Foreign Direct Investment in Bangladesh_edited

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Foreign Direct Investment in Bangladesh Introduction: Foreign Direct Investment (FDI) has been one of the most fascinating and intriguing topics among researchers in international business. Now days influence foreign direct investment is one of the major issues of a government. Regarding the regional distribution of FDI inflows for the period 1986-1990, more than 80 percent went to the advanced economies whereas the developing countries absorbed less than 20 percent of world inflows. Moreover, in the period 1991-1998, only a ratio from 61 to 66 percent went to the advanced economies when at the same time a ratio from 31 to 35 percent went to the developing countries. However, in the period 1999-2000, we return back to the statistics of the 1980s when the advanced countries absorbed again 80 percent of total FDI inflows, and the developing countries only 18 percent. Investment has acquired considerable emotive force in any country. It is viewed as beneficial on employment creator-as it brings about economic development. It can term capital flowing from a firm or individual within the country or in one country to a business or businesses in another country involving. So the significance of investment in a country is: 1. It increases the economic growth: sustain increase in real, per capita, national product. This brings -National income effect, Balance of payment effect& Public revenue effect. 2. Accelerate the industrial innovation this develops in integrations take a variety form that is not necessarily mutually exclusive. 3. Political modernization: sustain increase in the degree to which political functions are effectively collectively oriented, universalistic specific and achievement oriented. 4. It also brings infrastructural development & modern nationalism. It is two forms: 1. Local (Domestic) investment. 2. Foreign Investment. Investments come from a firm or individual within the country is domestic or local investment. Investment or capital come from a firm in one country to a business or businesses in another country is called foreign investment. The investment situation in Bangladesh is consisting of Private vs. Public and Local vs. Foreign investment. The economy in Bangladesh has been gradually drawing the attention of private sector investors since it’s opening up in early 90’s manufacturing is becoming increasingly vibrant Claiming a significant share in the total investment. During 1991-92 to 2002-03, cumulative private investment registered with Board of Investment (BOI), the apex private investment promoting and facilitating body, totaled US$ 25,933 million. The registered investments consist of 47.65 percent as local and 52.35 percent as foreign. 1.1

Rationale of the Study:

Foreign investment carries enormous significance in a developing country like Bangladesh. Realizing the importance of foreign investment Bangladesh formulated its first industrial investment policy in 1973, revised it again in 1974, 1975, and in 1978. Foreign private investment (Promotion and protection) act, 1980 and the Bangladesh Export Processing zones authority act 1980 were enacted. To make the foreign investment more attractive new industrial policy was announced in 1982. However, the industrial policy 1999 is by far the most comprehensive document. Bangladesh has ever made for investment including foreign investment. From the inception of the independence Bangladesh has been in the center of economic investment incentive for many countries and institutional bodies of the world. With the passage of time Bangladesh reform its regulatory structure in regard to the FDI to open up the new avenue and to dislodge the compliances related to the FDI. But the effort of this structural progress has back warded by sudden and unexpected political influence and changes. The situation becomes worse one in the September attack on US. During this period flow of FDI all over the world shrunken at a greater extend. Bangladesh had also severely affected by that unwanted changes in the


world scenario. Before going for in depth analysis the flow of FDI in Bangladesh we have the privilege to have a look on the regional and worldwide flow of FDI in the recent period. 1.2

Objective of the study:

This study is conducted with the objective to get an overall insight in the flow of FDI in Bangladesh. The total objective is decomposed into several parts to get idea about the factors affecting the flow of FDI. The specific objectives of this study are:  To give an insight into the theoretical issues relating to Foreign Direct investment.  To highlight the role of multinational corporation in FDI.  To give an overview of FDI in Asian Countries.  To focus on the administration of FDI in Bangladesh.  To evaluate the status of FDI in Bangladesh  To identify the problem of FDI & prescribe some issues for their solution. 1.3

Scope of the study:

The primary scope of this thesis paper is to get acquainted with the flow of foreign direct investment. The study will cover the scenario of FDI flow currently in Bangladesh. Comparative analysis of statement of sector wise distribution of FDI in Bangladesh and sources of FDI has been presented. The findings will be strictly structured upon the data provided by the Directorate of Board of Investment (BOI). 1.4

Data Collection Procedure This section describes the data used in the empirical analysis, specifically the measures of foreign direct investment, GDP and several controlling variables used in the regressions. There are several sources for data on foreign direct investment. An important source is The World Bank’s web site as well as from the Asian Development Bank’s web site. The historical data are collected from the World Development Indicators 2001 CD-ROM offered by The World Bank. Another source of the data is the IMF publication “International Financial Statistics” (IFS) which reports the Balance of Payments statistics on FDI. Data are also collected from the “Bangladesh Economic Review-2004” published by the Finance Ministry of Bangladesh. The World Development Indicators 2001 CD-ROM provide data on net and gross foreign direct investment (International Financial Statistics, and Balance of Payments Statistics, respectively). Net FDI refers to inflows net of outflows, and gross FDI refers only to inflows, that is, foreign direct investment into the country. An OECD publication (Geographical Distribution of Financial Flows to Developing Countries) tallies gross FDI originated in OECD member countries into developing economies. The choice between these alternatives depends on which data set would correspond more closely to the inflow of FDI. 1.5 Methodology of the study: Primary & secondary sources are used for preparing this thesis paper. For collecting primary data the personnel in the Directorate of Board of Investment (BOI) were interviewed. For collecting secondary data various papers supplements like the Financial Express, the Daily Star etc newspapers, internet and books are studied. Exchange of views from different people also played a significant role to do the Study. Throughout the report I presented historical background of the flow of FDI and to get insight about the possible changes in the coming years. I have gathered information and data relevant to this analysis from several sources. The collected data are highlighted in the tabular analysis and trend analysis. This analysis helps me to know about the movement of FDI flow over the year. I also tried to find out the possible causes and factors that shaped the trend line of the flow. In a particular year the flow is upward moving at another time this is downward moving. So what’s the reason behind that is the objective of the study as a whole. The analysis of the report is supported by some theoretical arguments that enhance the overall findings and guide towards a reasonable recommendation. 1.6

Limitations of the study:


Although I tried to find and set the causes that determine the shape of the flow of FDI, I believe I’m not at the best peak. I have relied extensively on published data and other secondary sources to precede the report. But some of those sources were not approachable and we lacked from data of that sources. In analyzing the report I have presented some factors that determine the shape of the flow of FDI. But these are not surely the only factors and many important factors may be omitted from the analysis. And another thing is that the underlying factors are mostly in qualitative factors in nature and therefore cannot be measured in numerical way. The consequences are that we failed to provide absolute guideline about restructuring policy and some other decisions. The finding of the report is based on some assumed scenario and changes on those scenarios may reshape the future flow of FDI. That is the analysis is situation and time based. The biggest problem we faced in the reporting period is the paradoxical data set. I have three sets of data in regard to the FDI, but all that provides us contradictory result. Board of Investment and UNCTD do not confirm what the Bangladesh bank published and vice versa. On the other hand the recording of FDI data is almost a new concept in our country. As a result we have FDI data for two periods only that is for the year 2002 and 2003. Theoretical Issues 2.1

Foreign Direct Investment (FDI)

FDI stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets. Foreign direct investment is thought to be more useful to a country than investments in the equity of its companies because equity investments are potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and generally useful whether things go well or badly. The importance of the Foreign Direct Investment to a nation’s economic welfare and development has been heavily documented in the economics literature since Konings (2001) pioneering inquiry into the nature and causes of the wealth of nations. Feldstein (2000) note that the gains to host countries from FDI can take several other forms: •

FDI allows the transfer of technology—particularly in the form of new varieties of capital inputs—that cannot be achieved through financial investments or trade in goods and services. FDI can also promote competition in the domestic input market.

Recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country.

Profits generated by FDI contribute to corporate tax revenues in the host country.

Of course, countries often choose to forgo some of this revenue when they cut corporate tax rates in an attempt to attract FDI from other locations. 2.2

FDI and GDP of the host country Among more traditional FDI determinants, market-related factors clearly stand out. In a frequently quoted survey of the earlier literature on FDI determinants, Agarwal (1980) found the size of host country markets to be the most popular explanation of a country's propensity to attract FDI, especially when FDI flows to developing countries are considered. Subsequent empirical studies corroborated this finding. Even authors who dismissed earlier studies as seriously flawed came up with results supporting the relevance of market-related variables such as GDP, population, GDP per capita and GDP growth; examples are: Schneider and Frey (1985), Wheeler and Mody (1992), Tsai (1994), Jackson and Markowski (1995), and more recently Taylor (2000). Chakrabarti (2001), while questioning the robustness of various other FDI determinants, finds the correlation between FDI and market size to be robust to changes in the conditioning information set. So, the summery is, A Country with large market size has the propensity of foreign direct investment. Empirical evidence that FDI has made a positive contribution to the economic growth of developing countries has accumulated fast. Some recent examples are Marwah and Klein (1998) for India; Li, Liu and


Rebelo (1998); Sun (1998), and Liu (2002) for China; Ramirez (2000) for Mexico; Lim, and McAleer (2002) for Singapore; Marwah and Tavakoli (2004) for Indonesia, Malaysia, the Philippines and Thailand. Borensztein, Gregorio and Lee (1998); Makki and Somwaru (2004) are also among the cross-country. The recent trend of FDI has created opportunities and challenges for development and economic growth, especially for developing countries. The positive benefits of FDI to the receiving host country include capital, skill and technology transfer, market access, and export promotion. While some studies observe a positive impact of FDI on economic growth, others detect a negative relationship between these two variables (Aitken and Harrison 1999; Djankov and Hoekman 2000; Zukowska-Gagelmann 2002; Konings 2001; Damijan et al. 2001; Castellani and Zanfei 2002a 2002b). The controversy has arisen partially due to data insufficiency in either cross-country or time series investigations, using different samples of countries by different authors and various methodological problems. Bengoa and Sanchez-Robles (2003) show that FDI is positively correlated with economic growth, but host countries require human capital, economic stability, and liberalized markets in order to benefit from long term FDI inflows. A straightforward incentive for foreign investors is the level of capital return in the host country. FDI will flow into a country offering a higher rate of return. Measuring the rate of capital return can be a daunting task in developing countries, however; especially in Africa, a region lacking effective capital markets. One way to overcome the challenge is to employ the inverse of GDP as a proxy. Asiedu (2002) explains the reasoning behind this approach. When the capital return is assumed to be equal to the marginal product of capital, a country with scarcer capital will turn out to have proportionally higher return. Given that a lower income level induces smaller capital stock, investment in low-income countries can be expected to yield high return. This, in turn, justifies the use of the inverse of GDP as a proxy for capital return. We include per capita GDP and the growth rate of GDP (GDP%) to control the actual and potential market size (Singh and Kwang, 1995). Hypothesis 1A: Country with high per capita GDP have higher propensity of foreign direct investment inflow. Hypothesis 1B: Country with high GDP rate have higher propensity of foreign direct investment inflow. 2.3

