Foreign Direct Investment
Executive Summery
FDI considers some sort of main
aspect throughout the economy regarding Bangladesh through quickening Yucky
Every day Merchandise (GDP), stand up as well as local conjecture had taken following
by basic fiscal improvement. Therefore it is crucial for the making country
including Bangladesh to complete convincing steps with being sure the thought
out of the way personal professionals to allow them to get the amiable climate
for you to add their particular cash. They will believe that their particular
aspect in the business ground regarding Bangladesh will be consciously famous.
In this particular relationship, sympathetic polices, disentangling
administrative routines, venture motivation as well as evacuation regarding
wasteful bureaucratic system must be guaranteed.
Introduction
Background of
the study
Foreign Direct
Investment (FDI) is considered as one of the imperative elements for general
improvement procedure of a creating nation like Bangladesh. Modern improvement
is a critical pre-imperative for financial development of a creating nation.
Bangladesh is essentially a nation of agrarian economy. For her financial
advancement, modern economy is basic. So Bangladesh is step by step moving from
agrarian economy to mechanical economy. In the time of globalization, it has
turned into a smoldering issue to trade sees, thoughts, capital and HR.
Legislature of Bangladesh is attempting to make a positive venture environment
through presenting financial strategies, motivating forces for speculators,
advancing privatization et cetera. Accordingly, the commitment of FDI is
essential in the upgrade of a nation's financial development.
Specialists have stamped
FDI as a critical variable in quickening monetary achievement and abundance of
a nation and in addition an entryway in making employments, encouraging economy,
and making more focused environment and contributing efficiency to the host
nation.
In Bangladesh, FDI
assumes a critical part in GDP increasing speed and monetary development
(Mottaleb 2007). FDI has a mentionable part in the modernization of the Bangladesh
economy for most recent two decades. It offers the nation in building up base,
some assistance with creating more occupation, creating limit, improving
aptitudes of the work power of the host nation through exchanging mechanical
learning and administrative capacity, and helping in incorporating residential
economy and the worldwide economy. Different positive characteristics of
Bangladesh is currently drawing the consideration of the financial specialists
from both created and creating nations.
In Bangladesh, it is
accessible to get gifted work at moderately low wages. Additionally, there is
sensibly steady macroeconomic environment. These two critical elements can make
Bangladesh a charming destination for remote speculators. Most reduced pay rates
among the Asian nations, bearable expansion rate, sensibly stable (with the
exception of earlier year) swapping scale, speculation neighborly custom
regulations and alluring motivator bundles make Bangladesh a good venture
destination. Bangladesh turned out to be more open toward FDI arrangements in
the course of the most recent decades. These above components will absolutely
keep up the late progression in FDI interest in Bangladesh by the remote
financial specialists.
Objectives of
the study
The objectives
of this project paper are as follows:
1.
To
evaluate the FDI status in Bangladesh.
2.
To
find out the prospects & problems of FDI in Bangladesh
Foreign Direct
Investment (FDI)
FDI is a vital classification of global
venture that demonstrates a long haul relationship between the immediate
financial specialist and the endeavor. It shows the impact of the speculator on
the administration of the undertaking. Direct venture relates the starting
exchange between the financial specialist and the endeavor. It likewise
demonstrates the exchanges in the middle of them and among subsidiary
undertakings, both joined and unincorporated. The parts of FDI are: an) Equity
capital, b) Reinvested income and c) Intra-organization advances.
Value Capital expresses the
proprietorship and additionally the offer obtaining of an endeavor by a remote
financial specialist. Reinvested income exhibit that divide of procuring of a
speculator which is not circulated back to him. This implies the benefits that
are not given out as profits. It is kept inside of the firm. Intra-organization
advances incorporate obligation exchanges and these exchanges are with respect
to loaning by the remote guardian organization to its offshoots as both short
and long haul.
Monetary
Growth
Monetary development is an ascent in
national or per capita wage of an economy. In the event that a nation expands
its generation of products and administrations, by whatever ways and gets to be
ready to build its normal salary, it can be specified that the nation has
accomplished "monetary development". Monetary development can be
measured in ostensible terms. This incorporates expansion, or in genuine terms
that is balanced for swelling. Gross domestic product or GNP per capita is
utilized as a part of looking at the financial development of one nation's to
another.
