Diversifying Your Asia Supply Chain: What Does Bangladesh Have to Offer?
- Bangladesh has a competitive investment climate, relatively large and young labor market, and is ambitious to grow its agribusiness, garment and textiles, energy, IT, and infrastructure sectors.
- Dhaka wants to attract foreign companies seeking to relocate from China or countries wanting to diversify their investment footprint in Asia.
- Bangladesh offers a low-cost and skilled labor market and imposes few limits on the level of foreign equity participation allowed.
- In this article, we look at the entity structures open to foreign investors, briefly discuss Bangladesh’s trade and investment profile, including top traded products, and spotlight incentive zones for foreign investors.
Bangladesh investment profile
The government of Bangladesh is keen to attract greater foreign direct investment (FDI) to build up capacity in its export-oriented industries and burgeoning technology and services sector. The country’s political leaders have asserted a development-first strategy, and FDI plays a prominent role in advancing their goals in this regard.
For years, its ‘least developed country’ (LDC) status allowed Bangladesh to tap into the Generalized System of Preferences (GSP) for benefits on exports as well as access concessions in various trade treaties.
However, the country is now on its way to graduate from this group and is expected to be taken off the United Nations’ list of LDCs by 2026 due to progress made on three fronts: per capita income, human assets, economic and environmental vulnerability. Bangladesh will, however, enjoy preferential market access to the EU and UK for an extra three years, till 2031.
So far, Dhaka has responded to this eventuality by aggressively expanding and modernizing its infrastructure, setting up investment-friendly zones, targeting key countries for greater FDI, and liberalizing relevant policies.
Moreover, Bangladesh’s export industries are dominated by the readymade garment (RMG) industry – an outsize contribution that the government hopes will reduce as other industries grow in output and value. This is also critical for the country’s financial stability as export income will fall after the withdrawal of LDC-linked benefits in international trade.
Overall, the Bangladesh economy grew at around 5.2 percent in the fiscal year ending June last year and is projected to grow 7.4 percent in the ongoing financial year. Despite the blip in growth – when compared with previous forecasts – Bangladesh is still doing much better than its regional peers.
Bangladesh currently allows foreigners to privately invest in all its industries, except the defense, nuclear energy, mining, and forest plantation industries.
Foreign investment is especially sought in export-oriented industries, industries in export processing zones (EPZs), and high-tech products as import substitutes or meant for export.
However, in areas where FDI policy is liberal on paper, there may still be hidden barriers for investors if the government seeks to promote local capacity creation or privilege domestic players. In this scenario, foreign investors may have to modify their market entry strategy.
What type of market entry structures are available to foreign investors?
In Bangladesh, foreigners can begin their businesses and further investments by establishing either one of the following entities.
Wholly owned subsidiary
A wholly owned subsidiary (WOS) is allowed, with foreign equity ownership up to 100 percent in most sectors. WOS companies require no prior government approval to incorporate in Bangladesh, can freely access the market, and can be formed as a private limited or public limited company. The incorporation process is handled by the Registrar of Joint Companies & Firms, beginning with name clearance. There is no minimum investment requirement for WOS-entities; however, companies that employ expatriates are required to invest a minimum of US$50,000. Incorporation of subsidiary companies by foreign investors does not require prior regulatory approval but some formalities must be cleared with the Bangladesh Investment Development Authority (BIDA) and the Bangladesh Economic Zones Authority, after the type and location of the company has been decided. The newly formed WOS company must obtain a trade license and secure income tax and VAT registrations. Additional permits, no-objection certificates (NOCs), and licenses, such as import-export licenses, may also be required depending on the nature of the business. Bangladesh is yet to approve the formation of a one-person company as a wholly owned subsidiary.
