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E-commerce: The role of FDI

MS Siddiqui | March 26, 2019

E-commerce technologies and business models are evolving rapidly around

the world. As the sector is increasingly using sophisticated technologies su ch
as artificial intelligence, machine learning, and big data, more consumers
have been able to enjoy the increased convenience of online shopping and
super-fast delivery. E-commerce technologies have also allowed small and
medium-sized enterprises (SMEs) established in any part of most of the
developing and developed countries to tap global markets and value chains
with minimal additional cost and effort.

Major e-commerce categories include business to -business (B2B), business-

to-consumer (B2C), consumer-to-consumer (C2C), and business-to
government (B2G) transactions. In many least developed countries (LDCs)
and developing countries in Asia and the Pacific , e-commerce use among
firms is extremely low. For instance, in September 2017, Pakistan only had
some 400 e-commerce vendors, roughly 0.44 per cent of its estimated
900,000 physical stores. Philippines had 0.5 per cent of its retail sales
conducted online in 2015. Armenia's e-commerce amounted to 0.08 per cent
of GDP in 2012 and Bangladesh's online grocery market is just 0.03 per cent
of its overall grocery sales (Bansal 2017). In contrast, in 2016, the share of
online fast-moving consumer goods (FMCG) to total FMCG market was
estimated at 16.6 per cent in the Republic of Korea.

Bangladesh has the potential to increase investment to facilitate expansion

of the e-commerce market. But it is likely to face many challenges
particularly in developing countries. Some ways of reducing these barriers
include (i) enacting e-commerce legislation, (ii) implementing measures that
will make e-commerce more affordable and accessible, (iii) directly
facilitating and supporting e-commerce activities, and (iv) launching publ ic-
private partnership programmes. Legal barriers are one of the major barriers
to adopting both domestic and cross -border e-commerce, especially in
developing countries.

The government has been encouraging foreign direct investment (FDI) into
the e-commerce sector alongside other sectors in the country. Recently the
ICT (Information and Communication Technology) ministry has prepared a
policy to restrict overseas investment in e -commerce to 49 per cent only. A
daily newspaper has reported that the Ministry of ICT is expecting that the
Ministry of Commerce will implement the policy 'soon'.

Such a policy will be extremely harmful for the e -commerce sector in

Bangladesh. Overseas companies go for FDI mainly because they want to
gain access to a larger market; to acquire more resources and to minimise
risks. Other reasons include flexible labour market; low corporate tax;
availability of skilled workers; availability of duty free market access in
developed countries etc.

On the other hand, FDI for a host country increases government revenue
earnings via corporate tax, income tax, and VAT; leads to employment
generation; helps technology transfer; increases gross domestic product
(GDP) growth; develops new sectors; helps to introduce and normalise
corporate culture and promote CSR activities in host country. FDI has a
positive impact on balance of payments. It can reduce import by producing
import-substitute products and save foreign currency. Finally FDI helps to
alleviate poverty and foster economic development o f host country.

Through Industrial Policy 2016, Bangladesh welcomed FDI in all areas of the
economy and there is no restriction on the amount of stakes in the
investment. Bangladesh passed The Foreign Private Investment (Promotion
and Protection) Act 1980 (FPIPPA) to give full protection to foreign investors.
This law ensures fair and equitable treatment for foreign investors, provides
protection in relation to expropriation and, in conjunction with regulations of
the central bank, provisions for foreign exchange. The law provides
measures for the non-discriminatory treatment and protection of foreign
investments.

The existing National Investment Policy (NIP) even allowed a foreign investor
to own 100 per cent stake in any business entity in Bangladesh. Ther e is no
restriction of FDI in e-commerce sector. The policy facilitated foreign and
domestic private entities and allows them to establish and own, operate, and
dispose of interests in most types of business enterprises. Four sectors,
however, are reserved for government investment: (1) Arms and ammunition
and other defence equipment and machinery; (2) Forest plantation and
mechanised extraction within the bounds of reserved forests; (3) Production
of nuclear energy; and (4) Security printing.

Industrial Policy (2010) established 17 "controlled industries" where any

proposed foreign investment will require approval from the relevant ministry.
In addition, there are 17 controlled sectors that require prior clearance/
permission from the respective line minist ries/authorities. E-commerce is not
included in the restricted list.
There are a number of laws and policies for provision of incentives. Some
attractive policy has been offered to foreign investors including tax holiday
for several years, duty-free facility for importing capital machinery, 100 per
cent foreign ownership, 100 per cent profit repatriation facility, reinvestment
of profit or dividend as FDI, multiple visa, work permit to foreign executives,
permanent resident or even citizenship for investing a specific amount,
eligibility to be involved in the Export Processing Zones (EPZ) and newly -
established free economic zone, and easy hassle -free exit facility. Potential
sectors that can attract more FDI are power generation, infrastructure
development, private port establishment, joint venture with deep sea port
establishment under PPP, ship building, ICT sector, call centres, education,
healthcare, mining, gas extraction, agro processed product, electrical &
electronics, light engineering, and fashion d esigning.

Readymade garments export is gradually switching to e -market. Bangladesh

can take a lead in e-export market with the support of global experts in order
to compete with other countries. Such techniques will ensure first -mover
advantage for Bangladesh as it needs to sustain the global market of its
single largest export product.

The non-committal language and non-exhaustive scope of the FPIPPA has

left ample room for interpretation of the actual openness to FDI. At present,
investments in some econo mic activities are not covered by FPIPPA while
others are subject to restrictions found in sectoral regulations that are
contrary to the spirit of the general law. In addition, restrictions in foreign
exchange provisions also jeopardise the openness to inw ard and outward
FDI.

Inadequate infrastructure and consumers' limited technical and economic

resources are often barriers to participating in e -commerce. This sector
around the world are embracing new technologies -such as big data analytics,
the internet of things (IoT), artificial intelligence (AI), augmented reality (AR),
virtual reality (VR), and blockchain technology -to meet evolving customer
needs, befitting greater customisation, maximum convenience, and security.

Bangladesh needs huge investment in t echnology, infrastructure and human

resources. E-commerce transactions require more than basic internet
access. Availability, accessibility, and affordability are basic requirements for
the promotion of e-commerce sector. The government needs to promote
widespread ICT infrastructure that offers low-cost and secure broadband.
The government can also foster an investment climate that will encourage
private sector involvement in ICT infrastructure and technology.

There is no alternative to foreign direct inves tment in developing technology

and infrastructure and human resources. Bangladesh may give priority to FDI
to build capacity of (i) ICT affordability and accessibility, (ii) bandwidth
availability, (iii) availability of online payment options, (iv) deliver y
infrastructure development etc. Government should promote online payment
platforms such as Mastercard, PayPal, Visa etc for local and overseas sales.
Another key concern in e-commerce development is affordability of ICT
hardware, software, and services.

Any policy formulated by any Ministry that conflicts with the industrial policy
and FPPIPPA law has apparently no legal basis. Moreover, e -commerce is
not included in the negative and restricted list for FDI under the industrial
policy. Such confusion in policies may frustrate potential overseas investors.
This is, after all, a subject that needs to be addressed by Bangladesh
Investment Development Authority (BIDA) under the Prime Minister's Office.

MS Siddiqui is a legal economist.

mssiddiqui2035@gmail.com