FDI and Inflation Another potential determinant of FDI is the movement in the price level. A large and uncontainable increase in the price level, or high inflation, might reflect instability of the macroeconomic policy of the host country. This type of instability creates uncertainty in the investment environment (Bajo-Rubia and Sosvilla-Rivero 1994, Yang et al. 2000). High inflation discourages FDI for re-exportation, since the relative costs of production in the host country rise. In contrast, falling price levels and the resulting contraction in economic activities might trigger a deflationary spiral and eventually bankrupt the host country’s firms. This can induce local investors to sell off their interests in the host country’s companies to foreign investors at low prices, thereby expanding the inflow of FDI (Razafimahefa and Hamori, 2001). Therefore, the proposed hypothesis stands as follows: Hypothesis 2: Country with high instability in inflation tends to get low inflow of foreign direct investment. 2.4

FDI and Interest Rate Interest rates in an economy are important for the foreign investors. In a country like developing, foreign affiliates will be satisfied with higher interest rates on their term deposits but will be hesitant if commercial interest rates were high. (Venkataramany, 1998).Bank lending rate is another determinant factor of FDI inflows. High lending rate will discourage investment. (Alvin & Densil, 2003). The stability in the rate of exchange combined with the significant differentials between real domestic interest rates and international rates resulted in a significant inflow of foreign capital. (Metwally, 2001) Capital inflows at substantial rates will reduce the need for borrowing. This will reduce the debt-service ratio, which can be a real drain on heavily indebted countries, such as Egypt (Jabber, 1986). The high debtservice ratio deprives the economy of the direct and indirect benefits of a large percentage of exports. This


reduces the ability of its economy to grow and increases its dependence on foreign debt (Metwally and Tamaschke, 1994a, b). Thus, by reducing the debt-service ratio, foreign investment contributes indirectly to economic growth. (Metwally, 2001) The inflow of equity capital will be determined by economic growth and interest rate differentials. Countries that enjoy higher growth rates and offer higher rates of return on invested capital are expected to attract more equity capital. (Metwally, 2001) Hypothesis 3A: Country with high interest rates on term deposit tends to get high inflow of foreign direct investment. Hypothesis 3B: Country with high commercial interest rates on lending tends to get low inflow of foreign direct investment. 2.5

FDI and Foreign Exchange Rate

Most previous articles that studied the effect of exchange rate risk on FDI concentrated on the role of risk aversion. Goldberg and Kotstad (1995), using a model in which firm produce under constant marginal costs but make production decisions before the resolution of uncertainty, showed that increased exchange rate uncertainty led a risk-averse firm to alter its FDI in order to reduce risk. Bailey and Tavlas (1991) showed that exchangerate risk has an ambiguous effect on the FDI of a risk-averse firm. Cushman (1985) analyzed the effects of real exchange rate risk and expectations on direct investment for four different cases, depending on where inputs were purchased, where output was produced, where financial capital was acquired, and where output was sold. He found that the direct effect of risk is to lower foreign capital costs and thus to increase foreign direct investment. However, when other inputs costs are affected induced productivity changes or output price changes may offset the direct effect, reducing foreign direct investment. While these theoretical studies found that exchange-rate uncertainty has ambiguous effects on the level of FDI, some empirical studies show that increases in exchange-rate risk are positively and significantly correlated with FDI flows (Cushman, 1985; Goldberg and Kolstad, 1995). Jackson and Markowski (1995) came with a conclusion that exchange rate uncertainty increases the option value of multiple facilities, may give the MNF a strategic advantage even though no such advantage exists in deterministic setting, and the uncertainty may increase the incentives for the MNF to move first even though there is no first-move advantage under certainty. Aliber (1970) argued that firms from countries with strong currencies are able to support financially their foreign investments in better terms than firms from countries with weak currencies. Besides, the appreciation of the home country currency reduces the capital requirement of foreign investments in home country currency terms. In addition to that the appreciation of the home country’s currency reduces the competitiveness of its exports and displaces them by production facilities in the host market (Barrell and Pain, 1996). Hypothesis 4: The currency depreciation of the host country is expected to facilitate the FDI involvement of home country’s firms. 2.6

FDI and Export The substantial increase in direct foreign investment had a noticeable favorable impact on the balances of current accounts of the receiving countries. The Jordanian current account turned from a continuous deficit in 1981 to a surplus since 1997. Egypt experienced a surplus on its current account, for the first time, during the period 1990-1995 (Metwally, 2001). Economic growth depends on growth in exports of goods and services and domestic absorption. Thus both the factors are expected to carry a positive sign. However, it should be noted that the extent of the impact of the rate of growth in domestic absorption will depend on leakage to imports (Edwards, 1991). Work toward increased openness to foreign trade, so the domestic enterprise sector can participate fully in the global economy. This approach should be undertaken jointly with efforts to increase business sector competition. A combined approach would allow a greater domestic and international openness to business to go hand-in-hand with safeguards against the negative effects of a rise in concentration. Moreover, the successful elimination of global and regional trade barriers makes participating countries more attractive for FDI, owing to the concomitant expansion of the “relevant” market (OECD, 2002).


An important controversy about FDI flows concerns the relative success of inward-and outward oriented determinants. In addition to the size of the domestic market in the host country, open export-oriented economies may be more successful in encouraging FDI flows. Recently, Hein (1992) and Dollar (1992) have found that outward-oriented developing economies (that rely on new export markets) have been relatively successful. Lucas's (1993) investigation of Southeast Asian countries provides some evidence of the relative importance of outward-oriented policies. Specifically, FDI is relatively more elastic with respect to demand for exports than with respect to aggregate domestic demand. If outward-oriented economies are relatively successful in attracting more FDI, the size of the domestic market need not be a handicap. Even small host countries could influence global corporate decisions by encouraging export-oriented policies. But, the empirical literature does not establish whether FDI flows are attracted by economies that are already exportoriented (exports precede FDI flows) or whether multinational investment causes exports to increase (FDI precedes exports). From a policy point of view, the direction of causality has obvious implications. International trade will increase as economic growth expands the economy’s export capacity. Thus, growth may influence trade as much as trade influences growth. Based on these considerations, the questions to be explored under this hypothesis are: Hypothesis 5: Country with high rate of export will tend to get high inflow of foreign direct investment. 2.7

Necessity of FDI for a country:

The world has seen a spectacular wave of global corporate activity particularly during the second half of the last decade. Advances made in the information technology have facilitated this. This trend, strengthened with the direction toward border less-economies, is drawing more and more TNCs (Transnational Corporation) into the global operation. FDI is no longer only a strategic option of corporations; it also plays a key role in the national economic development strategies. Various countries are attempting to attract foreign investors through a variety of measures, i.e. liberalization of investment environment, fiscal reforms and a package of incentive offers. FDI can transform a country's economic scenario within shortest possible time. It is not merely access to fund, but also provide transfer of technical know-how and management expertise. It is also a stabilizing factor in any economy, because once TNCs have made an asset-based direct investment, they can not simply pull out overnight like in the case of portfolio investment. Normally the benefits accruable from FDI are inclusive of (a) Transfer of technology to individual firms and technological spill-over to the wider economy, (b) Increased productive efficiency due to competition from multinational subsidiaries (c) Improvement in the quality of the factors of production including management in other firms, not just the host firm, (d) Benefits to the balance of payments through inflow of investment funds, (e) Increase in exports (f) Increase in savings and investment and (g) Faster growth and employment. Thus, foreign direct investment is viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has made it the centre of attention for policy-makers in low-income countries in particular. 2.8 Foreign investment opportunity: Private investment from overseas sources is welcome in all areas of the economy with the exemption of five industrial sectors (arms, production of nuclear energy, forest plantation and mechanized extraction within the bounds of reserved forests, security printing and minting, air transportation and railways) reserved for public sector. Such investments can be made either indecently or through joint venture on mutually beneficial terms and conditions. In other words, 100% foreign direct investment as well as joint venture both with local private


sponsor and with public sector is allowed. Foreign investment, however, is specially desired in the following categories: - Export-oriented industries; - Industries in the Export Processing Zones; - High technology products that will be either import-substitute or export-oriented; - Undertaking in which more diversified use of indigenous natural resources is possible; - Basic industries based mainly only on local raw materials; - Investment towards improvement of quality and marketing of goods manufactured and/or increase of production capacities of existing industries; and - Labor intensive/technology intensive/capital intensive industries. 2.9 An objective assessment of environment by a foreign investor for his decision making process: In attracting investment, countries must recognize the main reasons that firms invest in developing countries: Resource extraction: firms locate in a specific country because of the natural resource wealth that can be exploited Market access: firms set up production in a country because of its large domestic market or its preferential access to regional or global markets Operating efficiencies: firms locate in a country because of competitive unit costs (typically labor and transportation costs) Firms consider different options when selecting an investment site. Hence, countries compete to attract direct investment. The critical question for developing countries is: What are the factors that determine where firm set up direct investments? The determinants of investment are unique to each circumstance; nonetheless, there are common themes. Some of the questions that investors ask when considering investing in a developing country follow: · Are government policies supportive of investment? · Is the political environment stable and predictable? · Is there a well-managed economic framework? · Does the legal framework protect property rights and foreign investors? · How is the relevant industry regulated and structured? · Is the local work force sufficiently trained and healthy? · Is there adequate infrastructure in place? · Are there significant natural resource deposits? · How is the quality of life? These nine issues are explored in greater detail in the Investment Checklist in Figure 13. This checklist contains questions that potential investors will consider. With each individual investment, there is a shifting emphasis as to which are the key factors, hence, the checklist does not rank the importance of each issue. (Source The Publication of Bangladesh Accounts “Finance & Economics” A country’s International Capital flows are affected by any factors that influence direct foreign investment or portfolio Investment. Foreign direct Investment tends to occur in those countries that have no restrictions and much potential for economic growth. Portfolio investment tends to occur in those countries where taxes are not excessive, where interest rates are high, and where the local currencies are not expected to weaken.

