15 Feb
Introduction
In 2024, Bangladesh is at a crossroads in its Foreign Direct Investment (FDI) strategy. Traditionally driven by incentives like tax breaks and subsidies, Bangladesh is now shifting towards a more sustainable, capability-led FDI strategy. This approach focuses on leveraging the country’s existing strengths and industrial capabilities to attract long-term, high-value investments. In this article, we explore the key differences between incentive-led and capability-led FDI strategies, how Bangladesh can leverage its workforce skills to attract investments, necessary policy reforms, and how the country compares to regional FDI competitors like Vietnam and Indonesia.
Incentive-Led vs. Capability-Led FDI Strategies: Key Differences
A traditional incentive-led FDI strategy is centered around offering attractive financial perks, such as tax breaks and subsidies, to lure foreign investors. While these incentives can attract short-term investments, they often fail to build the sustainable industrial capabilities necessary for long-term growth.
On the other hand, a capability-led FDI strategy focuses on building upon a country’s existing strengths and industrial competencies. Instead of solely offering financial incentives, this strategy attracts investments that align with and build on local skills and capabilities. For example, Bangladesh’s Ready-Made Garment (RMG) sector has developed strong manual dexterity skills in its workforce, which can be leveraged to attract higher-value investments in sectors like electronics assembly, medical devices, and automotive components.
How Bangladesh Can Leverage Its Workforce Skills to Attract High-Value Investments
One of Bangladesh’s key advantages is its young & large workforce with significant experience in manual labor, particularly in the RMG sector. These workers have developed precise skills in areas such as hand-eye coordination, which are highly transferable to industries like electronics assembly and medical devices.
Bangladesh can build on this by investing in training programs and industry-specific curricula that align with global sector trends. For instance, with the electronics assembly market projected to grow at a CAGR of 6.8% by 2029, Bangladesh has an opportunity to move from basic assembly to complex manufacturing, targeting high-value sectors like IoT devices and medical devices. By upskilling its workforce in advanced manufacturing techniques, Bangladesh can increase its appeal to global investors seeking skilled labor and a cost-effective production base.
Policy Reforms Needed to Transition Towards a Capability-Driven Investment Model
To successfully transition to a capability-led investment model, Bangladesh must implement critical policy reforms across several areas:
- Digital Infrastructure: A digital investment facilitation portal will streamline the process for investors, offering transparent, real-time information on available plots, infrastructure status, and regulations. This would significantly improve ease of doing business.
- Skill Development: Bangladesh needs to invest in specialized training institutes to ensure that the workforce is aligned with global sector demands. By establishing strong industry-academia linkages, Bangladesh can ensure its labor force has the skills necessary to meet emerging investment needs.
- Regulatory Reforms: To support long-term investment, the country must improve its regulatory environment, particularly by creating a transparent repatriation framework and streamlining tax and labor regulations to encourage FDI inflows.
- Sector-Specific Incentives: Although the focus should be on capabilities, Bangladesh can still offer targeted incentives for sectors such as electronics, medical devices, and automotive components, where its existing capabilities provide a natural advantage for growth.
Bangladesh’s FDI Strategy Compared to Regional Competitors: Vietnam and Indonesia
When compared to regional leaders like Vietnam and Indonesia, Bangladesh’s FDI strategy still has room for improvement. Both countries have successfully implemented capability-driven strategies and transformed their economies into manufacturing hubs.
Vietnam, for example, has leveraged its comparative advantage in textiles to evolve into a major hub for electronics manufacturing, attracting billions in FDI. By focusing on workforce training and sector-specific growth, Vietnam has built a strong electronics assembly ecosystem, including companies like Samsung.
Similarly, Indonesia has capitalized on its skilled labor force and manufacturing capabilities to become a leader in sectors such as automotive and electronics. Both countries have succeeded in aligning workforce skills with industry demands, while Bangladesh lags in these areas, particularly in terms of regulatory environment and infrastructure development.
The Role of Existing Investors in Shaping Bangladesh’s Investment Landscape
Existing investors are critical in shaping Bangladesh’s future investment landscape. By promoting the successes of current FDI investors in sectors like RMG and electronics assembly, Bangladesh can leverage these companies as ambassadors to attract further investments.
Programs such as the FDI Champion Program can help Bangladesh harness the potential of these investors. Existing investors can provide valuable insights into Bangladesh’s strengths and challenges, offering a clearer picture to potential investors. They can also help build the ecosystem around new industries, from supply chain networks to quality control systems and logistics infrastructure.
Moreover, successful foreign investors in Bangladesh can help improve the country’s global reputation, positioning it as a competitive, high-value destination for international businesses.
Conclusion: The Future of Bangladesh’s FDI Strategy
As Bangladesh shifts from an incentive-led to a capability-led FDI strategy, it has an opportunity to harness its existing strengths to attract high-value investments that will drive long-term economic growth. By focusing on leveraging workforce skills, reforming policies, and creating a favorable business environment, Bangladesh can successfully transition into an industrial powerhouse.
To remain competitive with regional players like Vietnam and Indonesia, Bangladesh must prioritize policy reforms in digital infrastructure, skill development, and regulatory transparency. At the same time, it must continue to work with existing investors to build robust industrial ecosystems that support sustainable growth and attract global capital. By aligning its FDI strategy with global industry trends and focusing on building capabilities, Bangladesh can chart a sustainable path toward economic prosperity and FDI-driven growth.
