Foreign Direct Investment and Its Impact on Economic Development of Bangladesh
Chapter- I
Background of Study & Methodology
Chapt er
Introduction
1 Economic growth in any country depends upon the sustained growth of productive capacity, supported by savings and investment. Low levels of savings and investment, particularly in developing countries and least developed countries, results in a low level of capital stock and economic growth. The recognition of the role of knowledge capital in economic growth creates a basis for analyzing the role of FDI, which brings new technology and knowledge along with capital. The objective of this paper is to analyze the effects of foreign direct investment (FDI) and its role in driving economic development in Bangladesh. Bangladesh is virtually located as a bridge between the emerging markets of South Asia and fastest growing markets of South East Asia and ASEAN countries. With the proposed concept of a "Bay of Bengal Growth Triangle" with its apex Chittagong port extending south-west to Calcutta, Madras and Colombo and the south-eastern arm extends through Yangon, to Thailand, to Penang with the third arm to Colombo, this region should have growing attention of the investment world. Bangladesh has the potential to be an entry port to the region, a potential small
scale Singapore, for the region covering Bangladesh, Nepal, Bhutan, eight northeast Indian states (of Assam, Meghalaya, Monipur, Imphal, Arunachal, Nagaland, Mizoram and Tripura) and resource-rich northern Myanmar, a land locked region. Bangladesh is poised to become a regional hub where activities relating to assembling, manufacturing, trading and services, would be some of the areas that are picking up over the years. This geopolitical-economic location of Bangladesh indicates its history of being a nation of sea-farers, traders and suppliers. The definition of FDI will be followed in accordance with the United Nations Conference on Trade and Development (UNCTAD) and its World Investment Report 2006 which states that “FDI is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)”. The Bangladesh Board of Investment maintains the same definition. FDI consists of three core parts: Equity Capital, Reinvested Earnings, and Intra-company Loans. Equity Capital, as the name suggests, refers to ownership and a foreign investor’s purchase of shares of an enterprise that is in a country other than his own. Reinvested earnings refer to the investor’s share of earnings that are not distributed back to him, i.e. profits that are not given out as dividends but are kept within the firm (or any of its affiliates) as retained earnings. On the other hand, intra-company loans involve debt transactions in the form of short and long-term lending by the foreign parent company to its affiliates FDI inflows to Bangladesh have increased dramatically in recent years and have had some positive influence on development. Rationale of the Study:
There are several benefits of Foreign Direct Investment (FDI) on a macroeconomic level, particularly for a Third World Nation such as Bangladesh, where inflows of foreign investment can expand economic production and growth. In an era of volatile flows of capital, the stability of FDI and its emergence is an important source of foreign capital for any developing economy. As a developing country, Bangladesh needs foreign direct investment (FDI), one of the important factors in the development process and the economy of country can foster in a great way. FDI and economic prosperity of a country are related terms, it is necessary to know about FDI, it impact and the future prospects though there may be some argument against it present. Objective of the Study: The major objective of this study is to analysis the trend of FDI in Bangladesh and its impact on economic development of the country. The specific objectives of this report are• To provide insight about FDI and Its components. • To know about the potential benefits of FDI and determinants of FDI. • To examine the suitability and favorable environment for FDI. • To assess the requirements of building a strong market for FDI through enhancing all relative micro and macro economic factors as a means of speeding real economic growth. • To assess the major impediments of inflow of FDI and to identify the factors that encourage the inflow if FDI. • To have an idea of how the foreign direct investment will enhance our economic growth. •
To suggest pragmatic recommendations for increasing the prospect of FDI in Bangladesh.
Methodology: The study has been undertaken on the basis of secondary data. The secondary sources include various books, publications related to FDI and periodicals, documents of BB, BOI, and BBS. In line with the objectives of the study the analytical framework was designed to assess the effectiveness of FDI and its impact on economic development of Bangladesh. In this regard tables and selected descriptive and inferential statistics were used. In unfolding the nature of distribution and variability of each variable measures of central tendency and measures of dispersion was deployed. Considering the nature of the variables, significant difference among/between the means was done using appropriate test statistics like t-test. For assessing the dynamics of inflow of FDI into Bangladesh trend analysis was performed. In the analysis of impact assessment on different sectoral growth with FDI, correlation between sectoral growth and FDI inflow was shown.
Limitation of the Study: Although I tried to find and set the causes that determine the shape of the flow of FDI and find out the relationship between FDI and economic growth, I believe I am not that adept in doing so. I have relied extensively on published data and other secondary sources to furnish the report. But some of those sources were not approachable. In analyzing the report I have presented some factors that determine the shape of the flow of FDI its relation to economic prosperity. But these are not surely the only factors and many important factors may be omitted from the report. Also, Foreign Direct investment has a vast area to be covered. It is almost
impossible to even touch every single point of it. Therefore, the report may have lack of some important data and issues.
Chapter- II
Basic Concept of FDI Chapt er
2
Basic Concept of FDI
2.1. Definition: Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country. FDI is the category of international investment that reflects the objective of obtaining a lasting interest by a resident entity one economy in an enterprise resident in another economy to another for making profit . The flow of foreign capital in the form of foreign investment Cab Bridge the resource gap of the host country. In a broad sense foreign direct investment refers to the transfer of finance and intangible corporate assets , including global market links , by non residents who have an effective voice (in contrast of private portfolio investors) in the management of the enterprise in which they invest .Traditionally , such investment were in the form of whole or majority ownership . FDI is the output of the probability of profit joint venture, exchange of resource or may be in the form of capital investment Recent review of FDI is the outcome of production sharing technology. Thus it includes both governmental investment of to the governmental organs of host country and also includes private investment by the investor countries to the host country.
The definition of FDI will be followed in accordance with the United Nations Conference on Trade and Development (UNCTAD) and its World Investment Report 2006 which states that “FDI is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)”. The Bangladesh Board of Investment (2004) maintains the same definition. 2.2. Components of FDI: Flow of FDI comprises capital provided (either directly or through other related enterprise) by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by foreign direct investor. FDI has three components• Equity Capital • Reinvested Capital • Reinvested earnings and Intra-company loans. Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than 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. Intra-company loans or intra-company debt transactions refer to short or longterm borrowing lending of funds between direct investors (parent enterprises) and affiliate enterprises.
