Evaluating Bangladesh as a foreign direct investment destination

Bangladesh

Decisions about foreign direct investment can be complex, and require an incredible amount of information in order to evaluate the different options that a company needs to consider. The best methods of evaluation will apply a consistent set of criteria across a number of different variables and use these for all of the different countries. The company will also want to understand which key variables are the most important. How a country scores on a factor is one critical variable, but how important that factor is the final decision is also important. The following paper will work through a framework for understanding the desirability of a country for foreign direct investment, using the nation of Bangladesh as the prompt. The end result will be an example framework that illustrates the scoring system as applied to Bangladesh. In practice, this would then be used to evaluate Bangladesh against other countries that are competing for the business.

The underlying philosophy of this system is that it is a baseline. What this means is that there is no consideration of industry-specific variables. So for example a forestry company would obviously want to know about the nation's loggable forest cover, but this information is not of use in too many other industries, so it would not be included. Likewise, differential tariffs between industries and products are not going to be considered. Thus, issues such as these are going to be covered on an aggregate basis only. Tariffs would be evaluated for example on average tariffs or the country's general approach to free trade.

The framework is going to be built around the variables that are most important to business. Thus, the framework is going to take in demographic, macroeconomic, resource, political and cultural factors into this decision. Within each category there are going to be a number of different variables. These will be discussed in the following report that outlines the business attractiveness of Bangladesh. The variables in each category will be coded in order to fit onto a scale of 1-5, with 5 being the most attractive. All figures are from the CIA World Factbook unless otherwise noted.

Variables - Demographic

The first set of variables for Bangladesh is the demographic set. The key demographic variables that contribute to the attractiveness of a country are the size of the population, the growth rate of the population, the median age, the literacy rate, the average education attained and the life expectancy. Bangladesh has large population of 163 million, making it the 9th-largest country in the world. With a population between 100 and 200 million, Bangladesh scores a 4 for attractiveness. A rapid growth rate is considered to be preferable to a lower growth rate, because it implies more consumers and more economic growth going forward. The population growth rate for Bangladesh is 1.59%, which is just 76th in the world, a fairly average figure. The median age is 23.9 years, which is quite young. Too young is actually a problem because children in the developing world are not great consumers, but for Bangladesh this is a lot of working-age people too. The ramifications of this is that the country has a lot of people either just entering the workforce or just about to. That could lead to massive unemployment, or it could lead to tremendous economic growth opportunities. Thus, a company can view this median age as either a positive or negative, but it will generally be positive since most Bangladeshis are old enough to work and consume, but are still relatively young.

The official language in Bangladesh is Bengali and the literacy rate is 57.5%, which is poor, and this is tilted towards males. This reflects poorly on the quality of the workforce -- the quantity is there but mostly for low end work. The school expectancy is just 8 years, also a low total. The life expectancy at birth is around 70 years, which ranks 150th in the world.

The variables listed paint a picture of Bangladesh's demographics. The country is young, but undereducated. The low life expectancy reflects are a relatively poor state of health care. Not mentioned before was a low rate of urbanization, which indicates that most Bangladeshis are also among the rural poor. So this is a country with some positives, especially in a plentiful workforce that should be inexpensive, and a potentially interesting consumer market give its size and age characteristics. The other categories will inform us more.

Variables -- Resources

The third set of variables reflect the company's infrastructure and resource base. These are important. We know how many people there are and how much money Bangladesh has, but what sort of resource base does it have for its economy? Further, how do we get products to market in Bangladesh? This section seeks to answer those questions.

The first category reflects the country's energy base. Bangladesh is self-sufficient in electricity production, but it relies on fossil fuel for its power plants. The problem with this is that Bangladesh has no hydrocarbon resources, ranking 84th in the world for proved oil reserves but better with natural gas at 46th in the world. For a country with limited hydrocarbons to have no renewable or nuclear energy development means that its energy infrastructure is poor.

The transportation infrastructure befits a developing world nation. There are just 16 paved runways in the country, or one for every ten million people. The country ranks 64th for railway infrastructure, not much different than a similar-sized country like Greece but a poor total when compared with Namibia, which has more railway kilometers and hardly any people. Passenger traffic is popular so travel times can be long. The highway infrastructure ranks 107th in the world by distance, but almost all of Bangladesh's roads are unpaved and in rough condition. Chittagong is the only major container port and there is risk of armed robbery of ships in Bangladesh's territorial waters.

Bangladesh's main industries are agricultural, based on the primary resource of a fertile floodplain, but the country has little mining and almost no fossil fuel production. As far as communications infrastructure goes, the country has a questionable landline infrastructure but has a high level of mobile use. Most local media is state-owned, which hurts the flow of information, though foreign channels on satellite are available. The country has very low uptake of Internet, with less than 1 million users for its 160 million people.

Overall, Bangladesh is not particularly well-positioned for success. The country's only real resource is its agricultural production much of that goes for domestic use. The transportation and communications infrastructure date to the British era and are today crumbling. Further, its infrastructure is poorly-equipped to handle the flooding that occurs frequently.

Variables -- Political

The government of a country is a major determinant of its attractiveness to investors -- compare the two Koreas for an example of how that works. The key political variables are stability, debt, corruption, external threats, attitudes to trade, and rule of law. For a company investing in a country, stability is a good thing. It does not matter much if the government is democratic or not since the objective is to minimize volatility. In Bangladesh, stability always seems shaky. There is considerable factional violence and the country still bears the scars of its bloody war of independence (Nayar, 2013). After a long period of stability the current situation appears less stable, with mutinies, protests and riots. Bangladesh has a deep budget deficit of -4.6% of GDP, but its overall debt is just 31.7% of GDP, which is a healthy figure. Still, for a country with few sources of foreign exchange, a deficit is not healthy. There are few serious external threats to Bangladesh and no conflicts appear to be imminent, though relations with Myanmar are strained.

