Foreign Investment: Knowledge Based Proposition

 

There are different stages passed through to reach this current stage of fourth industrial revolution. Hunter gatherer society goes to agro-production, to machine based production, etc. The movement is going on unstopped. Machine with the support of technology results in tremendous progress. Different terminologies are in place to identify the attributes of the process.

Whatever the process is, business is initiated with fundamental components such as capital, management, labor, etc. The capital is used to procure different types of infrastructures and capital goods. Depending on the type of business, capital is injected into businesses. There are different types of businesses such as sole proprietorship, partnership, company limited by shares, one person company, etc. Capital for companies is known as equity or share. This is subscribed by sponsor-shareholders. Entrepreneurs make payments in money for obtaining shares. In lieu of money, shares can be issued against sales, services, or other items by share purchasers.

Investment can be made by foreigners and non-resident Bangladeshis. This is known as foreign direct investment. Different authorities are involved to facilitate foreign investment along with investment promotion agencies. The Foreign Private Investment (Promotion and Protection) Act gives safeguards to foreign investors. As per the act, foreigners can invest in Bangladesh by way of foreign currency, imported machinery and equipment, or in such other form as the Government may approve for the purpose of such investment.

Foreign exchange regulations are a factor for promotion of foreign investment. Conducive policy is necessary for cross border transactions, without limiting to repatriation of dividends. In line with the act as said earlier, central bank’s rule book stipulates operational modalities in respect of entry, transactions during businesses, and exit. The regulations require shares to be issued either against freely convertible foreign currency brought in from abroad through the banking channel or against import of capital machinery. There is no other option available under foreign exchange regulations. But investment promotion and protection act seems to be wider.

Let us confine the entry point in inward remittances and capital machinery. What does capital machinery mean? No legal definition is available. Open source tells that it is used to manufacture a product, provide a service or use to sell, store and deliver merchandise. In practice, big equipment made of iron, steel, etc. is treated as capital machinery used for producing outputs. It is an indication of manufacturing output in physical form. No solution is available for service sector. They do not need physical capital. Only apps are of help to run the operations. With the development of app-based solution, many charges are found in business environment. Shops are replaced by e-commerce platforms, Cineplex is grasped by Netflix and different OTT platforms. Taxicab services are eaten up by uber type businesses. Many startups are found operating with innovative ideas, without any physical infrastructure.

Business ecosystem is found in new shape. Whatever the system is, something is there to run the show. This is technology with different names such as software, apps, solutions, etc. A turbine is the capital machinery of a power plant. Vehicles are capital machinery for a transport operator. In the same way, technology is the capital machinery for a knowledge based company. This is true despite there are some disadvantages. It is said that the technology suffers from problems; they do not have resale value. This proposition is also applicable for physical capital machinery. The machine is found obsolete with development of same items. In the midpoint of economic life, the machinery may require to be replaced. The situation does bring nothing as disposal value of the old machinery. As such, no significant difference is found between physical machinery and non-physical ones.

There are different talks on the requirements of foreign investment. The concept of investment in the form of equity is perpetual. It means that investors are entitled to receive dividends till the operations of businesses. If the investment is to work in local market, it needs supports from market for settlement of payments like dividends in foreign currency. The requirement should be as much as accumulated from external income. Excessive demand by foreign owned companies indicates that local market is under control of foreign investment. However, foreign investment can work as ice breaks. Operations of foreign owned companies teach us so many issues. Innovation is brought in through foreign investment, including technological upgradation. Despite investment is not necessary for sectors requiring simple work process like production of consumer goods, logistics services, trading services, etc. But foreign investment cannot be avoided for sectors dependent on technology. The sector is run by technology for which investment is used for its purchases. Without purchases, foreign investors can come forward with technology as investment. Can it be treated as consideration for investment? This is a question which deserves attention.

It is said that price of technology or knowledge property is difficult to be ascertained. Identical qualities of technology are rare. Each item is unique. As a result, overvaluation is said to be possible. It means that foreign investment can buy many shares without appropriate payment by misinvoice of technology price. This may be possible, it is true. In the respect of capital machinery, same event can happen. The price of capital machinery is considered by what is presented in the customs assessment through bill of entry. This is not different value; rather it comes from commercial invoices. There is every possibility in manipulation of price in case of investment by capital machinery as consideration. If the proposition holds good, investment should be admissible by knowledge products in invisible form.

Invisible goods like software are treated as importable items. Software is essential from household lives to corporates. It is imaginary to run a corporate without the support of software or the like. It is regularly imported. Since it is delivered by online path, the import procedure is different. Importers need to have a certificate from Bangladesh Association of Software and Information Services (BASIS) to the effect that the purchase of software is genuine and sourced from reliable supplier. On the basis of this certificate and relevant other documents, customs authority issues assessment order. Based on this document and payment of duties/taxes, banks make payment against the purchase of the software. These instructions are found in the rule book of foreign exchange transactions of the country. The regulations seem to be simple.

In addition to software, there are other items such as patents, copyright, etc. which can be items as consideration against issuance of shares. Customs assessments are not necessary in this case. But payment of sources tax, value added tax; other levies can make these items authenticated in support of non-physical receipts. We are in the age of cutting-edge technology. It is not possible to avoid them. These are taking the places of capital machinery. If investment is necessary for knowledge based sectors, windows need to be opened for knowledge products as consideration for issuance of shares to external investors. There are different laws and regulations in the country applicable for foreign investment. In all regulations, inward remittances and capital machinery are the consideration for foreign investment. Technology is inevitable, we need it. As such, this deserves attention to be accommodated in the rule book as consideration. Who will take the lead is an issue.

 
Mehdi Rahman works in
the development sector.