2.3. Types of FDI:
FDI is mainly of three types-
Type-A: Type A includes the investment by the foreign investors in 100% foreign owned projects as well as investment by Bangladesh nationals ordinarily residing abroad. Under this type, total investment cost of the project including cost of construction, raw naturals and the entire working capital requirement are financed by the entrepreneurs own foreign exchange resources. Type-B: Type B includes investment in joint venture projects between foreign and Bangladesh entrepreneurs resident in Bangladesh. Under this type, the cost of capital machinery, spare parts and raw materials are provided by the foreign partners from funds to be brought abroad. The Bangladeshi partners may contribute local currency cost of the investment including working capital. Type-C: Type C includes investment by 100% Bangladeshi entrepreneurs resident in Bangladesh. Under this type, the cost of machinery spare parts, raw materials and other imported capital gods are financed under nonreportorial foreign exchange, Wage Earners` Earners` Scheme or such other arrangements as may be approved. 2.4. Rationale Investment Flow :
behind
the
Foreign
Direct
It is viewed that primarily foreign direct investment flows from one country to another as a response to the existence of transaction cost and factor cost incentives for global integration of related activities of production. K. Kojima (1975) has viewed foreign direct investment as being complementary to international trade; foreign investment creates an enlarged basis for trade through the transplantation of intangible assets from the source country’s comparatively disadvantageous industries to the host country’s comparatively advantaged ones. Foreign direct investment can make a direct contribution to• Introduce improved technology
• Open up new horizon for R&D expenditures • New investments including FDI generate additional employment, train local executives and workers. • Mobilization o local resources for investment in manufacturing, trade and service sectors. • Create new sources of tax revenue for the government. Generally a Multi National Company or Trans national Company is attracted to a foreign location because of two factors; they are: a) Safety of investment b) Opportunity for profit There are some other reasons like access to the foreign markets, access to inputs, freedom of decision making and operations, and reductions of risks. 2.5. Determinants of FDI: The unpredictability of autonomous FDI flows, in both scale and direction, has generated a substantial research effort to identify their major determinants. An extensive literature based generally on three approaches - aggregate econometric analysis, survey appraisal of foreign investors' opinion, and econometric study at the industry level - has failed to arrive at a consensus. This can be partly attributed to the lack of reliable data, particularly at the sectored level, and to the fact that most empirical work has analyzed FDI determinants by pooling of countries that may be structurally diverse. 2.5.1. Size of the Market:
Econometric studies comparing a cross section of countries indicate a wellestablished correlation between FDI and the size of the market (proxied by the size of GDP) as well as some of its characteristics (for example, average income levels and growth rates). Some studies found GDP growth rate to be a significant explanatory variable, while GDP was not, probably indicating that where the
current size of national income is very small, increments may have less relevance to FDI decisions than growth performance, as an indicator of market potential. In contrast, India, Pakistan and, to a certain extent, Bangladesh, have large markets but received proportionately relatively small (below 1%) FDI flows in 1986-95. Some analysts interpret this as evidence of high potential for increased FDI flows in the future; others stress that constraints are still restraining the channeling of foreign investment to these countries. For the majority of lowincome countries that fail to attract large FDI flows, their small domestic markets are often cited as the main deterrent. Given other economic and political shortcomings, most investors are doubtful about the value of installing a factory unless they can achieve a `critical mass' for their products. Regional integration is often perceived as a positive means of compensating for small national markets. 2.5.2. Openness:
Whilst access to specific markets - judged by their size and growth is important, domestic market factors are predictably much less relevant in export-oriented foreign firms. A range of surveys suggests a widespread perception that `open' economies encourage more foreign investment. One indicator of openness is the relative size of the export sector. Singh and Jun’s 1995 study indicates that exports, particularly manufacturing exports, are a significant determinant of FDI flows and that tests show that there is strong evidence that exports precede FDI flows. China, in particular, has attracted much foreign investment into the export sector. In Bangladesh, on the other hand, foreign investors have been attracted to the manufacturing sector by its lack of quota for textiles and clothing exports to the European Union and US markets. Garment exports, for example, rose from
virtually nil in the 1970s to over one-half of its export earnings by the early 1990s. In contrast, most low-income SSA economies have remained more inwardoriented. 2.5.3. Labor Costs and Productivity:
Empirical research has also found relative labor costs to be statistically significant, particularly for foreign investment in intensive-intensive industries and for exportoriented subsidiaries. However, when the cost of labor is relatively insignificant (when wage rates vary little from country to country), the skills of the labor force are expected to have an impact on decisions about FDI location. Productivity levels in sub-Saharan Africa are generally lower than in low-income Asian countries, and attempts to redress the skill shortage by importing Foreign workers have usually been frustrated by restrictions and delays in obtaining work permits. The lack of engineers and technical staff in these countries is reported as holding back potential foreign investment, especially in manufacturing; it lessens the attractiveness of investing in productive sectors. 2.5.4. Political Risk:
The ranking of political risk among FDI determinants remains somewhat unclear. In general, so long as the foreign company is confident of being able to operate profitably without undue risk to its capital and personnel, it will continue to invest. Large mining companies, for example, overcome some of the political risks by investing in their own infrastructure maintenance and their own security forces. Moreover, these companies are limited neither by small local markets nor by exchange-rate risks since they tend to sell almost exclusively on the international market at hard currency prices. Specific proxy variables (e.g. number of strikes and riots, work days lost, etc.) have proved significant in some studies; but these quantitative estimates can capture only some aspects of the qualitative nature of political risk. Surveys
carried out in South Asia and sub-Saharan Africa appear to indicate that political instability, expressed in terms of crime level, riots, labor disputes and corruption, is an important factor restraining substantial foreign investment. 2.5.5. Infrastructure:
Infrastructure covers many dimensions, ranging from roads, ports, railways and telecommunication systems to institutional development (e.g. accounting, legal services, etc.). Studies in China reveal the extent of transport facilities and the proximity to major ports as having a significant positive effect on the location of FDI within the country.