FDI
and Growth
It is uncovered in survey of different
written works accessible on FDI that outside speculation is still seen as an
issue of civil argument. Feelings are still separated in choosing that whether
FDI is blast or bane for host nations monetary development and improvement. FDI
has its own particular benefits and bad marks. Numerous researchers contend
that created countries may attempt to attack the power of host nation through
FDI. With a specific end goal to gain snappy benefit they may abuse the regular
assets at the speedier rate and in this manner leave the host nation denied
over the long haul. It have been expected that FDI is a major risk to survival
of local players. Once more, numerous are of the sentiment that fundamental
goal of remote speculations is to acquire benefits by disregarding the general
social and monetary improvement of the host country.
Key
Findings by different analysts
There is worldwide race for pulling in
FDI, yet the amount it can add to host nation's financial improvement is a
matter of assessment.
Aitken and Harrison (1999) have evaluated the
contribution of FDI to domestic productivity and found positive impacts of FDI
on economic development. Again, Levine et al. (2000) found negative results on
economic development.
Rothgeb (1984) found an
immediate troublesome effect of FDI flows on developing countries. This effect
would overcome after a short period of time, with positive impacts on growth.
Rothgeb (1984) used his model to explore the impact of foreign investment on
the growth of Bangladesh and found that FDI has a positive impact on growth. He
also found a strong positive effect of the change in the level of domestic
investment on growth.
Present FDI
Status
Bangladesh has attracted USD 913 million foreign
direct investments (FDI) in 2010 calendar year, a leap by 30 per cent. This
upgrades the country's position to 114 from 119 out of 141 nations in the World
Investment Report (WIR). During this period the telecom sector received USD 360
million FDI, the manufacturing sector received USD 238 million in investment
from abroad, USD 145 million in the textile and clothing sector, while leather
and leather products got USD 46 million. (The financial Express, 27 July, 2011)
The trend of Inflow of FDI in Bangladesh
has increased over the 1980s as compared to earlier periods and this same
momentum continues in 1990s as well. The total inflow of FDI has been
increasing over the years. During the period of 1977-2010, total inflows of FDI
were USD 8927.9 million, among which the total inflows of FDI during 2006-2010
was USD 4158.63 million. In 1977, this inflow was USD 7 million and in 2008,
annual FDI reached to USD 1086.31 million. Unfortunately, there was a
declination in inflows of FDI in 2010 which was USD 913.32 million (Source:
Survey Report, Statistics Department, Bangladesh Bank).
 |
| FDI Inflows (in million USD) by components in
Bangladesh during 1996-2010 |
FDI
in Bangladesh consists of three components: Equity
capital, Reinvested Earnings and Intra-company loans. These components have
fluctuated considerably in the last two decades. In the early year of 1996, the
total FDI inflow was only 210 million USD where reinvested earnings were the
bigger portion. This trend continued up to 1998. Then there is a sudden decline
in terms of total inflow as well as component wise inflow of FDI. Beside a
slight increase in 2000, this declining trend continues up to 2003. After then
total inflow continues to rise with some ups and downs. The portion of equity capital l continues to have a bigger part in the total FDI inflows. In 2008 the
total inflows was 1100 million USD which is the highest ever.
The
shifting of component wise FDI inflow in Bangladesh is clearly in the figure
3.2.2 and 3.2.3. In present years, the major share of FDI inflow in Bangladesh
come in equity capital form. In 1996 the share of equity capital in total FDI
was 30 percent which increases to 57 percent in 2010. In 1996 share of
reinvested earnings was 53 percent which decreased to 40 percent in 2010
FDI Inflows by Areas (EPZ and non EPZ)
 |
FDI Inflows (in million USD) by area (EPZ and
non EPZ) in Bangladesh during 1996-2010
Source: Survey Report,
Statistics Department of Bangladesh Bank and Foreign Direct Investment in
Bangladesh (1971-2010), Board of Investment.
That figure shows that despite the initial
increase and steady continuation, FDI inflows in Non-EPZ areas was in declining
trend during the period of 2001-2003. In 2004 it increased to 800 million USD
and this trend continued up to 2005.The FDI inflows in Non-EPZ areas in 2010
recorded to USD 795.15 million which is 87 percent of total inflows whereas in
the beginning of this period (in 1996) it was USD 189.3 million which is 82
percent of total inflows. In the EPZ areas, the FDI inflows were always in a
steady direction.
FDI Inflows by
sectors
Sector-wise analysis of
FDI reveals the fact that a shift has been made by the foreign investors in
their investment in Bangladesh (Annex Table-3.4). The table shows the trend of
FDI towards power and energy, manufacturing and telecommunications, whereas the
neglected sectors were agricultural, Services and trade and commerce. In 2005,
the main focus of investment was in the manufacturing sector. The success in
textiles through the ready-made garments (RMG) industry was a vital part of
this investment. The pie chart shows the shift of FDI in the sectors in Bangladesh.
