Is the US really the top investor in Bangladesh?

The question, laced with some pride, greeted me a few weeks ago as I opened my Twitter account. It was a message from the US embassy in Dhaka. The US ambassador to Bangladesh appeared in the message. With a picture of the Washington Monument and the Jefferson Memorial serving as a backdrop, the inquisitive ambassador seemed to be asking a question to a serious looking President of the US-Bangladesh Business Council. The message did not forget to remind us that America is also Bangladesh’s biggest export market for goods and services.
There is much discussion and commentary nowadays about what the USA can, or should, do in post-election Bangladesh. Some commentators focus on issues that were hot before the elections, such as democracy, free, fair, and participatory elections, government accountability, and human and labour rights. Others are concerned about security issues, whether within the country or beyond its borders.
I can comment on these topics, but these are not areas where I have a comparative advantage. Let me thus focus on economic relationships. Following the election, the US State Department issued an official statement. Among other things, it talked about “deepening our people-to-people and economic ties.” In early February, in his letter to Prime Minister Hasina, President Biden also invoked economics and declared “The United States is committed to supporting Bangladesh’s ambitious economic goals.”
If the US indeed wants to deepen economic ties with Bangladesh, and support its “ambitious economic goals” what areas should it focus on?
I guess it is reasonable to say that increasing the flow of US FDI should be an important part of the agenda. There are hints of this in an article by Michael Kugelman, the Director of the South Asia Institute at the Wilson Centre, a leading think-tank located in Washington DC. Writing in the January 16 issue of The Daily Star (What’s next for US policy in Bangladesh?), Kugelman struck a positive note, “Amid all the attention on bilateral tensions over democracy and elections, it's easy to forget that US-Bangladesh relations have actually strengthened considerably in recent years.” Echoing what the embassy said in its message, Kugelman stated “The US is the top destination for Bangladesh exports, and the biggest source of FDI in Bangladesh.” There are indications that boosting US investment in Bangladesh was also a subject of discussion during the just-concluded visit of Donald Lu, the US Assistant Secretary of State for South and Central Asian Affairs, reports DT.
Much of the US FDI has been natural resource-seeking, much of the UK, Netherlands, China, and Singapore FDI has been market-seeking, while FDI from South Korea has been predominantly efficiency-seeking.
So, is the US really the top investor in Bangladesh? Yes, and No.
The US does top the list when we look at the stock of FDI in Bangladesh, ie, the accumulated net FDI flows since independence. At the end of FY2022-23 (ie, at the end of June 2023), the stock of US FDI in Bangladesh was $3.95billion. It was the highest among all sources of FDI and accounted for one-fifth of the total FDI stock. The UK came next with $2.82bn, followed by Singapore with $1.55bn. Hong Kong and China were at numbers six and seven with $1.31bn and $1.27bn of FDI stock respectively (see Figure 1). It may be mentioned here that the top 12 sources of FDI in Bangladesh shown in the chart account for 83% of the entire stock of FDI into the country.
But these figures don’t tell the whole story.
Let’s go beyond the accumulated stock at the end of FY23 and look at more recent flows. This gives us a different picture. The chart below (Figure 2) focuses on three important sources of FDI to Bangladesh, ie, USA, UK, and China, and looks at the trend in FDI flows over the past two decades. Two things should be noted about the data. First, the data shows the share of the three countries in total FDI flows to Bangladesh, not the absolute amounts. Also, the figures shown are five-year moving averages of each country’s share in net FDI flows to Bangladesh. In other words, the figure shown for FY20 is not the actual share for that year, but the average share for the five years FY18-FY22. It is shown against FY20 because that is the mid-point of that five-year period. Taking three-year or five-year moving averages is a common practice in trend analysis because it allows us to look beyond yearly fluctuations, which can sometimes be quite erratic, and have a better idea of the trend over time.