Recent evidence seems to indicate that, although
telecommunications and airlines have attracted FDI flows (e.g. to India and Pakistan), other more basic infrastructure such as road building remains unattractive, reflecting both the low returns and high political risks of such investments. 2.5.6. Incentives and Operating Conditions:
Most of the empirical evidence supports the notion that specific incentives such as lower taxes have no major impact on FDI, particularly when they are seen as compensation for continuing comparative disadvantages. On the other hand, removing restrictions and providing good business operating conditions are generally believed to have a positive effect. In China, the `open-door' policy and enhanced incentives for investing in the special economic zones contributed to the initial influx of FDI. Further incentives, such as the granting of equal treatment to foreign investors in relation to local counterparts and the opening up of new markets (e.g. air transport, retailing, banking), have been reported as important factors in encouraging FDI flows in recent years. The lack of transparency in investment approval procedures and an extensive bureaucratic system deters foreign investors. In 1991, Bangladesh and Pakistan
implemented reforms allowing foreign investors to operate with 100% foreign ownership but still failed to attract significant flows (as a proportion of GNP) because of political instability and an over-extended bureaucracy. Nigeria, in contrast, continues to attract foreign investment as an oil-exporting country despite its erratic and relatively inhospitable policies. With regard to the remaining lowincome countries with small FDI inflows, surveys indicate that the lack of a clearcut policy with respect to foreign investment and excessive delays in approval procedures are amongst the most important deterrents. Although a number of African countries set up `one-stop investment shops' during the 1980s in order to simplify approval procedures, the increased workload created bottlenecks. 2.5.7. Privatization:
Though privatization has attracted some foreign investment flows in recent years (e.g. Nigeria in 1993 and Ghana in 1995), progress is still slow in the majority of low- income countries, partly because the divestment of state assets is a highly political issue. In India, for example, organized labor has fiercely resisted privatization or other moves, which threaten existing jobs and workers' rights. At a regional level, 1994 figures show 15% of FDI flows to Latin America as derived from privatization, but only 8.8% in sub-Saharan Africa and 1.1% in South Asia. A number of structural problems are constraining the process of privatization. Financial markets in most low- income countries are slow to become competitive; they are characterized by inefficiencies, lack of depth and transparency and the absence of regulatory procedures. They continue to be dominated by government activity and are often protected from competition. Existing stock markets are thin and illiquid and securities debt is virtually non-existent. An under-developed financial sector of this type inhibits privatization and discourages foreign investors.
However in brief, Table-1: shows the host country determinants of FDIHost Country Determinants I. Policy framework for FDI Economic, political and social stability. Rules regarding entry & operation. Standards of treatment of foreign affiliates Policies on functioning and structure of markets Privatization policy Trade policy Tax policy II. Economic determinants III. Business facilitation Investment promotion Investment incentives hassle cost social amenities after-investment services
Type of FDI classified Principal economic determinants by motives of TNCs in host countries. Market SeekingMarket size & per capita income Market growth Access to regional and global markets Country-specific consumer preferences Structure of markets B. Resource/ Asset seekingRaw materials Low-cost unskilled labor Skilled labor Technological innovatory and other created assets Physical infrastructure. C. Efficiency seekingCost of resources and assets listed under B, adjusted for productivity for labor resources Other input cost, e.g. transport and communication costs to/form and within host economy and cost of other intermediate products Membership of a regional integration agreement conductive to the establishment of regional corporate network
2.6. Motives Interaction:
of
International
Economic
A particularly useful framework of analysis is that of Eiteman and Stonehill (1989), who recognized three main motives for foreign direct investment: strategic, behavioral, and economic. These three categories are clearly interrelated, since the overall aim of the company is long-term survival and the achievement of a satisfactory level of shareholder wealth. 2.6.1. Strategic motives:
•
Raw materials:
Many multinationals, including oil and mining
companies, invest abroad in order to extract the raw materials needed for their production, especially if a domestic supply of raw materials is not available or is more costly. Multinationals, rather than local companies, exploit foreign raw material supplies because they have the finance, expertise and technology needed to extract them, which the local companies do not. By having direct control over raw materials, a amore certain supply at an acceptable cost can be maintained.
•
Knowledge: The maintenance of technological leadership is an important
ingredient of commercial success in the 1990s. One way of keeping ahead is to acquire foreign companies that are heavily involved in research and development, or control key patents and process. In addition, multinational companies may locate their operations where a high concentration R & D and expertise exists.
•
Efficiency: Because of imperfections in the international factor markets,
especially labour, companies often locate abroad in regions of cheap labour in order to cut production costs and thereby increase competitiveness. This is especially the case in the electronics industry, which is very labour-intensive.
•
Political security:
In order to avoid interference from governments,
companies often locate in regions free from government influence. Two corporate policies result from this motive: safe plants and multiple sourcing. Safe plants involve locating production facilities in politically stable countries in order to secure supply in case of government intervention in alternative source countries. These safe plants are often in economically suboptimal locations, but the fact that customers can always be sure of supply gives the company extra credibility and thus an edge in a competitive market. Multiple sourcing occurs when companies locate in several locations and produce similar products in each.
•
Markets: Imperfections and barriers to entry exist in many foreign
markets, which might mean that companies have to locate abroad in order to access new markets. The market motive is often defensive, as are the other strategic motives, with companies concentrating on overall survival rather than profitability. 2.6.2. Behavioral motives:
Aharoni (1966) studied the behavioral motives of foreign investment and identified two categories: external stimuli from the organization’s environment, and internal stimuli within the organization. External factors:
1. External proposals that are attractive to the multinational, from clients, distributors and governments. 2. Fear of losing a market 3. When competing companies are successful in foreign markets it is important for the company to locate there also 4. Strong competition from abroad in the home market could lead to retaliatory foreign investment abroad. Internal factors: 1. Creation of a market for components and other products 2. Utilization of old machinery. 3. Capitalization on know-how, i.e. spreading of research and development and other fixed costs 4. Indirect return to a lost market through investment in a country which has commercial agreements with these lost territories. 2.6.3. Economics motives:
Economic motives relate primarily to the competitive advantages of the multinational over companies located in foreign markets, direct foreign investment may result from imperfections in the product and factor markets. Five main areas of competitive advantage exist:
•
Economies of scale and scope: These can arise in production, marketing,
R&D, transport, finance and purchasing. Economies of scale arise as a result of size, in that as the company’s size and volume increases, the marginal fixed costs diminish. Examples of this are the marketing policies of Coca-Cola. Because of their enormous levels of production they are able to finance very expensive commercials with international stars and show them during peak rate because they have a global distribution network which enables them to fully utilize the
exposure. An economy of scale occurs when an investment can support several profitable activities less expensively in combination than separately.