The pie chart draws a clear picture how the dimensions of FDI inflows have
changed in recent years. The reduction in FDI shares of manufacturing
demonstrates that its stronghold position for foreign investment is in
declining state. On the other hand, telecom sector is gaining prominence during
present years. In 2008 the telecommunications sector overtook manufacturing
sector as the leading recipient of FDI. Due to increased privatization efforts
by the government, telecom has emerged as one of the fastest growing sectors in
the Bangladesh economy.
Much of this can be
explained by the increased competition between large private corporations that
have magnified efforts to attract FDI and attain better and latest technology
to optimize the profits. In addition to that, the energy sector draws lower
amount of.
FDI Inflows by
countries
The country-wise FDI inflows in Bangladesh from
top 10 investing countries during 1996-2010 are presented in figure given below.
|
 |
FDI Inflows (in million USD) by countries during
1996-2010
Source: Board of Investment, Bangladesh.
|
The figure shows
that United Kingdom has gained the top most position among the top 10 investing
countries in Bangladesh during 1996-2010 in investing in various sectors of economy.
Out of total FDI inflows from the top 10 investing countries during this
period, 17.4% was from United Kingdom, 13% from USA, 8% from Egypt, 7.7% from
South Korea,6.4% from Netherlands, 6.2% from Singapore, 5.6% from Hong Kong, 5.2% UAE, 4.8% from Japan, 3.5% from Malaysia, 3.2% from Australia, 2.1% from Denmark, 2.1% from Switzerland.
Prospects &
Problems of FDI in Bangladesh
Prospects of FDI
Bangladesh has been promoting FDI for decades with
the most liberal investment policy and incentive regime in South Asia. The
Foreign Private Investment (Promotion and Protection) Act, 1980, ensures equal
treatment for local and foreign Investors. This act also provides legal
protection to foreign investment in Bangladesh against nationalization and
expropriation. It also gives the guarantee of repatriation of capital and
dividend.
Bangladesh has achieved
a consistent GDP growth of over 5% in the last decade and never experienced a
negative growth. Even Bangladesh sustained growth of over 5% during the recent
global economic crisis. In 2009 Bangladesh achieved a 5.9% GDP growth. Various
necessary steps like generation of huge number of SMEs, success in microcredit
and NGO activities, rapid spread of telecommunications services, record level
of foreign remittances, acceleration of export earnings are taking the economy
at a higher level of growth. Its investment friendly climate offers generous
and attractive packages of incentives for foreign investors like 100%
ownership, tax and duty exemptions and others.
Actually the vision is
that the unique opportunities in energy and power, infrastructures,
manufacturing and knowledge-based sectors will attract substantial investment.
Bangladesh has become a least cost producer in the world with various positive
factors like industrious low-cost workforce, strategic location, regional
connectivity and worldwide access, strong local market and growth, low cost of
energy, proven export competitiveness, competitive incentives, export and
economic zones, positive investment climate.
Bangladesh is ranked 119th position globally and 4th in the SAARC region in the Ease of Doing Business
Ranking by World Bank and IFC report entitled "Doing Business in
2010".
Facilities and
incentives for foreign investors
FDI has been allowed in all sector of the economy
except five industries - defense equipment, nuclear energy, forest plantation,
security printing and railways.
The investors
enjoy the following incentives for investing in Bangladesh –
a)
5
to 7 years corporate tax holiday for selected sectors.
b) Private
power companies enjoy corporate income tax exemption for a period of 15 years.
c) Tax
exemption on royalties, technical knowhow and technical assistance fees and
facilities for their repatriation.
d) Tax
exemption on foreign loans regarding interest.
e)
Tax
exemptions on capital gains from transfer of shares by the investing company.
f)
Remittances of up to 50% of salaries of
the foreigners employed in Bangladesh and facilities for repatriation of their
savings and retirement benefits at the time of their return.
g) No
restrictions on issuance of work permits to project related foreign nationals
and employees.
h) Facilities
for repatriation of invested capital, profits and dividends.
i)
Provision of transfer of shares held by
foreign shareholders to local investors.
j)
Reinvestment
of remittable dividends would be treated as new investment.
k) An
investor can wind up on investment either through a decision of the AGM. Once a
foreign investor completes the related formalities to exit the country, he or
she can repatriate the sales proceeds after securing proper authorization from
the Central bank.
