Bangladesh does not have an FDI problem, it has a confidence problem

Every few months, a fresh set of numbers reminds us of an uncomfortable truth: Bangladesh, the second-largest economy in South Asia, with a population of more than 170 million and a GDP exceeding half a trillion dollars, still struggles to attract foreign investment commensurate with its size.

The latest figures make the point starkly. Fresh foreign equity investment — arguably the clearest measure of new investor appetite — fell by more than 70% year-on-year in the first quarter of this year, to just $78 million.

That is not simply a dip. It is a warning about investor confidence.

It is tempting to read the 2025 headline figure differently. Total FDI inflows rose 45% last year to $1.78 billion, ending two consecutive years of decline. Bangladesh Bank and BIDA officials, understandably, pointed to this as evidence that reforms are working.

But look beneath the surface and the story changes.

Much of that rebound came from reinvested earnings and intra-company loans — money that existing foreign firms were choosing to put back into operations they already had, rather than fresh capital arriving from new investors. Existing investors staying put is good news. It is not the same as new investors showing up.

And the sharp reversal in early 2026 suggests that whatever confidence was building has already begun to erode, likely on the back of election-related uncertainty and continued macroeconomic strain.

The regional comparison is worrying

The comparisons that should worry us are regional.

Bangladesh remains only the third-largest FDI recipient in South Asia, trailing India and Pakistan. Pakistan, a country grappling with its own economic crisis, has at times outpaced us.

More tellingly, a number of considerably smaller economies, including Uganda, Ghana and Vietnam, regularly attract comparable or greater volumes of foreign capital.

FDI as a share of Bangladesh's GDP is roughly one-third of 1% — a figure that should concern a country of our scale and ambition.

None of this is for want of a story to tell.

Bangladesh has the fundamentals investors are supposed to want: a young and large workforce; a resilient export base built around ready-made garments; a strategic location connecting South and Southeast Asia; and a domestic market of significant size.

On paper, we are exactly the kind of place global capital should be flowing towards as companies seek alternatives amid supply-chain diversification away from China.

In practice, investors keep choosing elsewhere.

The problem is what Bangladesh fails to guarantee

Why?

The answer lies less in what Bangladesh lacks and more in what it fails to guarantee.

Foreign investors do not primarily ask whether a country's growth story is compelling. They ask whether their capital, once committed, is safe; whether profits can be repatriated without friction; whether contracts will be enforced predictably; and whether the rules of the game will remain stable from one government to the next.

On each of these fronts, Bangladesh's record is patchy.

A banking sector still working through asset-quality problems, a bureaucracy that can turn routine approvals into months-long ordeals, an energy supply that is not yet fully reliable for round-the-clock industrial use, and a political transition whose contours remain unsettled — together, these factors can outweigh whatever wage advantage or market size Bangladesh can offer.

Reforms matter, but implementation matters more

There has been real progress worth acknowledging.

The Bangladesh Investment Development Authority has worked to streamline approvals and has cited a pipeline worth roughly $1.5 billion that it expects to materialise over the next two years.

A new Income Tax Act has simplified filing procedures. Labour law reforms in 2025 sought to strengthen worker protections in ways that matter for reputation-conscious multinational buyers.

A revised patents framework aims to bring intellectual property protection closer to global norms — a meaningful signal to technology and pharmaceutical investors weighing whether Bangladesh is ready for higher-value manufacturing, rather than remaining concentrated in garments.

These are not cosmetic changes, and they deserve recognition.

But reforms on paper do not, by themselves, move capital.

What moves capital is the lived experience of investors already here. Did the factory that applied for a gas connection receive one within a reasonable timeframe? Could the joint venture that wanted to repatriate a dividend do so without navigating a bureaucratic maze? Was a commercial dispute resolved by a court in months rather than years?

Investment promotion agencies can advertise reform. Only implementation converts that advertisement into inflows.

Right now, the gap between the two remains our single biggest liability.

The LDC transition is a deadline, not a destination

There is also the matter of timing.

Bangladesh had been due to graduate from Least Developed Country status this November, a milestone that would strip away preferential trade access that has underpinned garment exports for decades. The government has now sought a three-year extension.

That reprieve is valuable, but only if used deliberately — to fix the banking sector's balance sheets, build genuinely dependable energy infrastructure, make institutions faster and more transparent, and give investors a credible five- and 10-year picture of where policy is headed, regardless of who is in office.

An extension spent merely postponing difficult decisions will leave us exactly where we are today — simply three years later and with less room to manoeuvre.

Domestic confidence comes first

The most important audience for these fixes, ultimately, is not foreign.

It is domestic.

Foreign investors watch how local capital behaves before they commit their own. Private domestic investment in Bangladesh has been essentially flat for years, while growth in private-sector credit has slowed markedly.

When our own entrepreneurs hesitate to expand, no foreign delegation, however well received, will conclude that this is a market worth betting on.

Confidence at home is the leading indicator; foreign inflows are the lagging one.

Turn potential into commitment

None of this is a case for pessimism. It is a case for precision about what actually needs fixing.

Bangladesh's potential is not in question. It has not been for years. Almost every report on the subject says as much, often as a ritual disclaimer before listing the reasons investors stay away.

What is missing is the unglamorous institutional follow-through that turns potential into commitment: predictable regulation, a banking system investors can trust, reliable energy, and a political transition that resolves without prolonged uncertainty.

Get that right, and the capital will not need to be courted so hard.

It rarely does, once a country has shown it can be trusted with money already invested.

Suborna Akther Laboni is a researcher at the Dacca Institute of Research and Analytics (daira). She can be reached at suborna@dairabd.org. 

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