•
Managerial and marketing expertise:
Servan-Schreiber (1968)
suggested that the US multinationals were successful in the 1950s and 1960s because of better management training through their business schools, and that Europe was far too elitist.
•
Technology: Gurber et al. (1987) indicate a strong relationship between R
&D and foreign investment. This is due to the fact that the multinational has monopolistic rights over the innovations it has developed in the form of patents when it produces abroad, thus giving it a competitive advantage over local companies.
•
Financial strength:
By diversification of operations, multinationals are
able to reduce overall riskiness, because different markets have different economic cycles. So a downturn in one market can be compensated by an upturn in another, which reduces the overall cost of debt because there is less risk. Compounded with this is the fact that entry to new product markets mighty give access to new financial markets.
•
Differentiated products: Caves (1971) noted that, by heavy R&D and
marketing, companies are able to differentiate their products from those of their competitors and thus turn them into brand names’ like Persil and Walkman. By continually modifying their products and by regular advertising, they create a difficult time-lag for competitors to overcome, and use levels of advertising and R&D which competitors cannot afford.
Chapter- III
The History of Development in Bangladesh
Chapter
3
The History of Development in Bangladesh
Figure -1: Annual Economic Growth
*Source- World Development Index
Figure-1 uses the annual percentage growth in GDP per capita as a proxy to indicate the history of development in Bangladesh, which has been a turbulent one consisting of many ups and downs. For demonstrational purposes, the annual percentage change in GDP has also been illustrated. The logarithmic trend line runs through the middle of the chart and has an upward slope emphasizing that, despite all the volatility, the country has managed to experience modest levels of economic growth throughout its 35 years of its sovereignty. For practical purposes, the discussion of development in Bangladesh will be divided into the following four sections: (i)
Post Liberation Period: 1971-1979,
(ii)
Period of Sluggish Growth and Instability: 1980-1989,
(iii)
Period of Stable Economic Growth and Significant Development: 1990-1999, and Summary of Bangladesh’s Overall Transition in Development.
(i)
Post-Liberation Period: 1971-1979
After nine months of war and the approximate loss of 3 million lives, in the years following independence Bangladesh encountered a plethora of difficulties to worsen its already dire economic situation, including high population density, scarcity of resources, frequent occurrence of natural disasters and famine, inefficient government policy, political nepotism, and corrupt governance. These factors combined to induce a very negative image of the country during its beginning years as the international community remained pessimistic of the Bangladeshi economy’s ability to emerge from its seemingly permanent “below poverty level equilibrium trap” (United Nations Development Program 2000) and sustain itself in the long-run without massive flows of foreign assistance. Bangladesh’s future appeared bleak compared with its neighboring HighPerforming Asian Economies. Regardless of the skepticism, the decade after liberation constituted the phase of economic recovery. During the first half of the decade, it was in trying to pursue reconstruction and economic growth that the Government of Bangladesh established a Socialist economic system to boost development. This, however, ended up being a contradiction in that the inefficient State Owned Enterprises were only able to produce meager levels of GDP to barely facilitate economic growth. To further hinder development, the agricultural sector was barraged with both droughts and floods while the 1973 oil crisis dramatically raised the cost of production. Combined with inflation, these factors also propounded Bangladesh’s balance of payments deficit. In addition to having one of the lowest levels of income per capita during this period, Bangladesh’s struggle with poverty exacerbated as its dense population grew at a rate of nearly
3%. During the second half of the 1970s, the government recognized the shortcomings of their Socialist economy and took steps to ease state control and encourage a greater role for the private sector. The 1974/1975 reforms of the industrial investment policy were introduced to allow access to private investment (of up to a higher revised cap of Taka 30 million) for all sectors except eighteen that remained under the directive of the public sector. Foreign investors were also permitted to collaborate with domestic private investors. It is important to note that such reforms were promoted by the International Monetary Fund and the World Bank owing to their influence on the country through loan assistance. This entailed restructuring the economy on a number of different fronts and included rationalization of the tax system, subsidy reduction for the food sector, trade liberalization, increased regulation on credit expansion, improved domestic resource allocation, and privatization of small scaled enterprises. The objective of these policy changes was to remove barriers that adversely affected the productivity and efficiency of major industries. After the military coup d’état in 1975, previously state-run industries were also allowed to take part in joint collaborations with the private sector. Moreover, the government set up development financial institutions (DFIs) which financed credit and provided industrial capital to complement the equity of private enterprises. Though DFIs boosted Bangladesh’s economic performance during its beginning years, they also created the persistent long-term problem of loan defaulting. The makeover of Bangladesh’s economy from a Socialist state to a somewhat capitalistic mixed economy involved a wide array of policy changes. During the 1970s, however, the nation continued to be bombarded with macroeconomic shocks and the implemented reforms did not immediately improve the country’s economic situation. Compared to the other Least Developed Countries of that time, Bangladesh underwent a relatively longer time lag but the significance of the reforms slowly started to materialize as the nation emerged out of its post-war reconstruction phase and entered into the 1980s.
