Foreign Direct Investment

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.

Results

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.