Branch or liaison office
Foreign companies that wish to set up a limited presence in Bangladesh can do so by establishing either a branch or a liaison office – after it has been approved by BIDA. Activities under the branch office, which basically represents the parent company, include specific activities, such as import/ export of goods and providing professional or consultancy services. Branch offices cannot engage in any manufacturing activities. A liaison office acts a communication platform for the parent foreign entity and cannot engage in any income-earning activities. In addition, as cost of establishment, these office types are expected to bring in inward remittances worth at least US$50,000 while outward remittances are not allowed – unless they are granted specific exemptions from BIDA.
Joint venture company
Foreigners can incorporate a joint venture company (JV) with either its Bangladeshi subsidiary, a local investor, or another foreign entity. It is recommended that foreigners first enter into a joint venture agreement before incorporating a JV, as the agreement will address all the intricate details that are to do with conducting a business in Bangladesh.
Special purpose vehicle
A JV with a local investor, or another foreign company that owns existing projects is preferred most of the time, as foreign entities may want to invest in a specific project and not be stakeholders to other projects and their assets or liabilities. In such a scenario, foreign investors opt for incorporating a project company or a special purpose vehicle (SPV), which will focus on investing and participating in a specific project.
Acquisition of shares
Another market entry option is via the acquisition of shares in a Bangladeshi company. To do this, a share purpose agreement (SPA) is drawn up that details every aspect of the share acquisition. However, if the foreign investor does not want to acquire all the shares of the target Bangladeshi company, they can either acquire a portion of the company’s existing shares from its existing shareholders or inject capital into the company in the form of a share money deposit for the issuance of new shares. In fact, regardless of which option foreign entities go for, the involved shareholders must enter into a shareholders’ agreement (SHA) and the articles of association of the Bangladeshi company must be accordingly amended.
Where to locate investment
As per the Central Bank of Bangladesh, foreigners may invest in all of Bangladesh’s sectors (except those reserved for the government).
To better facilitate incoming FDI inflows, the Bangladeshi government has several facilitating agencies, out of which BIDA is the principal authority for promoting and supervising private investment and the Bangladesh Export Processing Zone Authority (BEPZA) is the principal investment supervisory authority of the EPZs.
Countries with a significant investment presence in Bangladesh include China, Japan, Malaysia, Egypt, South Korea, UAE, and the UK – besides India.
Export processing zones
To attract foreign investors, the Bangladesh government has set up export processing zones (EPZs) since 1980. Initially, three special zones were set up in Chittagong (Halishahar), Dhaka (Savar), and Khulna (Mongla) with favorable facilities provided to Bangladeshi and foreign investors. The Chittagong Export Processing Zone (CEPZ) started in 1983-84 while the Dhaka Export Processing Zone (DEPZ) started operations from 1993-94. Later, EPZs were classified into three types, that is, A-type (100 percent foreign investment), B-type (joint venture between Bangladeshi and foreigners), and C-type (100 percent Bangladeshi enterprises). These EPZs are located in:
The Bangladesh government provides up to 100 percent tax exemptions for operations in export-processing zones.
Private economic zones
The government has also set up 11 private economic zones (PEZs) in key districts:
- Abdul Monem PEZ – Munsigonj
- A K Khan PEZ – Narshindi
- Aman Private EZ – Narayangonj
- Arisha Private EZ – Dhaka
- Bay Private EZ – Gazipur
- Bosundhora Special EZ – Dahaka
- East-West Special EZ – Dahaka
- Megna Economic Zone PEZ – Narayangonj
- Megna Industrial Economic Zone PEZ – Narayangonj
- Sirajganj EZ – Sirajganj
Besides the above, the Bangladeshi government is also keen to attract investments to support large infrastructural projects.
Special economic zone for Japanese firms
As Japan incentivizes its companies to shift operations out of China, Bangladesh has emerged on the list of attractive low-cost destinations that can assist with the diversification of company supply chains. A special economic zone (SEZ) is being set up on 405 hectares of land in the Araihazar sub-dsitrict, which is about 32 km from Dhaka. In terms of financing its development, it is reported that Japan has earmarked US$350 million in special loans to set up the US$1 billion industrial zone. As per the Bangladesh Economic Zones Authority, this industrial zone is expected to attract US$20 billion in Japanese investment. There are presently about 300 Japanese firms operating in Bangladesh.