(ii)
Period of Sluggish Growth and Instability 1981-1989 :
The effects of the reforms of the 1970s began to show towards the beginning of this period as important development indicators were restored to pre-independence levels. On the other hand, inherent structural problems continued to limit the nation’s potential for growth and rapid development. Economic growth was sluggish for many reasons during this period. With very little improvement in productivity, state industries and public enterprises continued to underperform owing to a lack of infrastructure and inadequate policy measures taken by the government. The inefficiency of the economy in producing goods and services increased import demand (and severely limited the country’s export capacity) as the population continued to grow; the trade imbalance was only somewhat contained by artificially controlling for import demand using tariffs, quotas, and a tight exchange rate. Weak governance and the dismal condition of law and order allowed corruption and crony capitalism to become deeply rooted within the economic and political systems, particularly within the bureaucratic and regulatory framework; this widened the socioeconomic gap as the already privileged businessmen and government officials became even wealthier than the majority of the low-income population. Furthermore, with a largely poor population the inability to collect tax revenues weakened fiscal conditions as government expenditure increased. Over-expansionary monetary policy invoked inflationary pressures as the central bank pumped more money into the economy. The strategy of greater access to credit within the private sector backfired as debt defaults plagued the banking system. To make matters worse, the consecutive floods of 1978 and 1988 severely damaged the agricultural sector and inflicted a famine on some parts of country. Despite its economic travails, the country was able to produce a number of social
developments under the management of both government agencies and nongovernment organizations (NGOs). Mujeri and Sen (2002) observe that development indicators such as child mortality, total fertility, and primary school enrollment rates began to improve during this era. With regards to NGOs, the Grameen Bank and the Bangladesh Rural Advancement Committee (BRAC) served as renowned microcredit providers for the rural poor and aided village businesses and organizations through targeted development assistance. Other areas of social progress include rural advancement in infrastructure, food provision, water purification, healthcare, and crisis management. During this period, Bangladesh employed another series of reforms to better acclimate the economy towards driving growth and development. Like those of the 1970s, the changes were guided by the International Monetary Fund and the World Bank. The measures (e.g. the Bank-Fund’s Enhanced Structural Adjustment Facility) intended to reduce the structural problems that were generating the aforementioned internal and external instabilities. This involved further deregulation to untangle the red tape associated with excessive state presence and greater liberalization to create a more open laissez-faire economy by expanding the span of the private sector. As firms maximized profits and competed with each other, the reforms aimed to increase the incentive to efficiently allocate resources, raise productivity, enhance the nation’s production base, and improve the levels of domestic investment, savings, and overall GDP. As indicative by the unbalanced growth during this period, the extent of such progress was limited owing to the “uneven incidence of the adjustment burden on various socioeconomics groups” (Mujeri and Sen 2002). Regardless of the struggles, the 1980s experienced vital social developments and economic reforms that paved the way for better economic progress for the next period. (iii)
Period of Stable Economic Growth and Significant
Development: 1990-at present The beginning of the 1990s witnessed the success of a democratic parliamentary system through free and fair elections. In addition, the economic reforms of the previous decades finally began to show effect as the nation gained momentum in achieving stable growth and concomitant development. The reforms of the previous decade allowed for greater trade liberalization in the 1990s and gave domestic firms freer access to import much needed raw materials and capital goods. This particularly helped with domestic production to not only meet the demand for goods and services within the country’ borders but also develop export-oriented industries to earn much needed foreign currency. The ready-made garments (RMGs) industry faired exceptionally well in its ability to export its textile products and also helped reduce the gender wage gap by employing mostly women. The changes consisted of a reduction of trade tariffs, quotas, and duties, all of which were impeding the trade. Such measures were emphasized mainly as a means to strengthen and broaden the country’s export base to make it more competitive, e.g. by establishing specific export-processing zones. Other adjustments were made to the exchange rate by implementing a price basket system and allowing some flexibility through slow devaluation. The advantages of trade will be elaborated further in subsequent chapters. The agricultural sector, in particular, performed extremely well. The use of high yield variety crops meant that there was a dramatic rise in the amount of food grains available. Other areas such as poultry, livestock, and fish farms also contributed to the country’s development. Other developments were in infrastructure, clean water access, and healthcare. The success of the Grameen Bank in terms of microcredit also contributed to this as it not only helped expand village businesses but also facilitated the spread of technology and female empowerment through its phone program, which rented cell phones to village women enabling them to become operators in remote areas
which lacked communication links. Given the Bangladesh’s relatively low level of GDP per capita at $340 in 1999 (World Bank 2006), the success of the 1990s was quite remarkable and led into the current state of development in Bangladesh. Table 2: Social Development Indicators in Bangladesh -- 1991 to 2006
Indicator
Unit
1. Annual GDP Growth % 2. Per Capita GDP US$ 3. Total Export million US$ 4. Population Growth % 5. Adult Literacy Rate (15 % years & above) 6. Infant Mortality at Birth Per'000live births 7. Life Expectancy at Birth Year 8. Access to Safe Water % 9. Primary Enrolment Rate % 10. Social Sectors' Share in % ADP Allocation
1991
1996
2001
2006
3.38 277 1,718 2.17 35.32
4.62 334 3,884 47.3%
6.04 369 6,467 1.98 64%
6.5 456 10,526 1.48 66%
92
67
53
53
56.10 76 6.34
58.90 831 85 23.4
61.80 92.9 95 24.8
64.9 96.3 28.5
Sources: Bangladesh Economic Review 2006,Ministry of Finance, GOB & Bangladesh Bureau of Statistics
Chapter- IV
Bangladesh: An Investment Destination
Chapter
4
Bangladesh: An Investment Destination
Bangladesh is a moderate, democratic and homogeneous country. But being an ninth largest populated nation in the world, Bangladesh needs immediate attention from the strategic planners. It is her people who can shape our desired destiny by utilizing their energy and creativity in productive sector. The country has so far enjoyed limited success in the face of enormous calamities, manmade and natural. But the fortitude and resilience shown by the people on many occasions have made us proud and impressed the outside world. As a result, the change in FDI inflow during the next decade though not spectacular, but was definitely significant. In BOI registered investment proposals, the share of local and foreign investment was 88% and 12% respectively during 1981-1991. During 1991-2001, this trend has shown a gradual change and it is 42.5% and 57.5% respectively.
