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Will foreign investors relocate to Bangladesh from China?
With the Bangladesh economy in the first phase of its Covid Reopening, the country will be eagerly looking forward to attracting foreign investors to provide a much-needed stimulus. The Foreign Minister and the Commerce Minister sounded optimistic in their statements on the prospects of some Japanese manufacturing companies relocating from China to Bangladesh. On May 20, the Commerce Minister Tipu Munshi said, “The main point is how much investment we can attract when the factories will be relocated.” The Daily Star confirmed this outlook on May 21 in a report that quoted Foreign Minister Dr Abdul Momen, who said that “the Japanese embassy in Dhaka last week sent him a list of factories that want to relocate from China to Bangladesh”.
It is understandable that in the post-Covid era, many major US and Japanese firms might want to pull out of China and seek alternative partners to bolster their supply chain. However, there are still some major obstacles that Bangladesh needs to overcome before one can expect a major influx of foreign investment, particularly any capital being diverted from China. In The Daily Star report mentioned above, the Foreign Minster himself set off the alarm. He warned that foreign investors often express their dissatisfaction over bureaucratic tangles that stand in the way of business operations and obtaining various licenses. “They particularly complain about the poor services at the Bangladesh Bank, the commerce ministry and the National Board of Revenue,” the FM added. Ouch!
Let us analyse the facts. There is no doubt that after the US imposed tariffs on Chinese products, and after the outbreak of Covid-19, the US, the EU and Japan are looking elsewhere for cost-savings and to ensure safety and security. Japan has earmarked USD 2.2 billion of its record economic stimulus package to help its manufacturers shift production out of China. On May 21, Bangladesh’s Embassy in Beijing sent our Foreign Office a message indicating that some Japanese investors were exploring Bangladesh as a possible sourcing destination. Quoting Japan External Trade Organization (JETRO) officials in Beijing, the embassy said the 34 out of 690 Japanese firms registered in China have so far revealed the relocation plan. Unfortunately, JETRO declined to name the Japanese firms willing to relocate from China.
Therefore, we need to conclude that there is no guarantee that Japanese firms are packing up from China and heading for Bangladesh. As they say, there are so many steps “between the cup and the lip”. Bangladesh needs to act in a proactive manner to seize the opportunity that the new circumstances has offered.
The President of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) wrote a letter to the country representative of JETRO on May 12 calling for facilitating the relocation. The FBCCI also wrote to the Confederation of Asia Pacific Chambers of Commerce and Industry to encourage its member nations to relocate firms to Bangladesh.
Our business community and government can explore various avenues to draw investors to Bangladesh. The Office of United States Trade Representative (USTR) on May 1 last year released a list of 3,805 product categories that could be subject to tariffs of up to 25 percent. Anticipating higher tariffs on Chinese-made goods, Japanese companies initiated a plan to leave China. It is expected that eight Asian countries will get the biggest boost if the trade war forces US companies to leave China, including Vietnam, Philippines, Indonesia, Thailand and Malaysia. In a recent issue on foreign direct investment (FDI), The Economist writes that policymakers in other countries who aspire to take a share of the “redirected investment pie” must look beyond merely competing on manufacturing labour costs. “Infrastructure spending has to focus on fibre-optic cables as well as ports and roads. Education is essential because countries trying to break into global markets will need skilled workforces. These are tall orders for developing countries. But just waiting for higher Chinese wages to push jobs their way is a recipe for failure.”
Bangladesh faces tough competition, which means it has to go all-out to outbid Vietnam, Indonesia and India to attract the Japanese investors. Vietnam and India have already started talking to many Japanese and American firms that want to move out of China. In April, the Indian government reached out to more than 1,000 US companies and offered them incentives to move to India from China.
Bangladesh has special ties with many Korean business establishments and it needs to seek them out. Bangladesh is planning form a task force to make a strategic plan on “how to attract the companies, which are leaving from China” to invest here. The task force of the Government of Bangladesh must work overtime to ensure that existing investment is not in jeopardy and that new investment is forthcoming. Earlier this year, in March, Japanese Ambassador to Bangladesh Naoki sounded very optimistic. “The coronavirus outbreak will leave no scar on the flow of Japanese investment into Bangladesh and trade between the two countries will remain unscathed in the mid- and long-term”. While the Ambassador has to be lauded for his reassurance, it needs to be seen in the post-pandemic era whether this rosy scenario will materialise. Bangladesh cannot take for granted any of the pre-pandemic projections.
A recent survey by JETRO found that 70 percent of the existing Japanese companies in Bangladesh are keen on expanding their operations. The head of the Bangladesh Investment Development Authority (BIDA) is reported to be in talks with the Japan International Cooperation Agency and JETRO to communicate investment opportunities in Bangladesh. However, Paban Chowdhury, executive chairman of the Bangladesh Economic Zones Authority (BEZA), has been critical of the mindset of Bangladeshi bureaucrats who have not made it easy for foreign investors by throwing red tape at them. He suggested some conciliatory moves including extending tax waivers, allowing duty-free import of machinery—new and used, providing bond facilities, and speeding up services. “The bureaucracy must change its entire mindset in a bid to facilitate businesses instead of just regulating them,” Chowdhury pleaded.
Bangladesh has already lost more than two months in the race to lure foreign investment. It was in lockdown and the two investment promotion agencies—BEZA and BIDA—reportedly kept their activities limited to writing letters to the government mentioning the present situation, including challenges to getting foreign investments post Covid-19!
A recent report in The Business Standard rued that “most government officials in the country are on long holidays—of one-and-a-half months—as part of the government’s efforts to prevent the spread of Covid-19. They are slipping behind an existing stockpile of work that includes reforms to company and bankruptcy laws as well as overall doing business activities, which are vital to attract investments from overseas.”
The latest US Reshoring Index (USRI) published by the consulting company Kearney warned that while the probability for FDI heading out of China was high, there are three factors that all clients are looking at: cost, risk, and resilience. One of the authors of USRI, Patrick Van den Bossche, observed, “Three decades ago, US producers began manufacturing and sourcing in China for one reason: costs. The US–China trade war brought a second dimension more fully into the equation—risk—as tariffs and the threat of disrupted China imports prompted companies to weigh surety of supply more fully alongside costs. Covid-19 brings a third dimension more fully into the mix, and arguably to the fore: resilience—the ability to foresee and adapt to unforeseen systemic shocks.”
There is a lesson for Bangladesh in Van den Bossche’s last message. When we approach a prospective investor from Japan who is considering relocating to Bangladesh, our mantra ought to be that we offer not only lower costs, we can also minimise their future risk and enhance their supply chain resilience.
Dr Abdullah Shibli is an economist and works in information technology. He is senior research fellow at International Sustainable Development Institute (ISDI), a think-tank based in Boston, USA.
PHOTO: AP
It is understandable that in the post-Covid era, many major US and Japanese firms might want to pull out of China and seek alternative partners to bolster their supply chain. However, there are still some major obstacles that Bangladesh needs to overcome before one can expect a major influx of foreign investment, particularly any capital being diverted from China.