The trends shown are quite revealing. At the turn of the century, the UK and the USA were almost tied in the first position, each accounting for about 15% of annual FDI flows to Bangladesh. China was almost non-existent on the map, contributing less than half a percent of the FDI flows. After some fluctuations in the early years of the new millennium, we see a decline in the share of both the UK and the USA, moderate in the case of the former and rather steep in the case of the latter. After a brief recovery, the shares of both countries plateaued and have been like that for the past decade.
Meanwhile, China has risen, slowly and surreptitiously during the first decade and a half of the current millennium, but with a bang after that. This is clear from the chart above. As mentioned above, the chart above is based on five-year moving averages to show the trends better. If we look at the annual flows instead of the five-year moving averages, we see a similar picture. Of all FDI flows to Bangladesh during the past five fiscal years, ie, 2018/19 to 2022/23, the UK accounted for the most, ie, 12.6%, followed by China (11.8%), Netherlands (11.53%) and the US (10%). The new kid on the block, China, is clearly flexing its muscles.
The above analysis did not distinguish between different types of FDI. However, as I have often written, the composition of FDI matters. And if we look at the composition, the primacy of the US as a source of FDI is further diminished.
It is very important for Bangladesh to attract investment in export-oriented activities, especially those that will open new markets for us and give us a foothold in sophisticated global value chains. So, are the top FDI providers to Bangladesh providing us with that kind of investment?
Figure 3 answers that question. The chart is based on end-June 2023 data on FDI stocks (ie cumulative FDI flows since independence). This is from the Bangladesh Bank which provides a sectoral breakdown of both FDI flow and stock. The data are not granular enough for me to identify the specific products or services that the investments will produce. Thus, readers should take the analysis as a rough approximation. But I suspect the broad picture will not change much if more granular data were available.
I distinguish between natural-resource seeking FDI that seeks to exploit natural resources (such as FDI in the gas sector), market-seeking FDI that seeks to exploit the domestic market (such as FDI in power, telecoms or banking), and efficiency-seeking FDI that seeks to exploit the efficiency or cost-effectiveness of producing in Bangladesh in order to export abroad (such as in garments).
So, what do we see? The main take-away is that much of the US FDI has been natural resource-seeking, much of the UK, Netherlands, China, and Singapore FDI has been market-seeking, while FDI from South Korea (and to a lesser extent that from Hong Kong) has been predominantly efficiency-seeking. (Please note that the percentages don't add up to 100 because there is a category called “other sectors” which is quite large for some countries).
Bangladesh’s overarching economic goal as articulated in the government’s Vision 2041 statement, is to become an Upper Middle-Income country by 2031 and a developed country by 2041. One of the important agendas following from the vision is diversification of exports, in particular moving from simple products such as garments to more sophisticated products such as electronics or automative parts. Bangladesh needs to get a foothold in the global value chains of such products.
If the US is serious about being an important economic partner of Bangladesh, it should focus its attention on substantially increasing the flow of efficiency-seeking FDI to the country.
The experience of East Asian and South-east Asian countries who have made such a transition point to the critical role of FDI, and more specifically efficiency-seeking FDI that will view Bangladesh as an efficient production base from which to produce for global value chains. Thus, if the US is serious about being an important economic partner of Bangladesh, it should focus its attention on substantially increasing the flow of efficiency-seeking FDI to the country. As we saw from the analysis above, the US is rather behind on that front.
One other thing the US may want to focus on is bringing regulatory good practices to Bangladesh. The US has several good practices in regulatory governance, such as well structured processes for stakeholder consultation on proposed regulations, conduct of regulatory impact assessments that analyze the likely costs and benefits of enacting a new regulation, and periodic reviews of the existing stock of regulations with a view to identifying redundant, duplicative and ineffective regulations. It may be noted that the FDI and regulatory governance agendas are complementary.
So, if the US is indeed serious about “supporting Bangladesh’s ambitious economic goals,” as suggested by President Biden in his February message to Prime Minister Hasina, the twin agendas of bringing efficiency-seeking FDI and regulatory good practices should become the central piece of its economic engagement in Bangladesh going forward.
Syed Akhtar Mahmood is an economist, previously with an international development agency.