Trade and investment climate
Asia Pacific Trade Agreement (APTA)
The Asia Pacific Trade Agreement is a preferential trade agreement that seeks to promote intra-regional trade between its member countries via the exchange of their mutually agreed concessions. Member countries include Bangladesh, China, India, Lao People’s Democratic Republic (PDR), South Korea, and Sri Lanka. Special concessions are granted to those member countries that are considered to be a least developed country (LDC).
Bangladesh-Bhutan Preferential Trade Agreement (PTA)
Bangladesh and Bhutan signed their first preferential trade agreement, that will allow them duty free access to a range of each other’s goods on December 6, 2020. Under this agreement, 100 Bangladeshi goods will be provided duty free access to Bhutan, and 34 Bhutanese goods will be provided duty free access to Bangladesh. The Bangladeshi goods include jute and jute products, infant clothes and accessories, and men’s trousers, blazers, and jackets whereas the Bhutanese goods include jams, jellies, honey etc.
South Asian Association for Regional Cooperation Preferential Trading Arrangement (SAPTA)
Members of the South Asian Association for Regional Cooperation (SAARC), namely Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka aim to promote trade and economic cooperation among themselves through this preferential trade agreement via the exchanges of tariff concessions. Over 6,500 products have been covered so far under this agreement.
South Asian Free Trade Area (SAFTA)
The South Asian Free Trade Area succeeds the SAPTA, with Afghanistan being added as the new member country after Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. These member countries aim to provide differential treatment for one another for the purpose of increasing their trade via tariff reductions.
In 2019, Bangladesh’s top 10 exported goods accounted for 96.1 percent of the overall value of its global shipments.
- Knitted or crocheted clothing and accessories: US$20.3 billion (44.5 percent of total exports)
- Clothing and accessories that are not knitted or crocheted: US$19.4 billion (42.4 percent)
- Footwear: US$1.1 billion (2.4 percent)
- Miscellaneous textiles and worn clothing: US$1 billion (2.2 percent)
- Paper yarn and woven fabric: US$603.3 million (1.3 percent)
- Fish: US$532.9 million (1.2 percent)
- Leather and animal gut articles: US$68.3 million (0.8 percent)
- Headgear: US$332.6 million (0.7 percent)
- Raw hides (skins) and leather: US$139.8 million (0.3 percent)
- Plastics and plastic articles: US$113.2 million (0.2 percent)
In 2019, Bangladesh’s top 10 imports accounted for 59.7 percent of the overall value of its global product purchases.
- Machinery including computers: US$5.8 billion (11.5 percent of total imports)
- Cotton: $5.4 billion (10.8 percent)
- Mineral fuels including oil: US$4.4 billion (8.7 percent)
- Electrical machinery, equipment: US$3.2 billion (6.4 percent)
- Iron, steel: US$2.9 billion (5.8 percent)
- Plastics, plastic articles: US$2.2 billion (4.4 percent)
- Vehicles: US$1.7 billion (3.5 percent)
- Manmade staple fibers: US$1.6 billion (3.2 percent)
- Manmade filaments: US$1.42 billion (2.8 percent)
- Knit or crochet fabric: US$1.35 billion (2.7 percent)
Bilateral Investment Treaties (BITs)
- Bangladesh – Austria BIT
- Bangladesh – Belgium Luxembourg Economic Union (BLEU) BIT
- Bangladesh – China BIT
- Bangladesh – Denmark BIT
- Bangladesh – France BIT
- Bangladesh – Germany BIT
- Bangladesh – India BIT
- Bangladesh – Indonesia BIT
- Bangladesh – Iran BIT
- Bangladesh – Italy BIT
- Bangladesh – Japan BIT
- Bangladesh – Malaysia BIT
- Bangladesh – Netherlands BIT
- Bangladesh – Philippines BIT
- Bangladesh – Poland BIT
- Bangladesh – Romania BIT
- Bangladesh – Singapore BIT
- Bangladesh – Switzerland BIT
- Bangladesh – Thailand BIT
- Bangladesh – Turkey BIT
- Bangladesh – United Arab Emirates (UAE) BIT
- Bangladesh – UK BIT
- Bangladesh – United States of America (USA) BIT
- Bangladesh – Uzbekistan BIT