Bangladesh makes no
difference between foreign private investors and domestic investrs regarding
investment incentives or export and import policies. In Bangladesh foreign
investors enjoy the access to domestic capital markets for working capital in
the form of loans sanctioned from the commercial banks and development
financial institutions.
Bangladesh Bank has
prepared a sovereign and highly effective credit rating report. This should help
to attract FDI as well as boost short-term borrowings for the country's private
and public sectors. Country’s image will be enhanced by this sound and
sovereign credit rating report. It will certainly help local financial
organizations to tap low-cost borrowings from foreign sources.
Problems of FDI
Although Bangladesh is trying to be as friendly as
possible to FDI, she is facing some problems regarding investment from foreign
sector. The FDI friendly policies of the government and a culture of hospitality
to foreigners are very much positive to welcome FDI in Bangladesh. But it is a
matter of concern that FDI records in the country in terms of the number of
projects implemented as compared to those officially registered is frustrating.
Only 72 FDI projects went into production in end of 1999 and 27 were in process
of implementation of the 365 FDI projects registered during the year of 1996 -
1998, while the remaining 266 projects languished only as the file-cases.
The problems
that have restricted FDI potentials in the country are as follows:
·
Bureaucratic
interference
·
Irregularities
in processing papers
·
Overlapping administrative procedures
·
Absence
of a transparent system of formalities
·
Frequent power failures
·
Poor
infrastructure support
·
Labor
unrest
·
Political unrest
·
Lack
of professional personnel
·
lack of commitment on the part of local
investors
·
Unexpected
delays in selecting projects in studying feasibility
·
Frequent changes in policies on import
duties for raw mate rials, machinery and equipment etc.
Impact of FDI
inflow on the economy of Bangladesh
Impact of FDI
inflow
Now a day’s Bangladesh
is trying her best to attract foreign direct investment to boost up her
economic condition. Bangladesh has liberalized a number of policies so that she
can attract more foreign direct investment into the country.
It is usually considered
that foreign capital inflows can boost up domestic capital. It is believed that
FDI accelerates economic activities and eventually causes economic growth. It
increases employment opportunities. FDI brings highly productive resources into
the recipient economy. This causes positive effects on the employment creation
not only in the sectors that attract FDI inflows but also in the supportive
domestic industries.
Dependent
Variables
GDP
Gross domestic product (GDP) is the market value of
all final goods and services produced within a country within a given period.
There are many factors to accelerate GDP. It is
assumed that the GDP is influenced by FDI Inflow. If the explanatory power of
FDI Inflow, the independent variable is high over Gross domestic product (GDP),
the dependent variable, the assumption will be proved.
Export
There are many factors that can affect export. It is
assumed that FDI Inflow is one of the prominent factors that influence the
export. If the explanatory power of FDI Inflow, the independent variable is
high over export, the dependent variable, the assumption will be proved.
Domestic
Investment
There are many factors
that can affect domestic investment. It is assumed that FDI Inflow is one of
the prominent factors that influence the domestic investment through increasing
competitiveness. If the explanatory power of FDI Inflow, the independent
variable is high over domestic investment, the dependent variable, the
assumption will be proved.
Independent
Variable
FDI Inflow
FDI Inflow refers to the long-term investment in a
foreign country. It consists of three components: equity capital, reinvested
earnings and intra-company loans.
Hypothesis of
the study
H1:
FDI Inflow has positive and significant impact on GDP. H2:
FDI Inflow has positive and significant impact on export.
H3:
FDI Inflow has positive and significant impact on domestic investment.
Impact of FDI on GDP
The following regression equation is
found,
Y1
= 56987 + 158.757× FDII
Here Y1
= GDP in million USD
Table: Model Summary and
ANOVA (F)
|
|
|
Adjusted R
|
Std. Erro r of
|
F
|
Sig
|
|
Model
|
R
|
R Square
|
Square
|
the Estimate
|
|
|
|
|
1
|
.757(a)
|
.573
|
.540
|
35590.26862
|
17.451
|
.001(a)
|
|
|
|
|
|
|
|
|
|
a
Pred ictors: (Constant), FDI Inflow in million USD b Dependent Variable: GDP in
million USD
Table : Coefficients (a)
|
|
Unstandardized
|
Standardized
|
|
|
|
|
|
Coefficients
|
Coefficients
|
|
|
|
Model
|
|
B
|
Std. Erro r
|
Beta
|
t
|
Sig.
|
|
1
|
(Constant)
|
56987.297
|
24057.971
|
|
2.369
|
.034
|
|
|
FDI Inflow in
|
158.757
|
38.004
|
.757
|
4.177
|
.001
|
|
|
million USD
|
|
|
|
|
|
|
|
|
a Dependent
Variable: GDP in million USD
|
|
|
|
|
|
The above table presents regression coefficients
that are obtained from the regression Model. This is observed that the
independent variable FDI Inflow has exerted significant influence on GDP.