Figure-2: BOI register investment proposal: Trend in Local-Foreign Share
The Government initiated fiscal reforms, undertook ambitious scheme to improve general literacy in general and female literacy in particular, started creating conducive environment for investment and above all established rule of law in the country. Improvement in various social development indicators during the last 10(ten) years is the testimony of all these efforts. 4.1. Bangladesh – Economy & Business: Economic Performance: Highlights : • A steady average annual GDP growth of 5% over the last decade. • Inflation has been kept in single-digit. • Exports have been gradually shifted from traditional goods to more value added items. • Emphasis has been put on manufacturing and IT sector Figure-3: GDP Growth Rate at Current and Constant Price
GDP Growth Rate 14
Growth Rate
12 10.78
10 8
8.64
9.75
6 4
7.91
10.78 6.94
7.75
5.23
5.27
4.87
4.42
11.33
6.27
5.94 5.39
12.26
10.02
5.26
6.71 5.96
2 0 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
Current Price
Constant Price
Bangladesh is in the process of a transition from a predominantly agrarian economy to an industrial and service economy. The private sector is playing an increasingly active role in the economic life of the country, while the public sector concentrates more on the physical and social infrastructure. Cost of doing business is a significant indicator of competitiveness. In JETRO study, when arranging the order of 21 cities according to each of the 34 cost components including Office rent, Taxation on Remittance of Profit etc. Furthermore, comparing to other last years, the relative position of Bangladesh against the components like Rental Fee in Industrial Estates, Charge for overseas, Telephone Call, Cost of Water foe General use, Cost of Petrol etc, has been improve. JETRO views that the mean order of all components has risen to 3.01 from 3.06 indicating a very small elevation which means Dhaka has become a little more cost- competitive from the viewpoint of investment costs. The recently published World Bank and IFC report entitled “doing Business in 2006: creative jobs� ranked Bangladesh in the 60 th position globally and 4th in the SAARC in the Ease of Doing Business Ranking. Following is a comparative ranking scenario as prepared by the World BankTable -3: Ranking of Bangladesh
Rank 1 20 31 55 60 65 75 104 99 116 122
Country New Zealand Thailand Maldives Nepal Pakistan Bangladesh Sri Lanka Bhutan Vietnam India Afghanistan
*Source: Doing Business in 2006: creating jobs, world bank, 2005
4.2.
Competitive
Strength
of
Bangladesh
for
Investment: The democratic government has already taken a number of measures to stimulate the economy. In macro-economic terms, we have very prudent and market oriented fiscal policies. However, to improve the overall economy of the country and achieve the ultimate goal of eradicating poverty, annual investment has to grow rapidly from the present low base. The country's long-term economic future will pivot on the dynamism and success of the private sector. A recent study conducted by UNCTAD has revealed that foreign firms usually see Bangladesh as quite open to foreign investment and that FDI policies are liberal. Relative to other competing locations, Bangladesh is also improving its competitiveness. Let us now analyze the competitive strength of Bangladesh as "Investment Destination".
1. Location
: Geographic location of the country is ideal for global
trades with very convenient access to international sea and air route. 2. Natural Resources
: Bangladesh is endowed with abundant supply of
natural gas, water and its soil is very fertile. 3. Human Resources
: We have a population of 130 million who are hard
working and generally intelligent. There is an abundant supply of disciplined, easily trainable, and low-cost workforce suitable for any labor- intensive industry. 4. Social Stability
: Bangladesh is a liberal democracy and mostly a one
race and one religion country. The population of this country irrespective of race or religion have been living in total harmony and understanding for thousands of years. 5. Language
: Although Bengali is the official language, but English is
generally used as second language. Majority of even moderately educated population can read, write and speak in English. 6. Market Access
: As a result of low per capita GDP of only US$386, present
domestic consumption is not significant. However, it should always be considered that there exists a middle class with some purchasing power. As economic growth picks up, the purchasing power will also grow substantially. And in a country of more than 130 million people, even a small middle class may constitute a significant market. Furthermore, Bangladesh products enjoy duty free and quota free access to almost all the developed countries. This access to the global market is further helped by the fact that policy regime of Bangladesh for foreign direct investment by far the best in South Asia.
7. GSP Facility
: Most Bangladeshi products enjoy complete duty and quota
free access to EU, Japan, USA, Australia and most of the developed countries. However, for apparel export to USA, we have certain quota regime which is generally favorable to Bangladesh. 8. Cost of doing Business : The cost of doing business in Bangladesh is highly competitive in comparison to other economies in the region. Following table summarizes the relevant costs which will help to take investment decision. Table 4: Cost of Doing Business in BangladeshLand
Average price of developed land in the different industrial belts varies depending on location (price per square meter).
(US$)
10.0-15.0
Construction Average per square meter
100-125
Gas Tariff Average per '000 cubic meter
64
Power Tariff Average per kW/h
0.07
Human Resources: Labor Force Average per month depending on skill level
50-100
Human Resources : Management Mid-Level : Average US$ per annum
6000
Top-Level : Average US$ per annum
30000
Sea Freight (in US$ Approx.) Destinations
20'FCL
40'FCL
Major European Ports
900
1,800
USA - East Coast (NY)
2,000
3,000
USA - West Coast (LA)
1,900
2,550
Canada (Toronto / Montreal)
2,700
3,700
800
1,600
1,250
2,400
Hong Kong
500
900
UAE (Dubai)
800
1,600
Australia (Melbourne) New Zealand (Auckland)
Tax Structure Personal Income: On the first Tk. 200,000
Nil
On the next Tk. 50,000
10%
On the next Tk. 150,000
18%
On the balance
25%
Corporate Income: Industrial companies with Public Share
35%
All Other Public and Private companies
40%
*Source: Board of Investment
Bangladesh offers an unparalleled investment climate compared to the other South Asian economies. • Bangladesh is a largely homogenous society with no major internal or external tensions and a population with great resilience in the face of adversity (e.g. natural calamities). Bangladesh is a liberal democracy and mostly a one race and one religion country. The population of this country irrespective of race or religion have been living in total harmony and understanding for thousands of years.