Role of Multinational Corporation A review of MNCs activities related to FDI: MNCs commonly consider direct foreign investment because it can improve their profitability and enhance shareholder wealth. In most cases, MNCs engage in DFI because they are interested in boosting revenues, reducing costs, or both.


3.1 Revenue - Related Motives The following are typical motives of MNCs that are attempting to boost revenues: 3.1.1 Attract new sources of demand: A corporation often reaches a stage when growth is limited in its home country, possibly because of intense competition. Even if it faces little competition, its market share in its home country may already be near its potential peak. Thus, the firm may consider foreign markets where there is potential demand. Many developing countries, such as Argentina, Chile, Mexico, Hungary and China, have been perceived as attractive sources of new demand. Many MNCs have penetrated these countries since barriers have been removed. Because the customers in these countries have historically been restricted from purchasing goods produced by firms outside their countries, the market for some goods is not well established and offer much potential for penetration by MNCs. 3.1.2 Enter profitable markets If other corporations in the industry have proved that excessive earnings can be realized in other markets, an MNC may also decide to sell in those markets. It may plan to undercut the prevailing, excessively high prices. A common problem with this strategy is that previously established sellers in a new market may prevent a new competitor attempts to break into this market. 3.1.3 Exploit monopolistic advantage Industrial organization theory states that firms may become internationalized if they possess resources or skills not available in competing firms. If a firm possess advanced technology and has exploited this advantage successfully in local markets, the firm may have a more distinct advantage in markets that have less advantage technology. 3.1.4 React to trade restrictions In some cases; MNCs use DFI as a defensive rather than aggressive strategy. Specially, MNCs may pursue DFI to circumvent trade barriers. 3.1.5 Diversify internationally Since economies of countries do not move perfectly in tandem over time, net cash flow sales of products across countries should be more stable then comparable sales if the products were sold in a single country. By diversifying sales (and possibly even production) internationally, a firm can make its net cash flows less volatile. Thus, the possibility of a liquidity deficiency is less likely. In addition, the firm may enjoy a lower cost of capital as shareholders and creditors perceived the MNCs risk to be lower as a result of more stable cash flows. 3.2 Cost - Related Motives: MNCs also engage in DFI in and effort to reduce costs. The following are typical motives of MNCs that are trying to cut costs: 3.2.1 Fully benefit from economies of scale A corporation that attempts to sell its primary product in new markets may increase its earnings and shareholder wealth due to economies of scale (lower average cost per unit resulting from increased production). Firms that utilize much machinery are most likely to benefit from economics of scale. 3.2.2 Use foreign factors of production Labor and land costs can vary dramatically among counties. MNCS often attempt to set up production in locations where land and labor are cheap. Due to market imperfections (discussed in Chapter 1) such as imperfect information, relocation transaction costs, and barriers to industry entry, specific labor cost do not necessarily become equal among markets. Thus, it is worthwhile for MNCs to survey markets to determine whether they can benefit from cheaper costs by producing in those markets.


3.2.3 Use foreign raw materials Due to transportation costs, a corporation may attempt to avoid importing raw materials from a given country, especially when it plans to sell the finished product back to consumers in that country. Under such circumstances, a more feasible solution may be to develop the product in the country where the raw materials are located 3.2.4 Use foreign technology Corporations are increasingly establishing over seas plants or acquiring existing overseas plants to learn the technology of foreign countries. This technology is then used to improve their own production process and increase production efficiency at all subsidiary plants around the world. 2.2.5 React to exchange rate movements - When a firm perceives that a foreign currency is undervalued, the firm may consider direct foreign direct foreign investment in that country, as the initial outlay should be relatively low. 3.3 Comparing Benefits of FDI among countries: The optimal way for a firm to penetrate a foreign market is partially dependent on the characteristics of the market. For example, direct foreign investment by U.S. firms is common in Europe but not so common in Asia, Where the people are accustomed to purchasing products from Asians. Thus licensing arrangements or joint ventures may be more appropriate when firms are expanding into Asia. 3.4

Host Government views of FDI:

Each government must weigh the advantage and disadvantage of direct foreign investment in its country. It may provide incentives to encourage some forms of DFI, barriers to prevent other of DFI, and impose conditions on some other forms of DFI. Barriers that protect local firms or consumers: When MNCs consider engaging in DFI by acquiring a foreign company, they may face various barriers imposed by host government agencies. All countries have one or more government agencies that monitor mergers and acquisitions. The acquisitions activity in any given country is influenced by the regulations enforced by these agencies. Barriers that restrict ownership: Some governments restrict foreign ownership of local firms. Such restrictions may limit or prevent international acquisitions. “Red Tape” Barriers - An implicit barrier to DFI in some countries is the “Red Tape” involved, such as procedural and documentation requirements. A MNCs pursuing DFI is subject is subject to a different set of requirements in each country. Therefore it is difficult for MNCs to become proficient at the process it concentrates on DFI within a single foreign country. The current efforts to make regulations uniform across Europe have simplified the paperwork required to acquire European firms. 3.5 Impact of the FDI decision on an MNC value: An MNC’s foreign direct investment decision affects its value. Decisions on which countries to target for expansion affect the revenue generated by the foreign subsidiaries and the operating expenses of the foreign subsidiaries. Thus the FDI decisions determine determine the expected foreign currency cash flows that will be earn by each foreign subsidiary and therefore affect the expected dollar cash flows ultimate receive by the U.S. parent. Since the FDI decision by the U.S. parent determine the types of new operations and locations of foreign operations, they can affect the perceived risk of these operations that are supported by the parent’s FDI. Therefore FDI can affect the MNC’s cost of capital, which also affects the MNC’s value.


FDI decision on type Of Business and Location m

V =t=1

Σ [E (CFi,t)* E(ERi,t)] (1+k) t

FDI Decision on type of Business and Location

Where, V= Value of the U.S.- based MNC E (CFi,t)= Expected cash flows denominated in currency j to be received by the U.S. parent in period t. E (ERi,t) = expected exchange rate at which currency j can be converted to dollars at the end of period t. k = Weighted average cost of capital of the U.S. parent. m = Number of currencies n = Number of periods. MNCs may be motivated to initiate foreign direct Investment in order to attract new sources of demand or to enter markets where superior profits are possible. These two motives are normally based on opportunities to generate more revenue in foreign markets. Other motives for using FDI are typically related to cost efficiency, such as using foreign factors of production, raw materials, or technology. In addition MNCs may engage in FDI to protect their foreign market share, to react to exchange rate movements, or to avoid trade restrictions. International projects may alb MNCs to achieve lower risk than is possible from only domestic projects without reducing their expected returns. International diversification tends to be better able to reduce risk when the FDI is targeted to countries whose economies are somewhat unrelated to a MNCs home country economy.

FDI: Bangladesh & World Scenario 4.1

Significance of foreign investment in Bangladesh:

Foreign investment carries enormous significance in a developing country like Bangladesh. Realizing the importance of foreign investment Bangladesh formulated its first industrial investment policy in 1973, revised it again in 1974, 1975, and in 1978. Foreign private investment (Promotion and protection) act, 1980 and the Bangladesh Export Processing zones authority act 1980 were enacted. To make the foreign investment more attractive new industrial policy was announced in 1982. However, the industrial policy 1999 is by far the most comprehensive document. Bangladesh has ever made for investment including foreign investment. 4.2 The major incentives for foreign direct investment in Bangladesh are:  Projection of Foreign investment from nationalization and expropriation  Abolition of ceiling on investment and equity share-holding by foreigners  Tax holiday between 5 – 10 years power generating companies  Accelerated depreciation in lieu of tax holiday on certain simple conditions  Concessionary duty and VAT on capital machinery and spares  Rationalization of import duties and taxes  Six month multiple visa for prospective investors  Citizenship by investing USD 5,00,000 or transferring USD 10,00,000  Permanent relationship by investing USD 75,000  Tax exemption on capital gains under certain simple conditions  Bonded warehouse and back to back L/C for exporting industries  Avoidance of double taxation with certain countries  Facilities for repatriation of capital, profit, royalty, technical fee etc.  Tax exemption on royalty, technical know-how and expatriates’ salary  Protection of intellectual property rights


ď ˛ ď ˛

4.3

Taka convertibility in current account Treating reinvestment of reparable dividend as new investment

FDI and Bangladesh:

Foreign Direct Investment (FDI) generates economic benefits to the recipient country through positive impacts on the real economy resulting from physical capital formation, transfer of technology and increased domestic completion. Bangladesh stands to gain from these inflows provided it is able to allocate and manage these resources efficiently keeping in view the concomitant liabilities of profit and income payments. in the Bangladesh context, the recent surge in FDI in energy and telecom sectors appear to have heavy import content with little impact on foreign exchange reserve accumulation. The concern that logically emerges is whether the real economy would be able to generate sufficient foreign exchange to finance the remittance of profits and income originating from the foreign investment. Further more, the private sector has been incurring foreign debt obligation of short, medium, and long term maturity to the tune of USD 60-70 million a year. These give rise to interest and principal payments in foreign exchange over and above the official debt obligations to bilateral and multilateral agencies. Table 4.1: sector wise capital in flows (5) Year average) (Million USD) FY 2001FY2006-10 FY 1996-00 Sectors 05 Gas 134 218 114 Power 174 113 193 Telecom 17 17 17 FDI in EPZ 58 123 199 Other FDI 150 205 241 Total FDI inflow 472 757 744 Debt inflow 159 149 154 Total inflow: FDI+debt 621 911 902 Source: Portfolio: A Review of Capital market and national economy by Chittagong stock Exchange. Graphical Presentation of Sector wise capital in flows (5) Year average) (Million USD)

Table 4.2 Sector wise capital outflows (5 years average) Million USD


Source: Portfolio: A Review of Capital market and national economy by Chittagong stock Exchange. Sectors Gas Power Telecom Other FDI Total profit & Income Remittance Payment on Debt Total profit & & outflow FDI+ debt