Treaties with Investment Provisions (TIPs)
- Bangladesh – EC (European Community) Cooperation Agreement
- OIC (Member States of the Organization of the Islamic Conference) Investment Agreement
Investment Related Instruments (IRIs)
- Charter of Economic Rights and Duties of States
- Doha Declaration
- Fifth Protocol to General Agreement on Trade in Services (GATS)
- Fourth Protocol to GATS
- Investment Disputes between States and Nationals of Other States (ICSID) Convention
- International Labor Organization (ILO) Tripartite Declaration on Multinational Enterprises
- Islamic Corporation for the Insurance of Investment Credit
- Multilateral Investment Guarantee Agency (MIGA) Convention
- New International Economic Order UN Resolution
- New York Convention
- Permanent Sovereignty UN Resolution
- Singapore Ministerial Declaration
- Trade-Related Investment Measures (TRIMS)
- Trade-Related aspects of Intellectual Property Rights (TRIPS)
- UN Code of Conduct on Transnational Corporations
- UN Guiding Principles on Business and Human Rights
- World Bank Investment Guidelines
Reasons to invest in Bangladesh
Ease of investing
Bangladesh has eased the rules of investment for foreign investors by:
- Allowing 100 percent foreign equity.
- Allowing the obtainment of working loans from local banks, whose terms will be determined on the basis of the relationship the banks hold with the clients.
- Providing the same benefit that local investments are entitled to, such as respecting tax holidays and paying royalty fees.
- Issuing multiple entry visas and work permits without any restriction or hindrance.
- Giving full repatriation of capital that has been invested.
Protection of investments
As per the Foreign Private Investment (Promotion and Protection) Act that was launched in 1980, all local and foreign investments in Bangladesh are guaranteed legal protection against nationalism and expropriation and will not be discriminated against. In addition, non-resident Bangladeshis (NRBs) who are residents of Bangladesh but living abroad will be treated on par with foreign investors as well as given special incentives and facilities, in order to encourage them to invest in Bangladesh. Besides this, NRBs too can buy shares in Bangladeshi companies, and even have the option to maintain foreign currency deposits in a non-resident foreign currency deposit (NFCD) account.
Foreign investors will be granted tax holidays depending on the locations of the industrial enterprises they intend to invest in. For the enterprises located in the capital city Dhaka, the tax holiday period will last for five years whereas for the enterprises located in the Barisal, Chittagong, Khulna, Rajshahi, and Sylhet districts, the holiday period will last for seven years. The tax holiday period is actually calculated from the date the invested project’s operation starts and tax holiday certificates are issued by the National Board of Revenue (NBR) within 90 days after the submission of applications by investors.
Liberalization of exchange control regulations
To better facilitate their investments in Bangladesh’s industrial enterprises, foreign investors need no longer seek prior approval from the Central Bank of Bangladesh. Approval is also no longer needed to remit abroad the sale proceeds earned from these investments. However, repatriation of the sale proceeds will be allowed based on the net value assets of the shares of these enterprises.
Bangladesh’s urban population in 2020 was approximately 64.81 million, about 37 percent of the total population. The country’s population is also young – with 34 percent in the age group of 15 years and younger and five percent aged 65 years and older. At present, more than 65 percent of Bangladesh’s population is of working age, that is, between 15 and 64 years. The government is keen to channel this demographic dividend into achieving sustainable development goals – through investments in education and infrastructure and increasing formalization of the economy. These goals will need the influx of FDI.
