Monday, July 24, 2017

http://dailyasianage.com/news/75637/overseas-investment-for-natl-development

Overseas investment for natl development

M S Siddiqui

Globalization is integration of the economy with the rest of the world. It is a two-way process for
ensuring equal of opportunity for all at home and abroad without making any discrimination.
Bangladesh is exporting garments to China and India and importing garments for own market. The
demand and supply of garment is due to capability to meet the internal demand, technology, cost of
laboretc. The test and culture are other factors to determine the source of garments of consumers.
These factors are seen in exchange of goods and services as well as exchange of foreign direct
investment (FDI) both inbound and outbound.

The advantage of globalization is earned through competiveness in the global market. FDI is a
natural extension of globalization process that often begins with exports. In the process,
entrepreneurs go global in search of source of raw materials and market through expanding their
trading and manufacturing bases in overseas markets. Some studies observed that there are four
motivations behind FDI (a) market seeking, (b) resource seeking, (c) strategic asset seeking, and (d)
opportunity seeking.

The both inbound and out bound FDI have same reason of crossing the political border. According
to different studies, the reasons for globalizing were: to expand operations, to seek new
opportunities, to gain competitive advantage across frontiers, to diversify and increase market share,
to enjoy economies of scale, to take advantage of tax incentives offered by different countries and
some time to skip local competition.

The most prominent pushing factors were, in order of importance, labor shortage, high labor cost,
high land and rental cost, the governments' industrial restructuring strategy and the limited domestic
market. The leading pulling factors, in turn, were: availability of cheap labor, political stability, cheap
land and raw material, large market and shared language, culture and religion. It is interesting to
note that the government support was deemed the least important factor with a very low score in
those studies. The factors like tax incentives and trade barriers and market protection-often regarded
as crucial for FDI-were perceived as the least important factors. But the lengthy bureaucratic
approval process and corruption are regarded as barrier to inbound FDI.

Accordingly, adoption of such strategies helps them catch up with competing economies. The
entrepreneurs promote the brand image and source of raw materials available in the host country or
take raw materials near the market to sell their products. The indigenous technology and
craftsmanship of workers and expertise of production encourage the corporates in other country to
invest in any other countries. In addition to financial returns, which are the traditional purpose of an
investment, a particular attribute of FDI is its potential to generate returns of intangible capabilities
and tangible capacity.
The precise nature of these returns tends to differ depending on whether the investment is made in
economies which are equally or more advanced relative to the investing multinational's home
country, or in less advanced economies.

The returns from Overseas foreign direct investment (OFDI) is the economic returns and technology
transfer have a beneficial impact on economic development, if they help mitigate certain
development needs faced by a home economy, such as financial or technological constraints,
capability bottlenecks, resources shortages or a low amount of exports.

Financial returns result from income and profits generated by the sales of products and services
produced in the host economy or exported from the home economy. They are particularly significant
when FDI is made in more advanced, high- income markets, but they also result from investments in
less advanced countries. They are typical results of vertical and trade-supporting OFDI which
complements economic activity in the home economy.

For example, Chinese corporates have invested heavily in sales offices and assembly operations in
Europe in order to strengthen exports of low-cost products which are still made in China (Knoerich,
2012). Some OFDI enhances the sale of intermediate goods (often relatively more high-tech
components) to production locations in other countries, generating financial returns as well.

One example of this is Taiwanese offshoring to mainland China for exporting high tech intermediate
products. Bangladesh is trying to find market for high value brand garments but could not succeed to
gain confidence of buyers in other countries. Bangladesh should take lesson from china and
increase in overseas market for trade promotion through establishment of sales office and show
room and other marketing endeavors.

OFDI of developed countries is made in less advanced host countries in order to take advantage of
lower input and labor costs in manufacturing and other activities. The developing and emerging
countries also invest in other developing countries to have secured and competitive source of raw
materials. They also look for intermediate products for final assembling in developing countries with
low cost labors.

Bangladesh can invest in China for technology supported intermediate product and component and
bring these products /components into Bangladesh for labor intensive finishing or assembling final
products. These products may transformed to suitable and competitive for local and export market.
Some Korean companies already set up assembling plants in Bangladesh for assembling monitors
and other high tech equipment with imported components from own factories in Korea and exporting
those finish equipment for own market or re-export to other markets.