FY 1996- FY 2001FY 2006-10 00 05 34 111 151 340 13 156 0 20 42 36 190 409 83 477 942 45 117 229 129 594 1171

The main question is, can the economy sustain the foreign exchange payments that will be needed to cover the profit repatriation, interest payment sand amortization of private debt? Clearly, in the Bangladesh context, the nature of private capital inflows has implied little augmentation of foreign exchange reserves. Thus three three critical issues emerge from the nature of these capital inflows: ■ First, the high import intensity of FDI inflow and subsequent profit repatriation and interest payments, implies a worsening current account deficit associated with FDI. ■ Second, there is no discernible accumulation of foreign exchange reserves and consequently, no upward pressure on exchange rates (essentially ruling out the prospects of” Dutch Disease”) ■ Third this FDI together with private sector borrowing in foreign currency, which has risen to an estimated USD 600 million a year between FY 01-FY 05, and over a billion USD a year for the next 5 years.

ngladesh Status:


From the inception of the independence Bangladesh has been in the center of economic investment incentive for many countries and institutional bodies of the world. With the passage of time Bangladesh reform its regulatory structure in regard to the FDI to open up the new avenue and to dislodge the compliances related to the FDI. But the effort of this structural progress has back warded by sudden and unexpected political influence and changes. The situation becomes worse one in the September attack on US. During this period flow of FDI all over the world shrunken at a greater extend. Bangladesh had also severely affected by that unwanted changes in the world scenario. Before going for in depth analysis the status of Bangladesh from different aspects are discussed. Bangladesh could be an attractive place of FDI. It is located between the growing markets of south Asia. • Economic Status: The macroeconomic situation of the country is by large, stable, characterized by a manageable fiscal deficit and low current account deficit. In external trade, it has steady export growth. Foreign Exchange reserve is not bad. • Political Status: Bangladesh is a developing country having a republic type democratic government. It has British style parliamentary system. After liberation in 1971 the then government nationalized all the key industries. As a result, aid from wesrn world remains as the means of survival. But development of Bangladesh through aid seems to have failed. We see hat Bangladesh is still poverty-ridden. As the effectiveness of aid declined very much demand arose about market access to the developed countries of the product & services of developing countries. But the market access of developed countries is faced with several problems of which politics seems to be prominent. A free trade policy other wise called globalization is seen as a lively remedy to solve both the problems of developed and developing countries. •

Investment Status: The present democratic government concentrates on more local & foreign investments in oil, gas, cement, infrastructure, textile sectors of Bangladesh to face the challenges of the twenty first century. Though prospects are there in Bangladesh, due to insufficiency of capital & technology greater investment is no taking place. However the recent trends o administrative, banking and infrastructure reform process, low rate of inflation compared to the neighboring countries( in Pakistan 11.2%, in India 8.5%, Srilanka 16.7 % and Bangladesh 5%) and separate export processing zones are some of the indicators of the countries development process. That may help in attracting local and foreign investors from developed countries. Besides, the most important tasks is to revive the rural economy so that the migration of rural people will come down, because a country like Bangladesh has poor resources to meet the bargaining demand of the citizens already settled in the urban areas. 4.5 Investment Registration in Bangladesh: Before going for full-length analysis of the FDI flow in recent period I have a short look on the industrial investment status. The industrial investment mainly consists of private versus public, and local versus foreign investment. The analysis of industrial investment status will provide us good information as to how we are using the FDI. The economy of Bangladesh has been gradually drawing the attention of private sector investors since it’s opening up in early '90s. Manufacturing is becoming increasingly vibrant claiming a significant share in the total investment. Table 4.3: Annual Amount of Investment Registered with Bard of Investment (1991/92 through 2000/04) (In million US$) Fiscal year 1991-92 1992-93 1993-94 1994-95 1995-96

Local investment

Foreign investment

Total investment

Growth

91 90 457 846 1171

25 53 804 730 1516

116 143 1261 1576 2687

-23% 782% 25% 70%


1996-97 1997-98 1998-99 1999-00 2000-01

1108 1137 1183 1324 1420

1054 3440 1926 2119 1271

2162 4577 3109 3443 2691

- 20% 112% - 32% 11% - 22%

2001-02 2002-03

1531 2027

302 368

1833 2395

- 32% 31%

2132 14517 47.65%

448 14056 52.35%

2580 28573 100%

27% ---

2003-04 Total Share (%)

Source: IIMC Board of Investment, June 2003 During 1991-92 to 2003-04, cumulative private investment registered with Board of Investment (BOI), the apex private investment promoting and facilitating body, totaled US$ 25,933 million. The registered investments consist of 47.65 percent as local and 52.35 percent as foreign (100 percent and Joint Venture). Table 8.3 presents the time-series data during FY 1991-92 to FY 2003-04. In FY 1991-92, total private investment registered amounted US$ 116 million, whereas in 2003-04, it reached US$ 2,395 million. In 2003-04 experienced a 27 percent growth in the overall investment comprising of 32 percent growth in local and 22 percent in foreign investment. See table in above for more information. 4.6 Foreign Private Investment Projects Registered with Bangladesh: As per registration data, agro-based and chemical are the two most growing sectors in FY 2003-04. Manufacturing sector recorded 39 percent growth in FY 2003-04 compared to FY 2002-03.Simultaneously, total share of manufacturing grew from 55 percent to 62 percent in 2003-04. Table 4.4: Foreign Direct Investment by major Industries registered with re Board of investment. (1997/98 through 2003/04) (In million US$) Share in 2003-04 Sector

19971998

19981999

19992000

20002001

20012002

20022003

20032004

Agro based Food & allied Textiles

15.90 48.89 106.9 1 9.00

7.95 346.47 92.76

63.65 19.97 50.28

5.95 2.41 41.03

0.72 0.62 201.57

0.28 4.34 50.64

64.46 21.46 37.83

17.50% 5.82% 10.27%

-

2.00

0.18

122.01

2.35

0.58

0.16%

4.05

21.09

8.62

0.63

-

-

1.78

0.48%

113.6 4 -

53.85

336.51

962.43

201.53

44.84

74.90

20.33%

99.39

53.26

142.13

17.11

5.30

3.19

0.87%

21.31 596.5 9 137.2 1

10.62 2279.3 0 528.62

96.84 1290.85

20.98 770.99

29.77 650.70

57.86 134.93

25.65 137.25

6.96% 37.25%

3.56

172.27

48.03

0.98

1.33

.36%

Printing & packing Tannery & Rubber Chemical Glass & Ceramic Engineering Service Miscellaneous


Total

1053. 50

3440.0 5

1925.54

2119.8 8

1271.8 8

301.52

368.42

100%

Source: IIMC Board of Investment, June 2004 Table 4.4 shows direct foreign Investment in the major industries during the last seven years highest Investment was in service industries (37.25%) followed by chemical industries (20.33%). Textiles (10.27%) and Agro based is (17.50%) Table depicts the time-series data during FY 1997-98 to 2003-04. See table in above for more information. Registration of local industries also grew substantially by 32 percent. Engineering, printing and packaging, agro-based and food and allied sectors have led the growth .The share of manufacturing in local investment registration is 95 percent of the total investment proposals in 2003-04 that grow by 37 percent over 2002-03. The present investment trend indicates that the industrial growth would rise to 7 percent in the FY 2003-04. It may be noted here that the manufacturing sector maintained an average of 8.2 percent growth during 1991-92 to 1996-97, which however, sharply decelerated to 5.6 percent during 1997-98 to 2002-03. Because of marketoriented fiscal measures and restructuring of various facilitating agencies, the industrial growth in the FY 200304 has again increased to 6.62 percent. Comparative statement of sector wise distribution Table4.5: Comparative Statement of Sector-wise Distribution of Local Private Investment registered with the BOI (from FY 2002-03 to 2003-04.) Sect oral Local Investment (In million Taka) Particulars Agro based

FY 2002 - 2003 4900.17

FY 2003 - 2004 9132.26

Growth 86%

Food and allied

5285.93

8697.28

65%

Textiles

50772.27

43374.80

- 15%

Printing and packaging

1054.07

3045.47

189%

Tannery and rubber

794.23

874.00

10%

Chemical

11449.49

5914.00

- 48%

Glass and ceramic

2451.83

506.04

- 79%

Engineering

4187.17

39031.65

832%

Service Miscellaneous

6065.48 1099.10

4778.00 1172.72

- 21% 7%

Total

88059.74

116526.21

32%

Source: IIMC Board of Investment, june2004 From the above table we can see that engineering sector got the priority over other sectors. Agro based, and printing and packaging got the attention of the investors. The higher percentage of investments in the engineering sector indicates that industrial sector got the priority over others. 4.7 Recent FDI flows over the world: Asia, for some time now, has been a major influence in the global economy. South Asia, however, lags far behind in comparison despite its huge potential. Opportunities abound in terms of prospective investment in the South Asian countries since they offer different sorts of incentives. Many countries do not show any discriminating attitude towards foreign investors and they are allowed to take home their profits. In fact, over the last few years, countries in South Asia have come to adopt Foreign Direct Investment (FDI)-specific


regulatory frameworks to support their investment-related objectives. These have been reflected in recent trends of the FDI inflows in South Asia, which increased by 32% as a whole and amounted US$ 4 billion in 2002 while global FDI inflows plunged by 51%. South Asian countries received US$ 3 billion as FDI in 2001. UNCTAD's World Investment Report (WIR) 2003 revealed that global FDI inflows, after reaching US$1492 billion, record high in 2001, declined sharply to US$ 735 billion in 2002. Such a plunge, for the first time in a decade, was mainly the result of weakening of the global economy, notably in the world's three largest economies, all of which went into recession. A consequent drop in the value of cross-border merger and acquisitions, US$ 594 billion, completed in 2002, was only half of that in 2001 happens to be another reason as well. As a result, the downturn in FDI in developed countries was 59% against a 14% drop in developing countries. Ranking of FDI Recipient and Donors FDI Recipient Developed 1.USA 2.UK 3.Netherlands 4.8

Developing 1.Mexico 2.India 3.China

FDI Donors 1. USA 2.France 3.Germeny 4.Japan

Flow of FDI in South Asia:

FDI inflows into South Asia went up by 32% as a whole and amounted US$ 4 billion in 2001 while South Asian countries received US$ 3 billion as FDI in 2001. According to the WIR 2003, FDI inflows to India went up from US$ 2319 million in 2001 to US$ 3403 million in 2002, which is a 47% increase. Pakistan, too, experienced an increase in FDI inflow, where it reached US$ 385 million in 2001, a 26% increase over US$ 305 million in 2001. Source: Internet In 2002, south Asian Countries received $4 billion in FDI, which is $100 million upper that of the previous year. FDI Inflow countries Country India Pakistan Sri Lanka Bangladesh Nepal Maldives Bhutan

by

south

Asian

FDI Inflow $2300 million $308 million $217 million $170 million $13 million $12 million Not Recorded


4.9

Distribution of FDI by U.S. firms:

The United Kingdom and Canada are the biggest targets. The FDI by U.S. firms in Latin America and Asian countries has increased substantially as these countries have opened their markets to U.S. firms. Graph 4.1 summarizes the distribution of FDI by U.S. firms among large regions: Graph 4.1: Distribution of FDI by U.S. firms by Region. Graph 4.1: Distribution of FDI by U.S. firms by Region. (in (In billions of $) Billions of U.S.$. Asia and Pacitic 16% Latin America 20%

Other 3%

Europe Canada Europe 51%

Latin America Asia and Pacitic

Other Notice thatCanada Europe receives more than 50% of all FDI by U.S. firms. Another 30$ of FDI is focused on Latin 10% America and Canada, while 16% is concentrated in the Asia and pacific region.