Proximity to India
With India to its west, China to the north, and Southeast Asian markets to the east, Bangladesh is in the middle of a combined market of four billion people. Bangladesh is also actively courting investments from its neighboring countries, including India, whereby foreign firms can set up low-cost production bases in the country and export to their home markets. The Bangladesh government, has for example, offered three special economic zones for Indian investors at Mongla, Bheramara, and Mirsarai. Indian companies have invested in telecommunications, pharmaceuticals, FMCG, automobiles, power and energy sectors in Bangladesh. India and Bangladesh are members of various regional trade agreements, including APTA, SAPTA, and SAFTA which facilitate concessionary tariff regimes. Under SAFTA, India grants duty free and quota free access to Bangladesh on all items, except alcohol and tobacco.
Regional connectivity infrastructure between Bangladesh and India is also improving. In March, the ‘Maitri Setu’ or Friendship Bridge, constructed over the Feni River, was inaugurated to provide the landlocked northeastern Indian region (Tripura state) access to Bangladesh’s Chittagong Port. Connectivity projects in the pipeline include water, shipping, railways, road, and air links. Four Border Haats, two each in Tripura state (Srinagar and Kamalasagar) and Meghalaya state (Kalaichar and Balat), have been established to ease travel among communities living along the border areas of both countries. Ten additional Border Haats along the India-Bangladesh border will soon be set up as well.
Other incentives – support for investing in these target industries
Foreign investors will be provided with special facilities and venture capital support if they are looking to invest in any one of the following export-oriented industries:
- Artificial flower-making and floriculture
- Computer software and information technology (IT)
- Frozen food
- Jewelry, diamond cutting and polishing
- Oil and gas
Bangladesh’s readymade garments (RMG) sector dominates its economy as it contributes over 80 percent to its total exports. In 2020, the overall global exports of the RMG sector amounted to an approximate US$27.95 billion, and of the total categories of garments exported, articles of apparel and clothing accessories accounted for 83 percent of the exports, followed by textile yarn and related products at 5 percent, and leather and footwear at 2 percent.
According to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladesh is home to around 500 RMG factories and 91 are environmentally sustainable green garment factories, which have been awarded Leadership in Energy and Environmental Design (LEED) certification by the US Green Building (USGBC) Council.
Additionally, under the BEPZA, Bangladesh allows 100 percent FDI for only high-value products, such as jackets and protective outerwear. Foreign investments are especially encouraged for primary textiles, including fabric textiles, but discouraged for regular products, such as yarn. In 2018, the textiles and apparel industry under the RMG sector received FDI worth US$408 million.
In comparison to the RMG sector’s lead in exports, the agribusiness sector is Bangladesh’s prominent domestic sector and is hailed as a pillar of its economy. Half of Bangladesh’s population is engaged in agriculture, but the sector lags in productivity due to outdated modes of production and vulnerability to climate factors. Here the country is actively seeking technology investments. According to the government, Bangladesh is a major inland fish producer, freshwater fish producer, and rice producer, ranking in the top five producers in the world in these categories.
To boost its industrial growth and support urbanization, Bangladesh needs foreign investment and financing to address critical infrastructure gaps. In 2018, the government revamped its public and private partnership (PPP) policy framework to allow opportunities for large and advanced infrastructural projects to be undertaken and financed by foreign investors and companies. Major infrastructure development goals include building better transport connectivity within the capital Dhaka and other parts of the country. According to a report by The Economist Intelligence Unit, major projects that are expected to be completed in 2021-25 are: Karnaphuli underwater tunnel, Rampal coal power plant, Padma multipurpose bridge, Padma Bridge Rail Link, Chattogram-Cox’s Bazar railway link, Dhaka elevated expressway, Dhaka-Chattogram express railway, Matarbari power plant, Dhaka metro rail, Roppur nuclear power plant.
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