Bangladesh's FDI problem is not one of quantity — it is one of quality

Foreign Direct Investment (FDI) is more than a source of capital — it facilitates technology transfer, enhances managerial capabilities, expands access to export markets, and integrates host economies into global value chains. 

For Bangladesh, which is striving to sustain growth and competitiveness, attracting greater FDI is critical. Yet despite investment arriving from a growing number of source countries, the overall scale remains limited. More concerningly, inflows are increasingly dominated by intra-company loans and reinvested earnings, whilst fresh equity investment shows little growth.

According to a recent Bangladesh Bank report, net FDI inflows rose to $1.77 billion in 2025 from $1.27 billion in 2024 — a 39.36% increase, largely driven by intra-company loans. Total inflows reached $4.69 billion, with gross FDI inflows at $2.92 billion. 

New equity investment remained comparatively low; reinvested earnings increased by $159 million (25.68%), and intra-company loans rose by $330 million — nearly three times the previous year's figure. Equity capital within net FDI, by contrast, grew by only $10 million, underscoring a structural weakness in attracting long-term investment commitments.

In per capita terms, Bangladesh's FDI inflow stands at just $9, against $227 in Cambodia, $82 in Indonesia, $175 in Vietnam, $284 across ASEAN economies, $187 in RCEP countries, and $26 within the LDC group. Bangladesh thus falls below even the LDC average — a significant competitiveness gap. FDI stock as a percentage of GDP tells a similar story: 4% in Bangladesh (2024), compared with 111% in Cambodia, 22% in Indonesia, and 54% in Vietnam.

Sectoral concentration further limits FDI's transformative impact. In 2024, textiles attracted the highest investment ($4.1 billion), followed by banking ($3.5 billion) and power ($2.9 billion), with the remaining $2.5 billion distributed across other sectors. Bangladesh has successfully diversified its investor base, with approximately 25 countries now investing, with the United Kingdom holding the largest share; however, this has not translated into greater investment volume or sectoral breadth. Concentration in a handful of traditional sectors suggests that whilst initial investor interest is strong, expansion momentum is weak.

This pattern reflects deeper structural challenges: slow industrial diversification, limited technology absorption, weak job creation in high-value sectors, and constrained export competitiveness beyond the Ready-Made Garment (RMG) industry. 

As Bangladesh approaches LDC graduation, compliance requirements in key export markets such as the EU and the United States are tightening, making it all the more urgent to attract quality FDI that strengthens productive capacity and meets rising standards.

The growing share of intra-company loans is a mixed picture. On the positive side, such loans bring in foreign currency, support the balance of payments, ease pressure on foreign exchange reserves, and help finance ongoing operations or expansions — particularly during periods of economic stress.

However, because they do not involve ownership transfer, they generate limited technology transfer or managerial spillovers, and their contribution to long-term structural transformation is therefore weaker than equity investment.

There are also material risks. Multinational firms may use intra-company debt arrangements for transfer pricing — shifting profits to parent companies through inflated interest payments and thereby reducing taxable income in Bangladesh. This erodes the domestic tax base. High levels of such debt also increase external vulnerability, making subsidiaries dependent on parent company support and exposing them to instability should that support be withdrawn.

Whilst some constraints lie beyond the government's immediate control, a significant portion of Bangladesh's FDI challenge stems from regulatory complexity and policy uncertainty. Investors frequently encounter lengthy approval processes, inconsistent policy implementation, and bureaucratic inefficiency. Although the Bangladesh Investment Development Authority (BIDA) is working to improve the investment climate, the gap between policy commitments and actual execution remains wide.

The UNCTAD Investment Policy Review (IPR) implementation report (2026), conducted in collaboration with UNDP and BIDA, identifies 56 policy gaps relative to the previous review in 2013. It assesses progress across ten areas: investment legislation and promotion, tax reform and rationalisation, land access, skills development, investment-related policy coordination, export-oriented trade policy, pharmaceutical sector competitiveness, PPP framework strengthening, and infrastructure development in energy, roads, and ports. Of these, only the pharmaceutical sector is assessed as substantially implemented; all others are either partially implemented or remain unaddressed.

In pharmaceuticals, meaningful progress has been made in preparing for a post-TRIPS exemption environment. The review recommends the gradual relaxation of the National Drug Policy (NDP) to allow foreign firms to sell domestically, promote in-licensing and contract manufacturing as vehicles for technology transfer, and introduce competitive pressure through phased import liberalisation. 

It also emphasises transparent and efficient management of the API Park initiative. The adoption of NDP 2016, which relaxed earlier restrictions on foreign manufacturers, has already contributed positively to the sector's development.

Challenges remain, however. Foreign firms engaged solely in contract manufacturing are still restricted to export markets. Firms without local manufacturing facilities — including those from Australia, France, Germany, Japan, Switzerland, the UK, and the US — may engage in in-licensing and technology transfer agreements, but broader market access remains constrained. Meanwhile, local manufacturers have begun API production, and plans for a second API park in Chattogram are under consideration, both of which are welcome developments.

To enhance FDI diversification and scale more broadly, the review recommends building on the pharmaceutical sector's strengths, attracting investment into API production, strengthening patent law implementation, developing the digital economy, and promoting university–industry collaboration. Cost-benefit analyses of existing investment incentives are also recommended to assess their effectiveness and value for money.

The review further identifies sectoral FDI restrictions and certain provisions within the Foreign Private Investment Protection and Promotion Act (FPIPPA) as deterrents. Perceived discrimination between foreign and domestic investors, the absence of explicit profit repatriation guarantees, and restrictions on foreign exchange transactions — including mandatory conversion into taka and limits on foreign currency accounts — all discourage investment. Requirements for prior approval to access foreign loans add a further layer of complexity.

Institutional fragmentation compounds these problems. Whilst BIDA serves as the central investment authority, parallel mandates operate across BEPZA, BEZA, and BHTPA, each within its own jurisdiction. Sectoral ministries also issue No Objection Certificates (NOCs), frequently prolonging approval timelines. The result is that investors who initially express strong interest are often discouraged by delays stretching from months to years.

The IPR 2026 provides a clear roadmap for addressing these challenges. The 56 identified policy gaps must be systematically tackled to send a credible signal that Bangladesh is ready to facilitate investment effectively. Consistent progress on these recommendations — particularly in areas already showing momentum — can rebuild investor confidence, increase equity-based FDI, and strengthen technology transfer.

Rationalising sectoral priorities is equally important. The current industrial policy lists approximately 184 sectors across multiple categories — export diversification, priority, restricted, and services. 

This breadth dilutes strategic focus. A more targeted approach, centred on high-impact sectors and supported by a reconsideration of which sectors are designated "restricted", would sharpen policy clarity and improve outcomes.

Ferdaus Ara Begum is the Chief Executive Officer of BUILD, a public-private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.