The way that the country deals with the outside world is also important. Bangladesh does not have a good attitude towards trade liberalization. The government is heavily involved in business. It has no regional trade agreements and hardly trades anything with its neighbours. The country is a member of the WTO, however, but has not been active at fostering trade relations. Corruption is a major problem in Bangladesh, with the country scoring 144th in the world for corruption (Transparency International, 2012). The rule of law is not applied with much consistency in Bangladesh. Aside from the corruption, the legal system is a hodgepodge of English common law and sharia law, and there are often political motivations to judicial decisions.

Overall, the political environment is poor. Bangladesh suffers from a leadership deficit. While it is not believed that there is a serious long-term risk of destabilization, the country is less stable now than it has been in the past. Corruption and a marginal legal system are two more issues that call into question the governance of the country. For those looking to invest in Bangladesh, the country has not done much to encourage investment. Aside from joining the WTO, it has just signed a trade deal with the U.S., but there is a lack of serious intent to pursue a free trade agenda (AFP, 2013).

Variables -- Cultural

There are several different cultural variables that are also important to take into consideration. These are the social harmony, equality, business attitudes, power distance and workers' rights. Social harmony is an issue in Bangladesh. While most of the country consists of Muslim Bengalis, there are differences that remain lingering from its bloody war of independence and the new Prime Minister has stoked some of these fires. This is not a nation in a state of civil war, but there is definitely a lack of harmony among its different political factions. For a country with female Prime Minister, Bangladesh does not have a high level of equality. There are few protections for women and minorities in law, and women receive substantially less education than do men.

In Bangladesh, there is a shortage of men. There are 0.87 males to females between the ages of 15-24 and 0.90 males to females from ages 25-54. This is because so many working-age men leave the country to find employment elsewhere, such as the Arabian states and Malaysia. This social imbalance provides the country with valuable remittances but it also creates social disruption at home.

The country does not harbor pro-business attitudes. There has been little investment in manufacturing and the country has not shown much interest in signing trade agreements. Socialism is strong in the country and many workers expect paternalistic attitudes from their employers. There are millions of small-scale entrepreneurs but a banking system that seldom gives access to capital harms the ability of these entrepreneurs to grow bigger. The concept of microfinance was developed here in order to help foster a better business climate so that people would feel more comfortable taking charge of their own lives.

The work ethic, however, is strong. Bangladeshis are willing to do whatever work they need, something that has led to the low unemployment rate and millions of workers in the Gulf. Hard work is not something that will be questioned by the Bangladeshis. Lastly power distance reflects the attitudes towards hierarchy, and the Bangladeshis prefer to have strong hierarchy as a high power distance culture. The people tend to accept that people are not equal.

Overall, the social factors for Bangladesh are not particularly positive. The people work hard, but they do not take much initiative and when they do they receive little help from the government or the banking system. This leads to a climate that discourages innovation and entrepreneurial activity.

Drawing Conclusions

There are several key conclusions about the attractiveness of the Bangladesh market. In general, it is not attractive. The problems begin with leadership, where the situation may be stable but looks shaky at times, and the country is generally not run very well. There is little effort to sign trade agreements or promote investment, so Bangladesh exists in a 1970s world with high tariffs, trade barriers and a tremendous amount of structural barriers awaiting whatever hapless company manages to successfully get into the country. Without a leadership that is committed to good governance and a desire to build the economy, there will be no changes to the status quo in Bangladesh

The government has not placed emphasis on creating the conditions for investment. The recent deal with the U.S. emphasizes safety in the garment industry, but this is not much to work with. The country is not endowed with tremendous resource depth, either, so an investment is mostly in the human capital . Even that has its difficulties. The workers are often poorly education and 40% of them are illiterate. The demographics are favorable for long-term growth but the government needs to foster this growth, something it has been hesitant to do. This is a part of the world where socialism resonates and that manifests itself in a culture that does not really understand how to make itself more friendly to business.

Thus, even with one of the largest populations in the world, Bangladesh is going to be challenged to grow its economy at a healthy pace. There may be period inflation issues, but as long as these knock down the value of the currency this will be acceptable.

The table of the conclusions is as follows. I gave them all equal weighting because I do not know the industry yet, but the table I have designed is adaptable and flexible to the needs of the different industries that might use it to determine whether Bangladesh is attractive. At this point, it is not and there are relatively few things with which to be passionate about. It all starts at the top for Bangladesh, and the country is going to need stronger, more stable and more pro-business government to really make it more attractive to foreign investment because there is little impetus for a Western firm to invest in the country.

Demographic

Macroeconomic

Resource

Political

Cultural

Population Size

4

GDP size

2

Energy

1

Stability

2

Social Harmony

3

Pop Growth

3

GDP growth

4

Air Transport

2

Debt as %GDP

3

Equality

2

Median Age

4

F/X strength

2

Water Transport

2

Corruption

1

Business Attitudes

2

Literacy

2

Inflation

2

Land Transport

1

External Threats

4

Work Ethic

4

Avg Education

2

Trade Balance

3

Communications

1

Attitude to Trade

1

Power Distance

1

Life Expectancy

2

Unemployment

4

Mining/Forestry

1

Rule of Law

1

2.83

2.83

1.33

2.00

2.40

Total

Attractiveness

Score

11.40

/25