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Bangladesh Government Allows 100 Percent Foreign Investment in eCommerce Sector, Technology Policy in Bangladesh and Realities of Regulations

1/ The Bangladesh government has announced permitting 100 percent foreign direct investment (FDI) in the ecommerce sector in Bangladesh, dropping the previous condition of a joint venture with local companies. The new rule will enable global entities such as Amazon or Walmart to launch their own entities, or invest and own a 100 percent stake in local ecommerce entities in Bangladesh. 

2/ Previously the National Digital Commerce Policy-2018 did not allow foreign ecommerce entities to own 100% of ecommerce companies in Bangladesh. Instead, international investors/companies were required to form a joint venture and could only own a 49 percent stake in the jointly formed entity. However, Daraz, the leader in ecommerce, was an exception to the rule since its acquisition by Alibaba in 2018.  The commerce ministry issued the National Digital Commerce (Amended) Policy-2020 scrapping the condition allowing greater freedom to foreign investors interested in the sector.   

3/ eCommerce has been seeing steady growth in Bangladesh over the past few years. The coronavirus pandemic has helped accelerate the growth. According to many industry insiders, ecommerce companies across verticals have seen widespread rise of orders from new users who did not shop on ecommerce before - a consumer behavior that many expect to persist beyond pandemic. 

4/ The new rule, allowing 100 percent foreign investment in ecommerce, is reminiscent of Indian Government’s 2016 policy to allow 100% foriegn investment in ecommerce marketplaces without inventory upon the request from Flipkart and Snapdeal. 

5/ However, Bangladesh Government’s the National Digital Commerce (Amended) Policy-2020 offers limited nuances as to how the government is going to implement the policy and whether there are other conditions that foreign ecommerce investors and entities will have to fulfill in order to be eligible for the rule. 

6/ For example, India made it strict that only marketplaces could take the advantage and these marketplaces can’t own inventory or sell goods to its merchants more than 25% of what a merchant sells on the marketplace. Marketplaces could build warehouses and provide support to sellers but could’t own inventories. India has since made a number of modifications to that rule in the past few years. More recently the Indian government announced a host of changes to the rule in 2019. 

7/ In putting forward the National Digital Commerce (Amended) Policy-2020, the government explains that allowing foreign investment in the sector will help improve local markets, attract foreign investment, and help fulfill local demands. This logic does make some sense as the local ecommerce market remains under-developed and there are widespread complaints from customers of irregularities and compromised service from existing players. More competition will help grow the sector, develop local talents, and provide greater benefits to customers in price and service.  

8/ However, many local entrepreneurs and tech experts opine that without long-term and astute policy thinking, the rule can turnout to be detrimental for the local tech entrepreneurs and the large unorganized retail industry in Bangladesh.

Technology policy and the realities of regulation 

1/ This brings us to the overall state of technology policy in Bangladesh. In many ways, the state of technology policy, across sectors, remains an incoherent mess in Bangladesh. While this is not completely new to Bangladesh - it is happening everywhere since these businesses are new in how they operate and project power, Bangladesh Government has particularly been slow and lethargic in responding to the changing world of business in the past decades. This reality is evident in an underdeveloped startup ecosystem, a lack of broad technology policy and long-term vision to promote local tech enterprises, and a lack of R&D policies. In many instances, policies undertaken around tech and digital businesses have been detrimental to the growth of local enterprises in these sectors. 

10/ Entrepreneurs across verticals in tech argue that the policies around VAT and tax around digital spending remain opaque and disadvantageous to local technology companies. Many government policies subject local companies to VAT on foreign payments against server bills such as AWS, Google Cloud Platform and advertising expenses on digital platforms such as Google Ads, Facebook, etc. Contrary to that, globally operating companies such as Uber and Foodpanda use the argument that their tech and advertising buys are globally managed and paid. Hence they should not be subjected to local VAT and taxes. This puts local companies at a disadvantageous position. Since global entities buy ads internationally they get a number of advantages around price and at the same time, they are waived on taxes and VAT. As a result, local companies are at a disadvantageous position when it comes to competing with these global entities.  

11/ Local entrepreneurs have been pushing for a more fair and thoughtful technology policy that will ensure a label playing field and allow local tech companies to compete effectively with foreign entities. Local tech entrepreneurs complain that forieng tech entities receive unfair advantage when it comes to competing with local companies. Not only do these companies enjoy access to unrestricted capital from their parent entities, they are also given advantage through a lack of proper policy guidelines in Bangladesh regarding how they should operate, manage their tech stack, advertising, and other areas of competition. 

12/ Every regulation is a tradeoff. As a result, regulations are often complex and it is hard to balance and find an optimum point that would be beneficial for everyone involved. Take, for example, allowing 100 percent foreing investment in ecommerce in Bangladesh. The explanation that the commerce ministry has put forward - attracting foreign investment, global companies unwillingness to enter into a 49% stake joint venture with local entities in order to operate in Bangladesh, fulfilling local customer demand, is not completely out of place. There is truth to this explanation. 

At the same time, the concerns raised by the local entrepreneurs and technology business experts that the move, with other regulatory limitations, is likely to negatively affect the growth of the local tech industry in general and ecommerce industry in particular in Bangladesh. That the current regulatory framework is unfavorable towards local tech companies and puts local companies in disadvantageous position when it comes to competing with global tech companies operating in Bangladesh, is equally an important point. 

13/ It will be unrealistic to expect that any regulation will be able to find a fine balance between these two positions. The ideal condition will be a compromise. But the compromise has to be on both ends. For instance, the government may allow foreign investment and at the same time, put forward a regulatory framework that will allow local tech companies to compete with any global players at equal footing. There are lessons we can learn from India, China and even the EU. 

Every regulation comes with certain limitations. Although I assume regulations are prepared with utmost good intentions; at times, they end up not serving the purpose.

As I mentioned above, when you prepare a regulation or a policy, it is always about tradeoffs. You choose a policy over another, meaning you gain some benefits and face some disadvantages.

When policymakers often see the benefits from a certain regulation, there are chances that they overlook the shortcomings both in the short-term and long-term. Understanding this tradeoff in the long-run is at the heart of any good policy. 

Mohammad Ruhul Kader is a Dhaka-based entrepreneur and writer. He founded Future Startup, a digital publication covering the startup and technology scene in Dhaka with an ambition to transform Bangladesh through entrepreneurship and innovation. He writes about internet business, strategy, technology, and society. He is the author of Rethinking Failure. His writings have been published in almost all major national dailies in Bangladesh including DT, FE, etc. Prior to FS, he worked for a local conglomerate where he helped start a social enterprise. Ruhul is a 2022 winner of Emergent Ventures, a fellowship and grant program from the Mercatus Center at George Mason University. He can be reached at ruhul@futurestartup.com

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