4.10

Distribution of FDI in the United States:

Just as U.S. firms have used FDI to enter markets out side the United States, non-US firms have penetrated the u.s. market. Much of the FDI in the United States comes from the United Kingdom, Japan, the nether lands, Germany and Canada. Seagram, Food lion and smoothers foreign overfed MNCs generates more than half of their revenue from the United States. Many well known firms that operate in the United States are owed by foreign companies, including shell oil (Netherlands), Burger King (United Kingdom), Citgo petroleum (Veneruda), camon (Japan), and Fireman’s fund (Germany), many other firms operating in the United States are partially owned by foreign companies, including MCI Communication (United Kingdom), Universal studios (Canada), and northwest Airlines (Netherlands). While U.S. basal MNCs consider expounding in other countries, the must also compete with foreign firms in the United States. Mony U.S. based MNCs have recently increased their FDI in foreign countries. For example, Exxon Mobil, IBM and Hewlett- Packard have at least 50% of their assets in foreign countries.

Administration of FDI in Bangladesh Since market economy concept is accepted in Bangladesh and foreign exchange controls are relaxed, the international community has taken a keen interest in this region. When somebody intends to initiate joined venture in Bangladesh, he should look for regulatory support. That is here the Board of Investment (BOI) come in, this is a government agency. 5.1

Structure & Objectives:

Board of Investment (BOI) was established by the investment board Act 1989 to promote and facilitated investment in the private sectors both from domestic and overseas sources with a view to contribute to the social economic development of Bangladesh. It is headed by the Prime Minister and is a part of the Prime minister’s office. Its membership included representatives (at the highest level) of the relevant ministries- industry finance, planning, textiles, foreign, commerce, telecommunications, energy power, science and information &


communication technology et.al. As well as others, such as Governor of Bangladesh Bank, precedents of FBCCI and BCI. Objective of BOI: Broadly, the objective of BOI is to encourage and promote investment in the private sector both from domestic and overseas sources and to provide necessary facilities and assistance in the establishment of industrial sectors with a view to contribute to the socio-economic development of Bangladesh. 5.2 Functions & Facilities: Broadly, BOI is responsible for facilitating private investment in the country. According to the BOI Act, its functions are: a. Providing all kinds of facilities in the matter of investment of local and foreign capital for the purpose of rapid industrialization in the private sector; b. Implementation of the government policy relating to the investment of capital in industries in the private sector; c. Preparation of investment schedule in relation to industries in private sector and its implementation; d. Preparation of area-schedule for establishment of industries in the private sector and determination of special facilities for such areas; e. Approval and registration of all industrial projects in the private sector involving local and foreign capital; f. Identification of investment sectors and facilities investment in industries in the private sector and giving wide publicity thereof abroad; g.

Invention of specific devices for the purpose of promotion of investment in industries in the private sector and their implementation;

h.

Creation of infrastructural facilities for industries in the private sector;

i.

Determination of terms and conditions for employment of foreign officers and experts and others employees necessary for industries in the private sector in the private sector;

j.

Preparation of policies related to transfer of technology and phase-wise local production in the private sector and their implementation;

k.

Providing necessary assistance in the rehabilitation of sickly industries in the private sector;

l.

Financing and providing assistance in the financing of important new industries in the private sector;

m.

Adoption of necessary majors for creation of capital for investment in industries in the private sector;

n.

Collection, compilation, analysis and dissemination of all kinds of industrial data and establishment of data-bank for that purpose; and

o. Doing such other acts and things as may be necessary for the performance of the above functions. In addition to the above, recently BOI has been entrusted to give approval of foreign offices i.e. brunch, liaison, representative and buying houses. Facilities Available from BOI: To summarize, facilities and services available to the investors from BOI could be described in three stages.


Stage 1: Pre-investment Information and Counseling At this stage, BOI provides all sorts information required by an investor to undertake initial investment move. Professional investment and business counselors provide cordial assistance upon visit to the BOI office over phone, by email & fax and express mailing. It also assists in company formation. Stage 2: Special Welcome Service to Foreign Investors BOI has a welcome service desk Zia International Airport (ZIA) operating round- the-clock. It assists in obtaining necessary immigration and Visa on Arrival / Landing Permit, hotel accommodation and counseling arrangement. Stage 3: Investment implementation and Commercial Operation Once the investor decides to invest and forms a company, BOI provides following specific facilities and comprehensive services upon confirmation of the first one i.e. / registration of the company with BOI. a. b. c. d. e. f. g. h. 5.3

Registration of the company Obtaining Industrial plot Obtaining Utility Connections Registration / Approval for foreign loan, Suppliers’ Credit, PAYE Scheme etc. Import of Machinery & Raw Materials Obtaining Work Permit Remittance of Royalty, Technical know-How and Technical Assistance Fees.

Business set up at a Glance: Implementing a 100% foreign-owned or joint venture industrial project in Bangladesh is a rather simplified process. The entire Process is divided into 5(five) major steps as presented the following diagram. BOI supports are available in step 1 through 4. Major Steps to set up a Plant in Bangladesh & BOI Assistance 1. Info Search

BOI Assistance Available

2. Physical Verification 3. Getting Structured 4. Plant Set-up 5. Commercial Operation

5.4

Terms and Condition of BOI: 1) Investors shall have to take necessary safety measures as Factory Act, 1965; 2) Investors shall have to arrange sufficient fire fighting equipment as safety measures of the project; 3) Investors shall have to import the machinery, spare parts and raw materials as per existing Import Policy Order of the Government;


4) Investors shall have to obtain necessary clearance from the Department. Of Environment to ensure that the manufacturing process do not pollute the environment; 5) Investors shall have to arrange preservation of rain water for using in the factory to reduce pressure on ground water; 6) Investors shall have to should have to submit the quarterly report to BOI (IIMC) regarding progress of implementation of the project in every quarter till the unit goes into commercial production. After going into commercial production, half-yearly performance report regarding production and employment of the project shall have to be submitted; 7) Investors shall have to take prior permission from BOI in case of any amendment of this registration letter including ownership or location of the project; 8) Any effluent of the industrial unit should not be discharged into the nearby river connecting lake or general water reservoir without proper treatment. 9) Investors shall have to provide/ create the following facilities, if applicable; (1) Day care center; (2) Maternity leaves; (3) Low cost and safe housing facilities for the low paid female workers, near & around the factory; (4) Equal space and allowances for male & female workers in the organization; (5) Low prices canteen; (6) Enact effective rules of conduct to enable favorable working atmosphere among the male and female workers; 10) All other terms and conditions the registration letter no. IP/ P&P / 9(1639)/ 243 dated 02-02-1998 will remain unchanged... The Board of Investment reserves the right to cancel the registration of an investment if any of the above conditions or any part of the condition is violated This chapter presents the formation, function and procedures of BOI. As the prime strategic IPA of the country, BOI’s role is central to all investors in Bangladesh. This would enable the investors to avail the facilities provided by BOI, smooth working with BOI functionaries and exchange views and opinions in developing investment climate.

Trends of FDI in Bangladesh FDI Inflow survey in Bangladesh Foreign private capital flows into Bangladesh have taken three forms: FDI, portfolio investment, and foreign currency loans (supplier credit or commercial loan). But liberalization of the investment regime, while making foreign investment procedures simpler, has also made it difficult for the central bank to mobilize information on capital flows. The Bangladesh Bank has been experiencing difficulty reporting FDI accurately as private capital flows emerge as a significant component in the balance of payments. FDI Inflow Survey 2003 was successfully conducted by BOI, for the first time in Bangladesh in February 2004.It was the first-ever attempt to gather credible data on actual FDI inflow on the basis of definition given by UNCTAD. The World Investment Report 2004 (UNCTAD-2004) mentioned that ''FDI flows to Bangladesh and other countries in the sub region declined. However, in the case of Bangladesh, FDI flows in 2003 would have been higher if investment in kind were included. 6.1 The FDI census in Bangladesh: The Bangladesh Board of Investment (BOI) conducted a census of foreign direct investors in February 2004 to gather comprehensive primary data and actual FDI inflows based on projects registered with BOI and the Bangladesh Export Processing Zones Authority. Table 6.1: Actual FDI Inflow in Bangladesh in 2002 and 2003 Components

2003

2004

Growth

Component


1.Equity 2.Reinvstment 3.Intra-Company Borrowing Total

Jan-Dec 133.8 116.8 77.7 328.3

Jan-Dec 198.36 186.47 46.97 431.8

(%) 48.30% 59.60% 39.50% 31.50%

Share 45.90% 43.20% 10.90% 100%

Source: 1. Bangladesh Bank Enterprise Survey 2. Provisional of FDI inflow Survey by BOI and EPZA •FDI inflows in 2003 were $328 million (compared with $ 58 million on a balance of payments basis reported by the Central Bank of Bangladesh). Half of it was financed by equity, 31% by reinvested earnings and 19% by intra-company loans. This is an example of how careful FDI statistics need to be interpreted, given the different ways in which they are compiled. 6.2

Summary of FDI inflow by components:

According to the commitments made in the Mid-term Strategic Promotional Plan 2004-05 of BOI, the first half yearly FDI Inflow survey of 2004 was undertaken by BOI in cooperation with BEPZA. This Report, the second of its kind, presents the findings of the survey in detail. Distribution of FDI inflow by Components:    

Total FDI inflow during January-June 2004 is US$ 287.667 million. Equity is the major portion of the inflow constituting 59%. Reinvestment stands for about 34% of the total investment. Intra-company borrowing comprises of 7% of the FDI.

