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Textile and apparel companies should be allowed to invest abroad for value chain up-gradation

Bangladesh is very potential country in terms of sub-continental connectivity because of its great strategic location. The market-based economy of Bangladesh is the 46th largest in the world in nominal terms, and 33rd largest by purchasing power parity; It is classified among the Next Eleven emerging market economies and a Frontier market. According to the IMF, Bangladesh’s economy is the second fastest growing major economy of 2016, with a rate of 7.1% but till now Bangladesh Bank (BB) has not allowed any Bangladeshi national to invest fresh money in overseas.

The top business mover and a researcher of the country have advanced the government to liberalize the process of making abroad investment from Bangladesh. Investing overseas can become a means of enhancing the country’s GDP growth and poverty alleviation while it can increase income from investment abroad for the country. For the companies particularly from textile and apparel to upgrade in the value chain, finding out international investment opportunities is a must. Designing to marketing, if a Bangladeshi textile and apparel maker want to add more value adding stage in the operations, they will require investing in other countries where designers and the market is present.

Figure 1: Value chain up-gradation opportunities for Bangladeshi textile and apparel companies.
Figure 1: Value chain up-gradation opportunities for Bangladeshi textile and apparel companies.

To cater market opportunities, Bangladeshi textile and apparel makers now need to invest in building design houses and in the marketing part of it.

As per figure 1 if any Bangladeshi company wants to invest in doing product research and development, doing fashion design and sourcing materials from all around the world they will require to have international engagements, transactions and investments.

On the other hand as per the figure 1 to reach more closure to the western markets in the post-production value up-gradation, they will require opening their marketing office in EU and US. For catering the markets in Middle East, Asia Pacific and in Africa the garment makers can go there and invest in building marketing, distribution and even in opening their own apparel brands. This is a demand of time now.

There are brave entrepreneurs in Bangladesh who want to invest in abroad to elevate the positive images of Bangladesh and they said “we are well capable to invest abroad to enhance the country’s GDP growth”. But only Bangladesh Bank has acknowledged permission to five companies to invest abroad from their export incomes with conditional basis. Three of them in health sector, have invested $9.1 million in six countries between 2013 and March 2016, according to the BB. Within the list below there is a textile company DBL group who are investing in building production facilities. Earlier some Bangladeshi manufacturers have built there garmenting operations in Mauritius.

                                    Table 1: BB allowed companies to invest abroad. (Source: Bangladesh Bank)
Table 1: BB allowed companies to invest abroad. (Source: Bangladesh Bank)
  • According to the BB reports ACI Healthcare Ltd got the permission to invest $447,000 for production and marketing of oral solid dosage in the US.
  • Incepta Pharmaceuticals Ltd will set up a subsidiary of its own in the UK, investing £10,000 and €2,500 for building a joint venture investment company in Estonia.
  • Square Pharmaceuticals got the permission to invest $5 million for expansion of its business in the US.
  • MJL Bangladesh Ltd received permission to invest $547,000 for expansion of its business in Myanmar and to form a subsidiary in Singapore.

Textile and apparel companies can follow the examples of pharmaceuticals companies of Bangladesh. They need to understand that investment doesn’t necessarily mean only for production. This is the time to increase investment behind intangible value addition activities. Intangible value addition steps provide higher profit margin.

The International Monetary Fund has advised Bangladesh to make capital accounts convertible by liberalizing foreign exchange rules further. The International Business Forum of Bangladesh (IBFB) had arranged a round table discussion about liberalize the process of making overseas investment from Bangladesh.

The speechmaker said Bangladesh is potentially losing a significant amount of tax revenue through capital flight (figure 2), if local investors are allowed to invest overseas legally and competitively, they can gain potentially higher rates of return available in overseas market.

Figure 2: Increasing trend of foreign currency flight from Bangladesh mostly in illegal undeclared way. (source: Global Financial Integrity)
Figure 2: Increasing trend of foreign currency flight from Bangladesh mostly in illegal undeclared way. (source: Global Financial Integrity)

Director of IBFB M S Siddiqui presents the keynote and said, “Global experience shows that investing overseas can become a means of boosting the GDP growth and poverty alleviation while it can also enhance our capability to become a middle-income country by 2021.”

Bangladesh restricted the outward FDI through the Foreign Exchange Regulation Act 1947 and in September 2015, the government amended the 1947 Act Section 5(v) that allows ‘conditional provision’ for opening up overseas investment through converting capital accounts. Due to the modified act, the opportunity of FDI is strictly limited to the approved investors and BB has also made provisions to allow overseas FDI from export retention fund.

The provisions are still incompetent, so the speakers request for further liberalization of the related rules and regulations. Shafiul Islam Mohiuddin, President of Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) said, “The competitive advantage that exists in overseas market may erode in future due to competition. So, Bangladeshi investors need to explore the untapped overseas investment opportunities from now.”

When Bangladesh government will have been allowing more foreign investment the major concern will be Balance of Payments and foreign exchange reserve. Now this time the foreign exchange reserve is higher than other time and this high forex reserve may also lead to decreased asset value, higher opportunity cost and inflationary pressure said by expert observer. So the government has better understanding about present investor capability to make investment abroad with more technical soundness who already have shown their outstanding performance on the RMG sectors and others.

On the other hand, according to the scarcity of big investment opportunities in Bangladesh, many big entrepreneurs investing many areas where the SME’s should invest and if they are allowed to make big investment abroad while it would open up space for more local investment for SMEs. Most potential countries for better investment.

Figure 3: Investment potentials for Bangladesh in Textile and Apparel related business.
Figure 3: Investment potentials for Bangladesh in Textile and Apparel related business.

The government needs more research, accurate data and proper analysis to identify potential areas for outward investment for Bangladeshi companies to reduce risk. And also Bangladesh has to maintain strong diplomatic relation with those countries for providing security of Bangladeshi assets in those countries.

The investor has to take necessary permission from Bangladesh Investment Development Authority (BIDA) for remittance from the country if further investment is required. The policies should also state that entities investing abroad would be required to submit audited financial statement while income tax file should reflect the FDI. A strong monitory cell must be ensuring the entire investment should be taken back to the country while on failing to meet terms and conditions, the counterpart at home will meet the obligations.

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