• Broad non-partisan political support for market oriented reform and the most investor-friendly regulatory regime in south Asia. • Trainable, enthusiastic, hardworking and low-cost (even by regional standards) labor force suitable for any labor-intensive industry. • Geographic location of the country is ideal for global trades with very convenient access to international sea and air route. • Bangladesh is endowed with abundant supply of natural gas, water and its soil is very fertile. • Although Bengali is the official language, but English is generally used as second language. Majority of even moderately educated population can read, write and speak in English. • As a result of low per capita GDP of only US$ 386, present domestic consumption is not significant. However, it should always be considered that there exists a middle class with some purchasing power. As economic growth picks up, the purchasing power will also grow substantially. And in a country of more than 130 million people, even a small middle class may constitute a significant market. Furthermore, Bangladesh products enjoy duty free and quota free access to almost all the developed countries. This access to the global market is further helped by the fact that policy regime of Bangladesh for foreign direct investment by far the best in South Asia. • Most Bangladeshi products enjoy complete duty and quota free access to EU, Japan, USA, Australia and most of the developed countries. However, for apparel export to USA, we have certain quota regime which is generally favorable to Bangladesh 4.3. Sustainable Competitive Sectors: Considering the strength of Bangladesh either in the form of offering substantial resource advantages or low-cost, skilled manpower and global market demand, the
following sectors could form the backbone of industrial development of the country: Table 5: Investment Opportunity: Sustainable Competitive Sectors in Bangladesh 1. Textile a. RMG Backward linkage industries 2. Electronics a. Semi-Conductor b. Cell Phone Assembly c. Other Electronics 3. Information Technology a. Data Processing b. Software Development 4. Natural Gas-based Industries a. Electricity b. Fertilizer c. Petro-Chemicals
5. Frozen Foods 6. Leather a. Finished Leather b. Leather Goods 7. Ceramic a. Tableware b. Sanitaryware c. Insulator 8. Light Engineering a. Machinery Parts b. Consumer Items 9. Agro-based Industry a. Canned Juice/Fruit
4.4. Scenario of Promising Investment Sectors of Bangladesh: 4.4.1. Agro-Based Industry:
A. I. Canned Juice / Fruit II. Dairy and Poultry Sector Highlights
Bangladesh has a huge supply of raw materials for the agro-based industry. Fruits and vegetable production has increased significantly in recent years. Government and NGOs have been conducting regular training programs in developing a skilled manpower for this industry. There is a substantial demand supply gap in the agrobased industry. IndustryOutlook Bangladesh has the basic attributes for successful agro-based industries, namely, rich alluvial soil, a year-round frost-free environment, an adequate water supply and an abundance of cheap labour. Increased cultivation of vegetables, spices and tropical fruits now grown in Bangladesh could supply raw materials to local agroprocessing industries for both domestic and export markets. Progressive agricultural practices, improved marketing technique and modern processing facilities would enable the agro-processing industry to improve its quality and expand production levels significant Investment interests in agro-based industries are highly encouragingly.
B. Agriculture: Sector highlights: 1. Agriculture accounts for 19.49% of GDP and employs over 63% of work force. 2. Government is keen to implement National Agricultural Policy. 3. In 2000-2001, agriculture experienced a growth of 6.04%.
4. Government, as part of the investment policy is promoting agro-based industry and declared it as a priority sector. The Government continues to support the agricultural sector through a number of policy interventions, with the ultimate view to t promoting food self-sufficiency as envisaged in the Fifth Five Year Plan (1997-2002). However, the non-crop sector, which includes livestock and fisheries, seems to have performed much better, on account of private sector initiatives. Bangladesh is in the process of a transition from a predominantly agrarian economy to an industrial and service economy. The private sector is playing an increasingly active role in the economic life of the country, while the public sector concentrates more on the physical and social life. 4.4.2. Ceramic:
I. Tableware II. Sanitary ware III. Insulator Sector Highlights • Bangladesh has a skilled manpower in ceramic industry. • Historically, tableware industry is labor-intensive. • The clean gas reserve required for firing is a great competitive advantage for Bangladesh. Industry Outlook Global ceramic tableware industry is currently going through a phase of acquisition and consolidation as smaller industries in the developed countries are becoming uncompetitive and bankrupt. As a result, the big names like Noritake, Wedgewood, Lenox, Villeroy & Boch and Royal Doulton are all individually becoming billion-dollar operations.
Historically, tableware industry is labor-intensive and even after spending billions of dollars on automation, developed countries could not reduce the number of workforce according to their expectations. As a result, the cost of production will always remain extremely high in developed countries and the premium brands are only surviving because they are charging huge price to the consumers for their brand equity. Bangladesh, being a gas-rich and low-labor-cost economy, offers to be strategic partners in production and supply of ceramic products. Investment interests in this sector are strongly welcomed. Figure-3: Growth and projection of Ceramic Tableware Exports from Bangladesh (1995-96 to 2002-2003) In million US$
*Source: Board of Investment
4.4.3. Frozen Foods:
Sector Highlights: 1. Government is promoting semi-intensive shrimp farming. 2. Fish and prawn exports grew at an average 20% in the past decade. 3. Shrimp processing and export industry is largely dominated by the smaller unorganized sector.
Industry Outlook The frozen foods export is the second largest export sector of the country. The average annual growth rate is about 28%. This export-oriented industry includes the following sub-sectors which need proper attention for augmentation of production and export earnings. •
Hatcheries
•
Sustainable aqua-culture technology
•
Feed meals plants
•
Processing unit for value-added products.
Investment in frozen food sector with new technology and equipment has a vast potential for growth. 4.4.4. Natural Gas-based Industries: 1. Electricity 2. Fertilizer 3. Petro-chemicals
Sector Highlights 1. Bangladesh has a substantial gas reserve of about 20 trillion cubic feet (tcf) 2. There is a huge demand for fertilizer in Bangladesh as the agriculture is the principal sector of the economy.
Industry Outlook The private sector power generation policy announced in 1996 under which private power companies are exempt from income tax for 15 years. Several bargemounted power plants are in operation. But an extensive demand gap for electricity is crucial.