Equity capital is the foreign direct investor's purchase of shares of an enterprise in a country other than its own. Reinvested earnings comprise the direct investor's share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested. Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises. Table 6.2: Summary of FDI inflow in Bangladesh during January – June 2004 FDI Component 1. Equity a. Capital machinery b. Cash 2. Reinvestment 3. Intra Company borrowing

BOI Registered In million US $ 126.316 52.219 74.097 72.833 6.819

BEPZA Registered In million US $ 42.339 29.528 12.811 25.060 14.300

Total In million US $ 168.655 81.747 86.908 97.893 21.199

Total

205.968

81.699

287.667

Source: 1. Bangladesh Bank Enterprise Survey 2. Provisional of FDI inflow Survey by BOI and EPZA •

FDI in the form of equity is significantly higher in BOI registered projects (61%) in comparison to BEPZA projects (51%).


Graph 6.1

Distribution of FDI inflow by components Reinvestment 34% Equity 59%

Reinvestment

Intra company borrowing 7% Intra company borrowing Equity

In the above graph foreign direct investment interns of component is higher increase of Equity is 59% and Reinvestment is the 34% and third is entering company Borrowing 7% in year 2005. Comparative Statement of FDI Inflow: Table 6.3: Comparative Statement of FDI Inflow during Jan-June 2003 and Jan- June 2004. (FDI component in million U.S. $) Particulars

FDI inflow Jan – June’ 2003

FDI inflow Jan – June’ 2004

Periodic Growth

1. Equity 113.176 168.655 a. Capital Machinery 64.528 81.747 b. Cash 48.648 86.908 2. Reinvestment 26.0725 97.893 3. Intra company 28.910 21.199 borrowing Total 168.158 287.667 Source: 1. Bangladesh Bank Enterprise Survey 2. Provisional of FDI inflow Survey by BOI and EPZA 

49.00% 26.70% 78.6% 275.5% - 26.9% 71.10%

The highest growth has been experienced in reinvestment marking 276%. It definitely shows the confidence of the existing investors on the investment climate and performance of the economy as a whole.

Growth in the equity (49%) was immensely contributed by increase cash inflow (78.6%), which should be reflected in the country's Balance of Payment Statement. 6.3 Sect oral Distribution of FDI: The growth of manufacturing sector is evident from the table below: Table 6.4: Sect oral Distribution of FDI during Jan-June 2004. Sector

BOI Registered

BEPZA Registered

Total

Sect oral Share

Sect oral Rankin


g In million In million In million US $ % US $ US $ 133.309 81.170 214.479 74.56

a. Manufacturing Textile 31.096 65.820 96.916 Chemicals 78.056 9.490 87.546 Agro – based 16.663 -16.6636 Engineering 2.285 4.750 7.608 Food and allied 3.392 -3.392 Tannery & 1.244 1.110 2.354 Rubber b. Service 72.013 0.130 72.143 Telecommunicat 38.500 -38.500 i o n s Energy & Gas 30.527 -30.527 Power 6.747 -6.747 generation Oil & gas 22.182 -22.182 LPG bottling 1.598 -1.598 Other services 2.986 0.130 3.116 Computer 0.771 -0.771 software Others 2.215 0.130 2.345 c. Miscellaneous 0.646 0.399 1.045 Total (a+b+c) 205.968 81.699 287.667 A. Not ranked separately Included in Service Sector. Source: IIMC, Board of Investment, June 2004 

Positio n --

33.69 30.43 5.79 2.64 1.18 0.82

1 2 4 5 6 7

25.08 13.38

3 A

10.61 2.35

A A

7.71 0.56 1.08 0.27

A A A A

0.82 0.36 100%

A 8 100%

Textile is the highest recipient of FDI (33.69%) followed by chemicals (30.43%). The garments in EPZs largely contribute textile sector. However, chemical sector is largely contributed by cement (60%) followed by garment accessories. A detail study on cement sector of Bangladesh is available in BOI quarterly newsletter "Bangladesh Investment Review", Vol. 1, Issue 1, published for the period April-June 2005. Energy and gas sector has sharply declined (only 10.6%) to attract FDI during this period. Given the present utility infrastructure situation of the country and projecting faster growth of industry in coming years, energy and gas could be attractive sector for investment in future. Graph 6.2:


Sectoral distribution of FDI inflow Telecom 13%

Others 1%

Energy & Gas 11%

Manufac turing 75% Energy & Gas

Manufacturing

Manufacturing continues to receive the highest FDI (74.6%).

A tremendous growth in the manufacturing sector indicates prospective growth of the industry in the upcoming years. It will also facilitate creating job opportunities and SME development.

Telecommunication has emerged as the 3rd largest sector having huge growth potential in the reformed environment of telecom sector. 6.4 Trends of FDI Inflow by Sources:

The major sources of investment in 2003 were Asia (45%), followed by Europe (32%) and North America (17%). Norway was the single largest investor (19%), followed by the United States (17%), Singapore (14%) and Hong Kong (China) and Malaysia (9% each). Most of the FDI from Norway was in telecom and from the United States in the services sector (i.e. power generation, oil and gas, liquefied petroleum gas bottling, Medicare service). Investments from Asia, particularly South, East and South-East Asia, were concentrated in manufacturing. •The major investors include ASE and Unocal (United States), BASF (Germany), Cemexs (Mexico), Holcim and Nestle (Switzerland), Lafarge and Total FinaElf (France), Taiheyo (Japan), Telenor (Norway) and TMI (Malaysia). Table 6.5: Country-wise Distribution of Foreign Private Investment Registered with BOI (from FY 1997-98 to 2003-04.) (In million US$) Country 199719981999200020012002 2003-2004 Sharein 20031998 1999 2000 2001 2002 04 2003 Japan 12.42 58. 68.32 24.46 0.94 0.82 106.00 28.77% 56 U.K. 73.39 32. 827.15 15.96 28.08 3.88 88.40 23.99% 12 Nether land -2.63 -3.04 4.82 27.2 42.64 11.57% 1 South K. 84.75 89.7 14. 5.14 43.19 24.6 27.28 7.40% 8 10 1


Taiwan Australia Singapore U.S.A. U.A.E. Malaysia

--132.15 8.17

--33.06 1378.5 4

43.67

--273.14 382.01

--2.28 2.51

23.49 17.41 16.05 13.00

6.38% 4.73% 4.36 3.53%

11.39

1.19

7.24 5.70

1.97% 1.55%

154. 7.60 87 13.18 35.48

31.62

5.11

1.39%

4.78

1.30%

18. 10.29

27.23

15.3 2 59.7 5 9.49

2.86

0.78%

--57. 1.93

--115.54

--1.79

1.81 1.55 1.07

0.49% 0.42% 0.29%

-152. 67 301. 52

1.02 3.00

0.28% 0.82%

368.42

100%

288. 16.36

--20.39 1178.3 5 6.13

--86.11 308.99

02 India

48.83

Hong Kong

484.92

China

9.97

Finland Thailand Germany

5.48 156.54 25.3 8 ---

--12.63

Norway Others

-142.60

Total

1,053. 50

33 ---

23.5 9 -1,346. 35 3,440. 05

1.17

74 -100.34

-811.11

518.16 94.64

1,925. 54

2,119. 88

1,271.88

Source: Board of Investment publishment On the above table, a country-wise analysis of foreign investment projects registered in FY 2003-04 shows that top five investment registering countries are Japan (28.8 percent), UK (24 percent), Netherlands (11.6 percent), South Korea (7.4 percent) and Taiwan (6.4 percent). Chart 6.1: Trend in FDI Flow by Sources Distribution of FDI flow by sources 41.00%

39.00%

3.00%

r e th O & n p a J d p lo v e D

3.00%

Series1

A & s a ,E th u o S

Sources of FDI

6.00%

r h O & ia tA s e W

a ic e m A rth o N

i U n a e p ro u E

8.00%

p o u rE e th O

Ilw D fF o %

45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%


European Union and Western Europe; South, East and South East Asia; and North America are the main sources of FDI in Bangladesh.  Europe as a whole is the largest source (44%) of FDI in Bangladesh during January-June 2004. This was mainly geared up by French investment in cement sector. 

South, East and South East Asia is the second largest source (39%) of FDI led by Hong Kong (13.94%), South Korea (10.62%) and Malaysia (9.28%).

European investments spread over manufacturing and service sectors like textile, cement, agro chemical, leather goods, drugs and pharmaceuticals, tele-communication, LPG bottling, lubricants, power generation, industrial gas etc.

Investments from South, East and South East Asian nations like China, Hong Kong, India, Malaysia, Pakistan, Singapore, Sri Lanka, Taiwan and Thailand are concentrated on manufacturing sectors. 6.5 Investment in EPZ’s: Investment & employment EPZs in Bangladesh are another potential export oriented sectors where FDI is used. Tables provide data relating to the number of operational industries, investment, manpower and export of the six EPZs at Dhaka, Chittagong, Comilla, Mongla, Uttara and Iswardhi.

