Reducing uncertainty is the key to more FDI

While we are still preoccupied with the immediate impact of the novel coronavirus, we need to start thinking about the post-corona scenario. The world is unlikely to be the same again. We need to reimagine as we reopen. 

Businesses all over the world will also be doing so. They will rethink many things. This will create challenges for us, but also opportunities. 
Many investors may want to further geographically diversify their investments. This will have implications, hopefully positive, for the FDI scenario in Bangladesh. 

But if investors show interest in relocating to Bangladesh, will we be ready to welcome them? It is time to start thinking about that. While we work on long-term solutions, such as building infrastructure and a skilled workforce, we can do quite a bit in the short and medium-term. Reducing regulatory uncertainty is one such area. 

Foreign investors often say, "We are delighted when a government says 'Yes' and move forward with our investment plans. We are disappointed when it says 'No' but we understand and can move on to other things. But we are really irritated when it keeps on saying, 'maybe'. This confuses us and throws us into uncertainty". 

Global surveys have shown that policy and regulatory uncertainty is one of the top reasons why foreign investors are discouraged from investing in a country.

One of the last pieces of work I did before retiring from the World Bank Group last year was a study on regulatory uncertainty in Bangladesh. It was partly based on a survey of businesses, mostly local, but some foreign. 

The study revealed that regulatory uncertainty is a major reason why many businesses do not make investment plans or do not fully implement plans that they have made. It also brought out the many manifestations of regulatory uncertainty, from the way laws and regulations are written to the way these are implemented in practice. 

If local investors are discouraged by regulatory uncertainty, foreign investors will be even more so. After all, they have other places to go to.

Government functionaries in Bangladesh characterise our FDI policy framework as very conducive and urge foreign investors to take advantage of it. They often point to the tax concessions and expect foreign investors to be attracted by these. 

Yes, investors like tax incentives but these become relevant at a later stage of a foreign investor's decision-making process. Foreign investors go through several stages in making their investment decision. 

Illustration by Rakibur Rahman

First, they make a longlist of countries to consider as an investment destination. This list is based on certain criteria. 

The list is then shortened based on additional criteria. Finally, they pick one or two countries from the shortlist to invest in. 

Tax incentives are usually a factor in the final locational decision but not when an investor is making a longlist or even a shortlist of a country. Here, policy and regulatory certainty is an important criterion. 

Bangladesh is not like India, Brazil, Mexico or Thailand - countries which easily make it to the longlist. For us even making it to the longlist is a challenge. This is where regulatory uncertainty is a big factor. 

Another factor is our track record of addressing problems faced by investors who are already in the country. We should note that a significant portion of the FDI in a country typically comes from reinvestment by existing investors. 

Moreover, prospective investors talk to those who are already in a country. If such investors have a negative experience story to share, that will discourage others from considering investing.

So, what can Bangladesh do? I have two concrete proposals, both related to setting up systems. If BIDA, the investment promotion agency of Bangladesh, has not yet thought about such systems, it may consider doing so. 

First, a system to follow-up on investment leads. Efficient investment agencies around the globe have investor tracking systems whereby they systematically track such leads. Such systems monitor how far an investor has moved along its journey - from initial interest in a country, to start of operations. 

A good investment promotion agency has a clear idea of the bridges that investors need to cross till their investment project is commissioned and operations commence. The tracking system monitors at which bridge an investor currently is and whether it is finding problems crossing the bridge. 

The proactive investor agency then takes corrective actions, by itself or in collaboration with other government agencies, to help the investor move forward. It is important to note that many investors silently withdraw their plans in the face of problems. An investment agency may never come to know about such cases in the absence of a tracking system. 

The absence of such a system has been an Achilles Heel for us. We often have roadshows for investors but do not track what has happened after that. We are more focused on events than processes. 

Second, an investor grievance system. While the tracking system mentioned above deals with prospective foreign investors, the grievance system focuses on investors who are already operating in a country. 

A grievance mechanism helps an IPA identify issues being faced by existing investors and take corrective actions, which often means bringing other government agencies to the table. Many countries have set up such systems and have managed to preserve investments that would otherwise have been lost. 

I know that government often addresses problems faced by individual investors when they are made aware of these. But we need to move away from such ad-hoc resolution of individual investor problems to a more systematic approach. The two systems I mentioned will help make that transition. 

The author recently retired from the World Bank Group. He was a co-author of the World Bank Group's Private Sector Development Strategy in 2002.