while existing foreign investors continue to operate and reinvest to some extent, fresh inflows have slowed considerably.

Over the past 24 years, Bangladesh's FDI stock has increased 5.4 times, which is not satisfactory when compared with its peers. Over the same period, Vietnam's FDI stock expanded 15.6-fold, while India's increased 7.7-fold, showing Bangladesh's slower pace of integration into global investment flows. Since independence, Bangladesh has accumulated a total of $34.18 billion in net FDI, with a historical peak of $2.83 billion in 2015. On the other hand, Vietnam attracted $38.67 billion in just the last two years, exceeding Bangladesh's lifetime inflows.

We see a comparable trend when examining greenfield projects, which are often considered an early indicator of investor confidence. According to UNCTAD, the value of announced greenfield FDI projects in Bangladesh fell sharply from $2.70 billion in 2023 to $1.75 billion in 2024. During the same period, greenfield investment across South Asia grew by 5.8% which puts a question mark on Bangladesh.

This trend is mirrored when foreign investment is assessed relative to the size of the economy. Data from the World Development Indicators show that Bangladesh's FDI-to-GDP ratio has remained persistently low in recent years. Between 2020 and 2023, net FDI inflows averaged only 0.37% of GDP, falling from 0.41% in 2020 to 0.32% in 2023. In 2024, the ratio stood at 0.34%. which is the lowest among comparable countries, far below Cambodia (9.48%), Viet Nam (4.23%), and Indonesia (1.74%). Even Pakistan and India performed better, with ratios of 0.72% and 0.69%, respectively These figures show that even smaller or similar economies are far more successful in drawing foreign investment relative to their economic size than Bangladesh.

The fragile investment environment is also evident in domestic financial trends. Private sector credit growth is an important indicator of investment activity which slowed sharply during the second half of FY2025. According to the Bangladesh Bank's Monetary Policy Statement, credit to the private sector grew by only 6.5% in June 2025.  This is the lowest growth rate on record and far below the Bangladesh Bank's projected 9.8% target. Such a sharp slowdown suggests that businesses are holding back on new investment and expansion. When domestic firms themselves are cautious, it sends a negative signal to foreign investors as well.

Several structural and policy challenges have contributed to this adverse FDI situation. Among these, one of the most visible obstacles is bureaucratic red tape and weak governance. Foreign investors often need to deal with complex rules, slow approvals, and unclear procedures when they try to do business in Bangladesh. 

This challenge is reflected in the World Bank's Business Ready (B-READY) Index 2025. Among 101 countries, Bangladesh ranks 90th in the regulatory framework, far behind regional peers such as Vietnam (55th), Indonesia (59th), Cambodia (71st), and Pakistan (73rd). The low-ranking captures exactly what investors experience such as lengthy procedures for permits, land access, and utilities along with uncertainty in tax administration and frequent policy changes.

While Bangladesh performs slightly better in public services, ranking 68th, it still lags behind Vietnam (58th) and Pakistan (57th). The situation is the same in terms of operational efficiency, which reflects how rules are implemented in practice: Bangladesh ranks 59th, behind Indonesia (57th) and far below Vietnam (16th). The gap with Vietnam highlights a key problem that regulations may exist on paper in Bangladesh, but slow enforcement, delays, and administrative bottlenecks make everyday business operations costly and unpredictable. Efforts to simplify procedures such as the One-Stop Service Centers have often fallen short and added to investor frustration rather than alleviating it.

The challenge of political and macroeconomic uncertainty is closely linked to weak governance. Investors prioritise stability, but Bangladesh's political landscape is marked by partisan conflicts, policy reversals, and the influence of crony capitalists which creates significant unease. These risks are compounded by macroeconomic pressures such as high inflation, exchange rate volatility, and fiscal stress. Sovereign credit ratings, which strongly influence investor perceptions, reflect these risks. According to Trading Economics, Bangladesh holds a B+ rating from S&P and B2 from Moody's, with a TE score of 35. By contrast, Vietnam is rated BB+ / Ba2 (TE 46), India (BBB / Baa3, TE 56) and Indonesia (BBB / Baa2, TE 60) enjoy much stronger ratings. Lower ratings translate into higher perceived risk, increased borrowing costs, and reduced investor confidence and thus making Bangladesh less attractive compared to its neighboring countries.

Governance weaknesses in Bangladesh are also evident in broader measures of economic openness. According to the 2025 Index of Economic Freedom, Bangladesh has a score of 54.7 and falls into the "mostly unfree" category. This ranks the country 122nd globally and 25th out of 39 countries in the Asia-Pacific region. Key problem areas include weak property rights, limited judicial effectiveness, and poor government integrity. Business, labor, and monetary freedom all remain below global averages. Trade and investment are further constrained by a trade-weighted tariff rate of 11.4% and persistent non-tariff barriers. The tax system is also a barrier to investment, with a corporate tax rate of 32.5% and total tax revenue at just 8% of GDP, limiting the government's ability to deliver quality public services. The contrast with peers is sharp. Vietnam and Indonesia, both scoring 65.2, rank around 60th globally and within the top 11 in the Asia-Pacific region, and are classified as "moderately free". Cambodia, with a score of 58.2, ranks 98th globally, still ahead of Bangladesh. India, scoring 53.0, ranks lower at 128th globally, but its massive market size continues to attract investors. 

Beyond rules and ratings, investors also look at people and their skill levels. Bangladesh faces another major disadvantage in this aspect. According to the Human Capital Index, Bangladesh scores 0.46, ranking 99th globally. This is below India (0.49, 92nd) and Cambodia (0.49, 92nd), and far behind Vietnam (0.69, 33rd). This gap reflects an under-skilled and underutilised workforce, particularly among educated youth. Workforce quality matters as much as wages for investors in technology, manufacturing, and high-value services. Vietnam's success in building a more productive labor force has given it a clear edge in attracting high-quality FDI, an edge Bangladesh has yet to achieve.

Infrastructure and logistics add another layer to the problem. Despite progress on flagship projects like the Padma Bridge and metro rail, day-to-day business logistics remain costly and inefficient. The World Bank's Logistics Performance Index (LPI) 2023 ranks Bangladesh 88th globally, with a score of 2.6. This is well below Vietnam (43rd, 3.3), India (38th, 3.4), and Indonesia (61st, 3.0). Weak performance in customs efficiency, port quality, transport infrastructure, and shipment reliability raises costs for exporters and manufacturers. For foreign investors dependent on global supply chains, such inefficiencies can be a deal-breaker.

As Bangladesh moves toward more ambitious development goals, this gap between rising investment needs and declining foreign interest becomes increasingly problematic. Reversing the trend will require more than isolated policy fixes; it will demand credible reforms that improve predictability, strengthen institutions, and create a business environment where both domestic and foreign investors feel confident committing for the long term.

Nafis Mubarrat is a Programme Associate at the South Asian Network on Economic Modeling (SANEM).

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.