Table 6.6: Number of Units, Investment and Employment in Operational Units Under EPZ. Products

No of Total Manpow units investment er (million US (Local) $)

Manpower (Foreign)

Total Manpower

Garments Textiles Terry Towel Knit & other textiles Garments Accessories Caps Tents Electronics Foot ware & Leather Metal Products Plastic Goods Paper Product

42 18 15 15

178.681 133.407 22.953 53.455

64260 12168 5216 19004

312 162 10 281

64572 12330 5229 19285

17

30.852

1408

20

1428

7 3 11 11

31.687 10.351 39.324 45.624

9442 4218 2152 5459

97 16 18 11

9539 4234 2170 5470

9 11 2

15.276 16.886 0.787

469 1294 120

10 5 0

479 1299 120


Fishing Real Rope Service Industries Agro Product Miscellaneous Total

1 2 4 2 10 180

31.582 5.748 3.780 0.570 13.080 634.039

901 301 338 294 1870 128917

1 2 2 1 10 958

902 303 340 295 1880 129875

Source: BEPZA Up to June 2004, 180 industrial units were operational in the sixteen zones with a total investment of US$ 634.04 million. Of the operational units, 23 percent were RMGs and 10% textiles. 1, 28,917 local manpower have been employed in these industries. Investment & Export Table 6.7: Annual Investment and Export: Dhaka, Chittagong, Mongla, Comilla, Uttara and Iswardhi EPZs. EPZ

Dhaka

Chittagon g

Mongla

Comilla

Uttara

Ishwardi

199 6199 7

199 7199 8

199 8199 9

199 9200 0

200 0200 1

200 1200 2

2002 2003

2003 2004

2004 2005

Investm ent amount Export amount

8.26

14.4 5

31.0 1

26.2 4

35.4 5

19.8 0

24.05

32.01

59.14

41.2 8

73.2 2

119. 45

185. 64

259. 58

364. 72

447.5 1

466.7 6

554.79

Investm ent amount Export amount

27.6 7

16.1 3

22.8 9

42.5 9

36.1 1

14.1 8

24.30

22.37

42.14

186. 98

263. 8

343. 31

450. 41

452. 12

526. 01

620.3 5

680.7 0

641.28

Investm ent amount Export amount Investm ent amount Export amount Investm ent amount Export amount Investm ent amount Export amount

0.00

0.00

0.00

0.00

0.00

0.00

0.045

0.043

0.011

0.00

0.00

0.00

0.00

0.00

0.00

0.048

1.55

2.99

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.64

1.05

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.012

1.15

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.16

0.20

0.00

0.00

0.00

0.00

0.00

0.00

0.00

--

--

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.01

0.50

0.00

0.00

0.00

0.00

0.00

0.00

0.00

--

--


Total investment amount Total export a m o u n t

35.9 3 228. 26

30.5 8 337. 02

53.9 0 462. 77

68.8 3 636. 05

71.5 6 711. 69

33.9 8 890. 82

48.41

55.71

103.13

1067. 87

1077. 03

1200.2 2

Source: BEPZA From the above table Up to June 2004 goods valuing of US$ 1077.02 million were exported from the Zones during 2002-03, which account for 18 percent of national exports. During 2003-04 the amount of export was US$ 1200.22 million, which is 18.33 percent of total export. Chart 6.2: Annual investment & export in the EPZs.

Investment & Export (US Million)

Annual investment & Export in the EPZs 1400 1200 1000 800 600 400 200 0 1994

1996

1998

2000

2002

2004

Year Annual investm ent

Annual export

The total Investment by EPZA is higher in 2003-2004 that is U.S. $103.12 million. Which is low in 1996-1997 that is US $. 30.58 million Here the investment trend is increase for investment incentives are increase and terms & condition of investment by foreigner are relaxed in our country. In the same way the export are increases and the trend is upward moved. Here the export is higher than the investment so here are higher incentives in future to participate in national export. 6.8 Impact of FDI Barriers on MNC’s: In this section we highlighted the experience of two renewed multinational companies that are operating their business for a long period. Especially we highlighted the experience they had in handling their business operation in our country. Experience of BOC Bangladesh Ltd. BOC Bangladesh Ltd. has been operating in Bangladesh for several decades now starting from preindependence time and has been facing the existing administrative barriers, which the company finds manageable with difficulty. If these barriers were not there, the company's profitability would increase. It may be mentioned here that in light of the global position of BOC, profitability in Bangladesh is quite impressive. Experience of Siemens Bangladesh Ltd. Siemens Bangladesh Ltd. started its operation here in 1962. Since then it is contributing a great in the economic progress of our country. Although the company has the good track record in our country it faces difficulty at


various periods to conduct its normal operation. They pointed out the political influence and corruption as the root of all evil. They have to comply with various fake changes in the political power and have to spend a lot of money to have the hassle free operation in Bangladesh. Should the company need not to spend such money the profitability of the company must increase.

Finding of the Study 7.1

From the above discussions some key issues regarding FDI in Bangladesh can be focused: •

Bangladesh has experienced a more stable (less vulnerable) form of capital inflow, with FDI making up about 85-90 percent of the total inflows so far.

Both FDI and private debt inflows in Bangladesh have largely financed imports of machinery and equipment a sign that Bangladesh is only in the preliminary phase of FDI flows.

FDI and debt inflows have not helped in augmenting foreign exchange reserves so far and are not expected to do so over the next 10 years. In fact, as inflows grow so do outflows in the medium- to long-term.

The benefits of FDI are many and worth harnessing. But the downside risks must not be overlooked. The growing repayment obligation presents the prospects of net negative transfers in the future and poses major challenges requiring the country to search for new avenues of earning (or saving) additional foreign exchange. The benefits of FDI in terms of physical capital formation, transfer of technology, and know-how are sufficient to justify sustaining these flows. Capital controls are not the answer to a rising flow of FDI. To ensure that resulting payments liabilities remain within the country s debt-servicing capacity, it is essential to develop an effective non-intrusive reporting and monitoring system the main ingredients of which are presented in the study. 7.2 Future of FDI in Bangladesh •

According to a recent study, FDI inflows are projected to average about $900 million annually from 2001-2010, as compared to $620 million annually during 1992-2001. Outflows in this case would rise, on an annual basis, from a mere $129 million during 1997-2001, to almost $600 million during 2001-2005, and $1.2 billion during 2006-2010. The energy sector has been the principal recipient of the inflows but, if current trends continue, foreign investment in telecom, manufacturing, and services could overtake energy by 2006. All these expected trends in FDI depend on several factors. The regulatory body like Board of Investment and other government and nongovernment institution should take proper step to remove the obstacles in the way of foreign direct investment. 7.3

Problem of FDI in Bangladesh

Problems that have restricted FDI potentials in the country include excessive bureaucratic interference, alleged irregularities in processing papers, lack of commitment on the part of local investors, inordinate delays in selecting projects for feasibility studies, and frequent changes in policies on import duties for raw materials, machinery and equipment. Overlapping administrative procedures and absence of a transparent system of formalities often confuse not only investors proposing projects, but also staff and personnel assigned for discharging procedural responsibilities. Frequent transfers of top and mid level officials in various ministries, directorates and departments affect continuity and prevent timely implementation of strategic, procedural, and even routine duties. Many foreign companies feel disturbed and ultimately are discouraged by disruptions in the production processes in the country because of frequent power failures, poor infrastructure support, and labor and political unrest. An additional problem is the lack of professional personnel, i.e., the technical, managerial and innovative skills in the country needed to efficiently handle entrepreneurial function including risk taking, planning and coordination and control.


7. 4 Barriers of FDI in Bangladesh: Despite substantial changes in government policy, Bangladesh has failed to attract satisfactory levels of FDI and reasons for this failure can be identified quite easily. Government policy is obviously an important factor influencing inflows of FDI. But, there are other, equally important factors. So far as the investment related policies of the government are concerned, these are fine in spirit, but their actual implementation continues to create obstacles for both local and foreign investors. An inefficient and not-too honest bureaucratic system is primarily responsible for this problem. All the administrative barriers are in fact generated from this noninvestment-friendly bureaucratic system. 7.5 Extent of the barriers: Policy legislation and implementation In this context, the extent of the administrative barriers is quite longwinded and inter-related. Poor policy design and implementation, competitive weakness, structural impediments, low quality of infrastructure and skills, weak institutions, poor governance and administrative hassles represent the administrative barriers that discourage potential FDI. But the main drawbacks in the bureaucratic system are inefficiency and corruption, turning the whole administrative functionaries into a harassing experience. Administrative barriers are also translated in different forms and vary from sector to sector. In Bangladesh, we are used to face barriers in different regulatory bodies in the form of their policy, legislation and functions. National Board of Revenue (NBR) and Board of Investment (the Investment Promotion Agency) are two important agencies directly related with FDI operations. 7.6 Cost of inefficiency is high indeed The governance and management of the government entities has been largely inefficient, ineffective and unresponsive. The cost of economy of inefficient services of state-owned entities in energy, telecommunication, ports, railways and other public utilities and banking, in terms of increased cost of doing business has been high indeed. Power outages and voltage fluctuations, shortage of gas supply particularly due to limited network, limited telephone services, inadequate urban water supply, and the high incidental and transaction costs associated with these services have imposed considerable costs on entrepreneurs. In fact, the activities of the public sector utility service providers have been inward looking and have not worked well, while the rationale for 'public' provision has been weak or missing in many areas. And much of the shortfall in their performance can be linked to ineffective and inefficient management and unresponsive governance. 7.7 Corruption is a disguised form of taxation Reasons for the extensiveness of official corruption can be numerous. Many of these are cultural or sociological, but the more important ones are organization-related and economic policy-related in nature. Corruption thrives in an environment of pervasive bureaucratic and regulatory controls. Extensive discretionary powers in the hands of the officials and weakness in the legal framework also induce corruption. Though corruption afflicts different sections of the society in diverse ways, its costs fall heavily on the investors, entrepreneurs as well as the business community. For them, corruption is a disguised form of taxation. When regulations and controls are pervasive, and effective means of obtaining redress through legal or administrative procedures are absent, businessmen end up bribing officials to overcome them. Many companies regard bribery as just one of the costs of doing business and show these payments as legitimate business expenses. 7.8 Policy discrepancy Bangladesh offers generous opportunities for investment under its liberalized Industrial Policy and exportoriented, private sector-led growth strategy and the relevant policies are attractive in paper. But, there are several policy discrepancies that are quite enough to discourage FDI. 7.9 Differential treatment Although existing regulations provide for equal treatment of domestic and foreign investors, certain discriminatory rules continue with regard to foreign investment. Sanctioning requirements for particular categories of foreign investment, restrictions against capacity expansion, special regulations for supplier’s credit and pay-as-you-earn-schemes are some of the areas of differential treatment.