Mergers and acquisitions (M&As) and other forms of alliances and partnerships with companies
other countries create valuable opportunities for the generation of intangible capability returns, as
the internal knowledge and assets of the firms involved become directly accessible to the partner
firms (Ahuja&Katila, 2001; Bresman, Birkinshaw, & Nobel, 1999; Inkpen, 1998; Ranft& Lord, 2002).
By investing overseas, enterprises generate returns of intangible capabilities in the form of additional
knowledge, skills, technological upgrading, managerial expertise and a brand's goodwill.

The investment make to developed and advanced economics by developing economies generate
return of intangible capabilities, knowhow and strategic assets. For example, the Turkish firm Arelik
acquired brands in Europe through M&As (Dunning &Lundan, 2008), and the acquisition of IBM's PC
business in 2004 elevated Taiwanese Lenovo's international competitive position to first in terms of
global market share through technological upgrading (Rui& Yip, 2008). The opportunity of fast-track
access to know-how and technologies may be an explanation for UNCTAD (2014) find that as much
as 56% of global cross-border M&As were undertaken by multinationals from developing and
transition economies in 2013.

The investors in developing and emerging economies taking over different ailing establishment in
developed countries for excess to technology and experience and re-design through reverse
engineering on the basis of high tech knowledge of developed countries. There are many M&A in
Europe by companies in developing countries like China, Brazil and India etc are very common new-
a- days.

There are instances where Chinese companies have shipped raw materials extracted from
overseas investment back to China (Cai, 1999; Deng, 2004) for competiveness of product in home
country. As economies industrialized and develop, they become increasingly dependent on overseas
resources, especially when local endowments become insufficient, or resources are unavailable,
scarce or expensive in the home country. Bangladesh is mostly dependence of raw materials for
garment from overseas sources such as China and India.

The local value addition is average 50% and major portion of value addition is cost of labor and
utilities. Bangladesh is mostly dependent on Chinese and Indian source of materials. There are
rumors that some of the Bangladesh industries already invested in other countries though illegal to
secure source of raw materials. If so these illegal investment enhanced the export capability of
Bangladesh. The logical question come up, why they did not invest in Bangladesh instead of illegal
overseas investment? Those industries are not feasible may be due to technology, market and raw
materials.

The developed, developing and emerging economies need investment in some particular sectors
and they invest to other market in some sectors considering the reasons of transferring the
investments for better return on their investments. The global statistics of FDI reflected the points
discussed above. According to UNCTAD's World Investment Report 2016, flows to developed
economies nearly doubled (up 84 per cent) rising from $522 billion in 2014 to $962 billion. FDI to
developing economies - excluding Caribbean financial centers - increased to $765 billion, a rise of 9
per cent, while those to transition economies fell by 38 per cent to $35 billion.

According to a joint Chinese government statement, total ODI flow in 2015 increased 18 percent to
USD 145.7 billion, compared to inbound FDI of USD 135.6 billion. Indian stock Of FDI was $310
billion (30 November 2013 est.) ; $225.1 billion (31 December 2012 est.), while OFDI was $120.1
billion (31 December 2013 est.) ; $118.1 billion (31 December 2012 est.).

The developing, emerging and developed countries have opened up their market for inbound and
outbound investment for economic development and Bangladesh cannot be exception. The
opportunity has been widen for developing and emerging counties to get excess to market,
technology and experience of developed countries due to globalization. The both inbound and out
bound investment is precondition to develop one economy in this globalized world.

Usually, a proportion of these investment related earnings are repatriated to the home economy.
Repatriated returns on FDI can be substantial, although they tend to fluctuate over time (UNCTAD,
2006). Although data for developing countries are lacking, around US$1 trillion of global earnings
from FDI were repatriated to the home economy or other countries in 2011 (UNCTAD, 2013). For
example, in 2011 for 10 leading emerging economies, FDI income has been a few USD billion for
most of these countries, with rates of return at 5% on average. Rates of return from FDI tend to
exceed other types of investment returns (UNCTAD, 2013) such as technology, experience and
brand image of companies and the country as a whole.
Bangladesh government has inserted sub-clause 5 (V) in Foreign Exchange Regulating Act, 1947
facilitate the conditional overseas investment by Bangladeshi Entrepreneur through amendment in
2015. A committee has been formed at Bangladesh Investment authority (BIDA) to prepare rule of
OFDI. Unfortunately the authority has confusion and hesitation about overseas investment due to
back dated idea of controlled economy. The authority should follow the political will of the dynamic
government.

The writer is a legal economist.

Email: mssiddiqui2035@gmail.com