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Poor Infrastructure Limits Bangladesh FDI

Greater inflows could boost exports and competitiveness, a survey by a United Nations agency said.

GENEVA — Foreign direct investment has not been a driving force in the vibrant ready-made garment industry of Bangladesh, in contrast to other key apparel-exporting nations such as Cambodia, due to pressure by local firms to restrict FDI in the sector, but greater inflows could boost exports and competitiveness, a survey by a United Nations agency said.

“Domestic firms have dominated the industry and shown resistance to FDI in this industry,” said the Investment Policy Review of Bangladesh compiled by the U.N. Conference on Trade and Development. “No formal restrictions apply anymore in RMG, however, the local sector association has put pressure to restrict FDI.”

The Bangladesh Garment Manufacturers and Exporters Association has indicated it wants the sector “reserved for the local entrepreneurs.”

From 2005 to 2011, FDI in the textile and garment sector totaled only $946 million and accounted for only a 15 percent share of the total inflows of $4.2 billion achieved during the period, found the study.

“This is a relatively small portion of total investment for the country’s top foreign exchange earning industry that generated over $22.2 billion in exports in 2011,” it said.

According to Amir Hossain Amu, Minister of Industries of Bangladesh, the apparel and textile sector constitutes around 84 percent of total exports, and has created more than four million jobs.

The U.N. review outlines that FDI in textiles and apparel has taken place mainly in Export Processing Zones, with most investment inflows coming from Asian economies. But the study observes that the low level of FDI in the sector is partly offset by “nonequity modes of international production,” with Bangladeshi firms operating as “contract manufacturers” under outsourcing accords for global brands.

In the knitwear industry, for example, foreign buyers have “acted as a catalyst for innovation, as they offered assistance and credit to domestic enterprises to shift toward production of higher value-added garments.”

So far, domestic firms that account for the bulk of apparel exports, however, have not managed to develop “international brands that can be marketed abroad. As a result, RMG exports are entirely driven by orders placed by international apparel companies with well-established brands in developed countries,” UNCTAD said.

Overall, Bangladesh “is far from having achieved its potential” as an investment location, the review said, and concluded that the country continues to offer “some of the most competitive business costs in the region.”

“Abundant and inexpensive labor is the country’s most important resource,” the study said. “Preferential access to key consumer markets in developed countries makes it an attractive platform for export-seeking FDI.”

Joerg Weber, head of UNCTAD’s investment policies branch, told WWD, “We can see that with the emergence of industrial restructuring at the global level [there is] a move to lower-cost Least Developed Countries, and Bangladesh stands to benefit from this.”

But a critical challenge for the country’s development, UNCTAD said, is the poor quality of infrastructure.

“Insufficient and unreliable supply of electricity has been a major bottleneck for investment,” it noted.

The report also highlights that the road network is highly congested, and notes that the route between Dhaka and Chittagong, the country’s biggest port that handles more than 90 percent of all international trade, should normally take six hours, but due to heavy traffic and poor road conditions often takes up to 15 hours.

Moving ahead, with long-standing plans to build a deep-sea port at Sonadia Island off Cox’s harbor to the south of Chittagong, with the capacity to handle Panamax class vessels, UNCTAD experts said, would help pave the way for direct-intercontinental trade and free the country from costly transshipments from Colombo or Singapore.

Amu endorsed the findings of the UNCTAD review and said it has “paved the way to underscore important viewpoints in promoting investment in Bangladesh, including foreign direct investment and joint ventures.”