7.10One stop service of BOI In Bangladesh, the Board of Investment (BOI) has created a cell to provide all types of services and assistance to private investments including FDI. But, offering one stop service to the existing and prospective investors in real terms is yet to materialize. The officials of several state-owned utility service providers, working for BOI one stop service, are less capable and less powered to provide necessary service. 7.11Dictated regulatory authority To facilitate investment and business activities, there are some government agencies working as regulatory authorities for the respective sectors. Though these regulatory bodies were supposed to enjoy operational autonomy, in practice their autonomy has been limited. This has affected their ability to respond effectively and quickly through prompt decisions catering to demands and necessity of the entrepreneurs and investors. For instance, supervisory control over the Public Finance Institutions (PFIs) by the Ministry of Finance, rather than Bangladesh bank (Central Bank), has weakened their autonomy and politicized their management. As a result, required services from PFIs become less effective and time spending. 7.12Legal paradox The legal procedure is very cumbersome in most South Asian countries and laws are not properly implemented. The archaic laws and regulations are not supportive of the policy incentives to FDI. Judicial dispensation process is mostly too lengthy and at times takes more than a decade in handing out a judgment. This is discouraging for investors in general and foreign investors in particular. 7.13 Protection of Intellectual Property Rights (IPR) It is being observed that Bangladesh is not moving quickly enough to ensure that the country's laws and regulations are in conformity with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Although there are existing laws in the country for IPR protection, these are not adequate. It is well known that there exists a direct relationship between increased foreign direct investment and IPR protection and in the backdrop of declining FDI flow; governments of South Asian countries must take immediate steps for protection of IPR. 7.14Lawsuits There are many lawsuits by taxpayers against the government and majority of which the government loses. But, due to cumbersome legal procedure such lawsuits become inconvenient for the businessmen. 7.15Hassles in implementation The major quandary of administrative barriers lies in the gap between investment and trade related policies, and lack of co-ordination between various government agencies in the implementation process. As a result, investors face hassles and the cost of doing business goes up. 7.16Discretionary authority of tax officials Tax officials have enjoyed the discretionary power and it appears that they exercise it to harass businessmen and investors. The discretionary authority of Tax officials made many of them corrupt. Some time, those who are willing to pay taxes are not able to pay even the amount assessed by tax officials themselves as the corrupt officials seek a 'percentage' from taxpayers in lieu of reducing the assessed value. 7.17Registration complexity The procedure for registration with the sponsoring agency has been an annoyance to entrepreneurs and does not serve any useful purpose. With regard to registration with the 'Inspectorate of Factories and Establishments' the rules governing the role of the inspector seem to provide ample discretionary power and put industries in a disadvantaged situation.


7.18Lack of coordination among state entities There is a serious lack of co-ordination between the policy implementing agencies of the government and because of this investor's suffering goes up. This induces lot of hassles in the implementation process and creates barriers for the investors in getting due incentives offered by the government and ultimately discourages foreign investors to proceed on. 7.19Fiscal policy changes Any change in the fiscal change after passage of Finance Act seriously disturbs any business plan and discourages FDI in particular. In Bangladesh, quite often policies are changed through issuance of Statutory Regulatory Orders (SROs). 7.20Lengthy customs processing It takes something like 25 signatures to release a consignment from customs. And it takes more than the stipulated time to release a consignment supervised by an authorized PSI firm even when the consignment is not selected for physical inspection. 7.21Infrastructure Also linked with administrative barriers the level of infrastructure development is another factor that affects the level of foreign investment and it can be hardly claimed that South Asian countries have reached a level of infrastructure development that will satisfy foreign investors. Again this administrative and bureaucratic inefficiency failed to increase proper infrastructure support. 7.22Restricted telecommunication access Bangladesh's telecommunication sector lags considerably behind compared to most other developing countries of the region and the sector strategy has been highly inward looking. Restricted access to telephone connections, noncompetitive pricing and poor quality of services, linked to the inefficiency of old telephone exchanges and transmission links and public monopoly in fixed lines, have imposed a high cost on the economy. This has raised the cost of doing business. 7.23Power supply Bangladesh has one of the lowest per capita consumption of power and coverage of electrification among developing countries. System losses in the power sector have often exceeded 40 per cent of gross generation. Involvement of the government in the power sector has created an overlapping and confusing situation regarding responsibilities. In fact, inadequate and inefficient power supply continues to impose a high cost on the economy. The extensive load-shedding from time to time, particularly during peak hours, has disrupted industrial production thus affecting the country's external competitiveness. 7.24Expensive port The cost of inefficient cargo handling at the Port has been particularly high, thus affecting the external competitiveness of the economy. There are numerous workers' unions at the port, all of which are crucial for handling cargo. In case that one of these associations decides to call a strike, the whole system comes to a standstill. There are, of course, the hidden unofficial costs for clearing cargo, be it for import, be it for exports. In fact the port happens to be one of the most expensive ports (container wise) in the world, singularly due to these "unofficial" payments, to which the authorities concerned are comfortably oblivious, evidently to their benefits. Another factor is the inefficiency and bureaucratic logjam, which increases the lead-time for shipments. Hence, even if a foreign client is interested in ordering from Bangladesh, the company is compelled to procure the products from elsewhere if it is quite urgent. Not only do the entrepreneurs lose, the government also loses its due tariffs and levies from the port. (Source: The Publication of the Bangladesh accountants “Finance and economics� Investment analysis and portfolio management written by frank K, Reilly & Keith C, Brown).


Conclusive Remarks and Policy Implication With the expansion of free market economy around the world MNCs have been getting more opportunity to expand their business internationally. MNCs are participating in FDI and portfolio investment. They are covering both the development and developing countries. In order to have a better understanding global FDI flow and Bangladesh scenario has have considered. It is observed that Bangladesh is not having lion share for the flow of FDI around the world. Bangladesh has shown some positive indication of FDI among the SAARC countries. The administration of FDI is more important to attract foreign investors. BOI has been employed to take care of the administration FDI in Bangladesh. It is observed that they are undertaking various supportive measures to attract foreign investors. It is observed that their activities are not free from shortcomings. Necessary steps should be undertaken to overcome these problems. An empirical analysis of the FDI flow in Bangladesh has been done. Our analysis suggest that the benefits of FDI are many and worth harnessing. But the downside risks must not be overlooked. The growing repayment obligation presents the prospects of net negative transfers in the future and poses major challenges requiring the country to search for new avenues of earning (or saving) additional foreign exchange. The benefits of FDI in terms of physical capital formation, transfer of technology, and know-how are sufficient to justify sustaining these flows. To ensure that resulting payments liabilities remain within the country s debt-servicing capacity, it is essential to develop an effective non-intrusive reporting and monitoring system the main ingredients of which are presented in the study. This study has identified some major problems that hinder the flow of FDI in this country some factors have been put forwarded to over come these problems. In fine it can be argued that Bangladesh has good prospect to altercate FDI If the Government can maintain favorable environment by providing attractive packages Bangladesh will be a good choice for FDI in the years to come. One can now look for the ways to overcoming the barriers to FDI as we have mentioned above. Here, we would recommend following measures that the authorities concerned might consider: Ensuring good governance Good governance denotes a desirable state of affairs and so is the key to success of all the reforms. Political and bureaucratic accountability are the two principal components of good governance, and without ensuring them, good governance is not possible. Securing progress on this front is the highest priority as continued difficulties pose a serious threat to the sustainability of even the development achieved already. Establishing the rule of law is in fact a pre-requisite to ensuring good governance. Accountability and transparency Accountability and transparency continue to remain the twin elusive prerequisites for the overall development of the country. Private sector investment and FDI inflow are severely hindered by the administrative barriers that arise out of a lack of transparency and accountability, which logically leads to inefficiency and corruption. Competence and efficiency, which are both appallingly, lacking in the bureaucracy, will both become achievable goals with the infusion of transparency in decision-making and governance. This will also greatly reduce what is commonly known as "red-tapism" or "bureaucratic wrangling" since the tiers of the decision making process are bound to become fluent and responsible if they are held accountable for their work. Co-ordination among state agencies Without reducing the utter lack of co-ordination among the state agencies, the services and functionaries cannot be efficient. Assuring proper co-ordination among ministries, departments, regulatory bodies, and faster decision-making in the implementation process will enhance the flow of investment.


Strengthening the regulatory authority Government agencies responsible for facilitating investment need to be more active. In this regard, full autonomy to the agencies like the central bank, investment promotion agencies, telecom regulatory authority, energy regulatory authority, securities and exchange commissions etc., is a prerequisite. Rightsizing the government The size of the state organs is quite large and thus mostly inefficient, unproductive and hazardous. So, rightsizing the government is important. By reducing the number of officials in the decision making process in various state organs, transparency and accountability of bureaucracy can be established. Offering a reasonable compensation package to the officials retained is also one of the key factors in ensuring transparency and accountability. Judicial and legal reforms A sound judicial system, which is a must for good governance, is possible when the judiciary can exercise its authority independently. In this regard, separation of the judiciary from executive branch of the government is essential as influence of the executive on the lower judiciary continues to be exercised. There is need for capacity building in the judicial system in order to ensure speedy disposal of cases. Archaic laws, especially those related with trade and investment should be updated in line with the needs of the day. Tackling corruption Tackling corruption in banking, power, other state-owned enterprises and tax administration ought to be an urgent priority. A comprehensive resolution of the corruption problem in banking, power and other state-owned enterprises will require privatization along with independent regulatory bodies functioning in the public sector. Fiscal reform Regarding tax administration, reform option includes establishing an autonomous tax institution with proper incentive and accountability. Countries of the region can learn from the international experience of a number of countries including the Internal Revenue Service of the USA. There is, however, a need for further deregulation of authority. It is also necessary to establish a coordinating mechanism to take decisive and continuous steps in resolving problems identified in relation to project implementation. Infrastructure reform The main policy challenge is to redefine the role of public sector in infrastructure development by gradually allowing the private sector to play a bigger role. Public sector's role should be restricted to regulatory functions only. Mention may be made here that, Bangladesh's existing Industrial Policy includes infrastructure as a thrust sector acknowledging a lead role of the private sector supported by special incentives and the Finance Minister of Bangladesh, in his 2002 budget speech, stressed the need for more private sector participation in infrastructure development of the country. The Infrastructure Investment Facilitation Center (IIFC) of Bangladesh has been interacting with the private sector to attract private investment in this sector. Other countries of the region could take lesson from Bangladesh in this regard. (Source: The Publication of the Bangladesh accountants “Finance and economics� Investment analysis and portfolio management written by frank K, Reilly & Keith C, Brown. In conclusion, it could be said that experiences referred to as above are based on the same encountered in Bangladesh. But, these are more or less the same in other countries of the region. If the respective governments do not take appropriate measures, it would be difficult to attract the expected level of FDI.


The policy regarding the foreign direct investment should be clear and flexible and should contain some lucrative options for foreign investors. This will certainly boast up the health of FDI in our country. Our country is very much underdeveloped. In the context of an underdeveloped country the role of FDI is very vital and essential. We do not have sufficient internal resources to meet up the growing demand of increasing population at different aspect. As a result we have to rely greatly on FDI to accelerate our economic growth and to meet up the demand. Another point is credible and must have to note is the necessity of common census of foreign direct investment. Only few months back the BOI and BB have provided contradictory result regarding the FDI in our country. But there should not be any discrepancy in regard to this. This figure represents the condition of the country and should be accurate in nature.


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