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COLUMN

The 'plus one' strategy and other lessons from Asia's FDI champion

IFTY ISLAM
After China and India, the clear success story in Asia's investment boom has been Vietnam, which has seen FDI expands tenfold from S 2 billion in 2000 to $20 billion in 2007 with in excess of $5 billion recorded for QI 2008. Vietnam's growth in the 2000-2006 period has been ‘7.4%, second only to China at 9.5% and above India's 6.7%.
A report last year from KPMG/EIU (“Vietnam: Open for Investment", August 2007) offered a number of useful insights on the Vietnam success story. They noted that "The speed with which Vietnam's economy is changing is staggering. From devastation after decades of war, 20 years of economic reforms have turned it into one of the world's most dynamic emerging markets”.
With an improving legal system and a stable political structure, coupled with a young and capable workforce, manufacturers of ail kinds (including mass-production and high-tech giants like Nike and Intel) are increasingly seeing Vietnam as a sound choice for their "China-plus-one" investments despite concerns about corruption and a slow-moving bureaucracy. The rapid privatisation of state-owned enterprises, ongoing reform of the banking sector and a WTO mandate to open up the services sector mean many other foreign investors are taking note.
As noted Asia watcher Chris Devonshire-English, of "2point6billion.corn" has commented: "The economics theory behind "China plus
one” works like this: as China is getting wealthier, and its population older, it is getting more expensive to manufacture there. Wages are rising and so are the prices of commodities China is experiencing some worrying inflationary trends right now that are pushing up the prices of everything from a bowl of rice to apartment rentals."
“Added to that, China unified its corporate income tax system last year, bringing the previous low rates that foreign businesses enjoyed up in some cases from 15 percent to 25 percent. Certain tax incentives also have disappeared, making other Asian destinations now more attractive than China for the receipt of foreign investment.
To compound this, the United States has quota systems in place for Chinese textiles, agricultural products and a whole host of other items, meaning once those quotas are used there are no more permissible US imports. Accordingly, some manufacturers are considering opening up elsewhere or moving their operations entirely. Vietnam, with American most-favoured-nation (MFN) status is a prime recipient of this investment, especially for export manufacturers looking to sell back to the US or markets elsewhere. It also has no US quota-based issues to worry about.
What can Bangladesh learn and what are the lessons for potential global investors in Bangladesh from the Vietnam experience?
Since the "Doi Moi" policy
was launched, the government has been striving to implement policy measures to promote investment. Since the introduction of the First Law on Foreign Investment in 1987, Vietnam "has identified itself as a country determined to attract FDI. The government also continues to provide pref-erentiaJ incentives to projects investing in the industrial, processing and economic zones. An additional 22 industrial zones were set up in 2007 alone and the total now stands at 150.6
A strong educational system is also a major attraction forVietnam as an FDI destination. Its literacy rate of 90% is similar to China's and significantly higher than India at 60% and Pakistan at 50% and Bangladesh at 43%. Due to Vietnam's openness to foreign influence and reliance on trade, the workforce's English language proficiency compares favourably with many of its neighbours, especially China. Many students have to supplement their coursework through private classes in English and, increasingly, computerskills.
Vocational training schools arc becoming a more important component of the education system, with 90 registered in Ho Chi Min City in 2006.
On infrastructure, Vietnam is constructing six international airports with one envisaged to be able to compete with Singapore or Bangkok. An elevated railway is planned for Hanoi. The government plans seven new power plants by 2010, one natural gas plant and
one nuclear plant all with the help of foreign investors. This will reduce reliance on hydropower from around 40% currently.
So in terms of Vietnam lessons for Bangladesh, a dynamic and proactive FDI strategy is clearly important. Investment in education is another key focus. Leveraging Diaspora is an area Bangladesh has done with remittances but it can clearly do more, especially in terms of attracting higher skilled diasporas back, leveraging NRB (non-resident Bangladeshi) intellectual and commercial capital, rather than lower wage
workers sending money back to the country.
But perhaps the greatest lesson Bangladesh can learn is that in the same way Vietnam has clearly benefited from the "China+one” policy of many global multinationals in terms of reducing their dependence on China, Bangladesh should aim to position itself as "In-dia+one". It has already done so to some extent in textiles. But in other areas such as outsourcing, it has been far less effective.
As growing competition for labour and rising domestic costs reduce the competitiveness of Indian companies,
Bangladesh is, by dint of low wages, location in the heart of Asia and preferential trade rules such as the lack of patent protection in pharma, ideally positioned to benefit. Bangladesh should study its large neighbour's economic development more closely and develop an FDI strategy that leaves it ready to welcome global multinationals that catch the "India+one" bug.
The writer Is managing partner of Asian Tiger Capital Partners and former managing director and head of Global Macro Strategy at Citigroup, London.
Ifty.islam@at-capital.com