As expected, FDI Inflow
is found to have positive and significant relationship with GDP.
Impact of FDI on Export
The following regression equation is
found,
Y2
= 934.8 + 15.7× FDII
Here Y2
= Export in million USD
Table: Model Summary and
ANOVA (F)
|
|
|
Adjusted R
|
Std. Erro r of
|
|
|
Model
|
R
|
R Square
|
Square
|
the Estimate
|
F
|
Sig.
|
1
|
.811(a)
|
.658
|
.632
|
2941.73737
|
25.015
|
.000(a)
|
|
|
|
|
|
|
|
a Predictors:
(Constant), FDI Inflow in million USD
b Dependent
Variable: Export in million USD
The above table reveals that F value is significant
at .000 level. This indicates that the variation caused by FDI Inflow in the
export is significant.
The value of Correlation Coefficient (R) and
Coefficient of Determination (R square and Adjusted R square) of the model are
shown in the Table. The values of correlation coefficient is .811 and R square
is .658. These show that FDI inflow, the independent variable under reference
has high degree of correlation with export.
Table : Coefficients (a)
|
|
Unstandardized
|
Standardized
|
|
|
|
|
|
Coefficients
|
Coefficients
|
|
|
|
Model
|
|
B
|
Std. Erro r
|
Beta
|
t
|
Sig.
|
|
1
|
(Constant)
|
934.807
|
1988.528
|
|
.470
|
.646
|
|
|
FDI Inflow in
|
15.711
|
3.141
|
.811
|
5.001
|
.000
|
|
|
million USD
|
|
|
|
|
|
|
|
|
a Dependent Variab le: Export in million USD
|
|
|
|
|
|
The above table presents regression coefficients
that are obtained from the regression Model. This is observed that the
independent variable FDI Inflow has exerted significant influence on export.
Conclusion &
Recommendations
In Bangladesh FDI plays
a very important role in achieving expected economic growth. FDI flows have
been successful in increasing GDP. At the same time, FDI has also made a
contribution in improving the income level of Bangladesh. FDI can ensure
Bangladesh to realize higher growth by having the capabilities of using all the
resources to the fullest potential. There is an increasing trend in foreign
investment due to positive effect of the incentives provided and changes in our
economic policies. FDI has positive correlation with GDP, export and private
investment.
In order to sustain the
economic growth and continue the present status of FDI inflow, Bangladesh needs
to maintain some effective steps. The administrative system of the country
should be reformed through appropriate and effective measures. The bureaucracy
needs to be reorganized. The control of bureaucracy should be minimized.
Government should look
into the law and order situation to ensure business friendly environment. A
social consciousness is much more needed to ensure the rule of law and reduce
the various effects of corruption. Both the government and private sector
should be taken much more priority in this sector. They need to come ahead in
investing in developing the infrastructure. Appropriate policy measures are
needed to be developed so that private sector can run smoothly It is important
for a developing country like Bangladesh to modernize the laws relating to
business and investment. It should be done focusing on international practices.
The development of new industrial parks can play a very important role in
attracting foreign investment in Bangladesh. The government may consider
setting up new EPZs to encourage export oriented investors. Necessary steps
should be taken to improve the image of the country abroad. An investment
promotion agency needs to provide functions such as investment generation and
policy advocacy. Bangladesh needs to strengthen economic and commercial
diplomacy in attracting FDI in by rapid globalization and increasing
competition. Bilateral relations with potential investor countries should be
improved.
Bangladesh should take
effective steps in accelerating reform measures for banks, other financial
institutions and capital market. A good governance and political stability
should be ensured. Corporate governance will play a key role in enhancing the
investment climate of Bangladesh. So we should implement corporate governance
strongly in financial sector. The rate of corporate taxes is 40% for non-
listed companies. It is one of the highest in Asia. This rate should be
favorable for investors. Different ministries and organization needs to work in
an integrated manner to successfully address issues regarding sectors.
In future, the prospect of the
Bangladesh economy would be affirmative if initiatives can be taken to
consolidate the proposed reforms. Recently Bangladesh has taken steps to
simplify various processes to encourage increased FDI. The government, total
financial sector and foreign investors must work together to achieve the goal
of making Bangladesh a progressive economy by the end of this decade.
