Policy and regulatory uncertainties are major factors discouraging foreigners from investing in Bangladesh, for which foreign direct investment (FDI) has remained low in spite of government efforts, said Syed Akhtar Mahmood, former lead private sector specialist at World Bank Group.

"The policies may be good on paper, although I would say there are still gaps in different places, such as in dealing with new technology or innovative business models," he told The Daily Star during an interview recently.

"The main problem is in the actual implementation," said Mahmood, who has three decades of experience advising governments on investment climate reforms, including ways to attract FDI.

From 2017 to 2022, Bangladesh annually received FDI of $2.92 billion on an average.

The inflow amounted to only 0.75 percent of the country's GDP, according to a report of the United Nations Conference on Trade and Development (UNCTAD).

In spite of the funds coming in US dollars, whose value is high compared to the local taka, the amount of FDI is a far cry from what was required as per government plans.

The government's "Vision 2041" aims to turn the nation into an advanced economy by 2041 and in this regard the country requires FDI equivalent to 1.66 percent of its GDP annually.

"We still have a lot of discretionary behaviour when it comes to treating foreign investors, which creates different kinds of uncertainties for the investors," said Mahmood.

"It is not enough to have good policies only on paper," he said.

According to him, what mattered was how those policies were implemented. Impediments in the implementation process, such as excessive ad-hoc or discretionary decisions, create uncertainties and act as a discouragement to foreign investors, he said.

"We must remember that foreign investors have many choices. If they don't find us attractive, they can easily go elsewhere," Mahmood added.

According to him, FDI, like any other investment, is driven by a calculation of risks and returns.

Foreign investors are typically driven by three motivations, he said.

Natural resource-seeking FDI is attracted by the possibilities of exploiting the natural resources of a country. The gas sector in Bangladesh, for instance, attracted some FDI in the past, said Mahmood.

They may be attracted by the large internal market of a country, which is called market-seeking FDI, he noted.

Mahmood laid emphasis on a third type of FDI, which was called efficiency-seeking FDI.

Here investors are attracted by relevant features of a country, such as the availability of cheap or skilled labour, which makes the country an efficient production base, he said.

Efficiency-seeking FDI uses such countries as production bases from which to export to that specific region or around the globe, he said.

Against the returns are the risks. Apart from the usual commercial risks, driven by developments in the marketplace, investors are also concerned about risks emanating from government behaviour, said Mahmood.

Surveys of large multinational corporations carried out by institutions like World Bank have shown that policy and regulatory uncertainties are usually the prime or second-most important factor discouraging FDI flows, he said.

"We don't have natural resources, except some gas, but we do have a large internal market," he said.

"Even though our per capita income is not that large, the total size of the economy is huge. Bangladesh is among the top 40 economies in the world. That is a large market that is attractive to foreign investors," said Mahmood.

"Bangladesh can also be a source of efficiency-seeking FDI as we have cheap labour, and labour that can learn fast," he said.

"We don't have as large a reservoir of skilled technicians and engineers as India but we do have a reasonably large number of such people," he added.

"Moreover, our engineers are still relatively cheap compared to engineers in other countries. So, we do have a lot of potential to attract foreign investment, which can use Bangladesh as a launching pad for exports," said Mahmood.

"This is consistent with our objective of export diversification, especially if we want to diversify into more sophisticated products such as electronics," he said.

"Foreign investors can help us get a foothold into global value chains where we make parts for different products, with a market size of billions and billions of dollars," he said.

"We need more of such efficiency-seeking FDI to achieve our objective of export diversification," he added.

Mahmood suggested four sets of actions to attain the desired level of FDI. Firstly, the government should ensure it is not carrying out policy or regulatory actions in a way that creates uncertainty, he said.

Secondly, investment promotion efforts must be strategic, he said.

For example, if the plan is to diversify exports and attract investment into sophisticated sectors, those must be first identified alongside potential investors, he said.

Thirdly, the progress made by investors who have shown some interest in investing in Bangladesh must be tracked. And finally, investors who are already here must be taken better care of, said Mahmood.