Opportunities exist in developing new plants (barge-mounted and other, large, small and mini), constructing transmission and distribution system, rehabilitating or upgrading existing plants and supplying a variety of support services. Investment opportunities are available on a build-operate-transfer (BOT) basis. Figure-4 : Growth rate of Electricity generation Growth rate of Electricity
Growth Rate
10
7.6
8
9.19
6
7.78
7.76
8.58
7.29
4 2 0 2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
Grow th rate of Electricity
*Source : Bangladesh Economic Review 2006 4.4.5. Electronics:
a. Semi-Conductor b. Cell Phone Assembly c. Other Electronics Sector Highlights 1. Manufacturing of semi-conductors could be established as a potential cottage industry. 2. Bangladesh is going to be the largest cell-phone market in South Asia. Industry Outlook Bangladesh's experience in basic electronics spans over two decades. In recent years, European and Asian electronic firms have established technical collaboration with their Bangladeshi counterparts to produce some electronic goods at competitive prices. This has tremendous potentiality for expansion.
The Government of Bangladesh has adopted National Telecommunication Policy, 1998. Investment is encouraged through BLT-BOT/BOO/BTO and other joint venture schemes which by greatly increasing the capacity, quality and type of services, will create improved efficiencies in other sectors such as transportation energy and the textile industry. To meet the telecommunication requirements of the country the government has been developing and expanding the systems and services of BTTB. Private sector operations in the rural telecommunication, paging, cellular telephones and riverine radio trunking have already been allowed. At present 7 private operators are providing their services to about 100,000 customers. Government has allowed expanding 300,000 digital telephones in Dhaka by private sector participation through open tendering. In
accordance
with
overall
national
policy,
liberalization
of
the
telecommunications sector will continue. However, the government retains the sale authority to determine the number of competitions that are economically viable for certain services. The strategy is to provide equal and rational opportunities to all competitors 4.4.6. Information Technology:
a. Data Processing b. Software Development Sector Highlights 1. Investment is mostly confined to information processing. 2. Bangladesh has a cheaper and rapidly growing IT workforce. 3. Government is keen in establishing IT related infrastructure for the development of the industry.
Industry Outlook Availability of substantial number of qualified and experienced young people in various branches of engineering, science and technologies have opened up the scope of profitable investment in these sectors. Comparatively short training period and low investment have made such ventures highly profitable. A number of Bangladeshi IT firms are interested in finding international investors or collaborators in various sub-sectors. 4.4.7. Leather:
Sector Highlights: 1. The labor-intensive leather industry is well suited to Bangladesh having cheap and abundant labor. 2. Bangladesh has a domestic supply of good quality raw material, as hides and skins are a by-product of large livestock industry. 3. Adequate government support in the form of tax holidays, duty free imports of raw materials and machinery for export-oriented leather market 4. The industry lacks domestic technology and expertise and local support industries such as chemicals are still under-developed. Investment Incentive: 1. Present Government is in the process of setting up of separate Leather Zone relocating the existing industry sites to an well-organized place. 2. New FDI inflow is highly encouraged and foreign investors are welcome to have the opportunity. Industry Outlook:
There is already a substantial domestic leather industry, mostly export-oriented. The leather includes some ready-made garments, although that aspect is continued mainly to a small export-trade in "Italian-make" garments for the US market. Footwear is more important in terms of value addition. This is the fast growing sector for leather products. Presently Bangladesh produces between 2 and 3 percent of the world's leather market. Most of the livestock base for this production is domestic which is estimated as comprising 1.8 percent of the world's cattle stock and 3.7 percent of the goat stock. The hides and skins (average annual output is 150 million sq.ft.) have a good international reputation. Foreign direct investment in this sector along with the production of tanning chemicals appears to be highly rewarding. Having the basic raw materials for leather goods as well as for the production of leather shoe, a large pool of low cost but trainable labour force together with tariff concession facility to major importing countries under GSP coverage, Bangladesh can be a potential off shore location for leather and leather products manufacturing with low cost but high quality. 4.4.8. Light Engineering:
1. Machinery Parts 2. Consumer Items Sector Highlights 1. A growing and increasingly affluent middle class indicates demand for
consumer durables. 2. There is a significant sector of cottage industries engaged in simple
electronic goods. 3. Export-oriented production in light industries has gained momentum in the
past few years.
Industry Outlook Light industries in Bangladesh produce a multitude of labour intensive goods including toys, consumer items, small tools and paper products for the domestic market. Further development for these industries offers various investment opportunities. Export-oriented production in light industries has gained momentum in the past few years. Entrepreneurs from Hong Kong, Japan and Korea have taken advantage of Bangladesh's cheap and easily trainable labour and its infrastructure facilities to manufacture products for the export market. 4.4.9. Textile:
Sector Highlights: •
The fastest growing industry in Bangladesh with RMG accounting for more than 75% of total exports.
•
Bangladesh is best placed in the region for textiles and garments because of cheap labor and trade status with the EU.
•
Government incentives for the spinning and weaving industries include a 15% cash subsidy of the fabric cost to exporters sourcing fabrics locally.
•
There is a huge fabric demand supply gap in the RMG industry which is being me by imports. Thus the potential for backward linkage industry is enormous.
RMG and Backward Linkage : The phenomenal growth in RMG was experienced in the last decade. With about 2,600 factories and a workforce of 1.4 million, RMG jointly with knitwear accounted for more than 70% of total investments in the manufacturing sector during the first half of the 1990's.
Figure-5: Growth of RMG Exports from Bangladesh (1980-81 to 1999-2000) In million US$
*Source: Board of Investment
4.4.10. Transport & Communication:
Sector highlights: 1. Almost all parts of Bangladesh, even the remote ones are today connected by a road network. 2. Bangladesh has the best water transport system in the region, which accounts to two-thirds of cargo transport within the country. 3. Government has been encouraging private sector investment in telecommunication sector. Improving transportation and communication is a major goal of Bangladesh Government.
Bangladesh South Asia & Bangladesh: 4.5.
–an Investment Destination Factors Attracting FDI
in in
Bangladesh is virtually located as a bridge between the emerging market of south Asia and fastest growing markets of South East Asia and ASEAN countries. The
geographical-economical location of Bangladesh indicates its history of being a nation of traders and suppliers. Bangladesh is poised to become a regional hub where activities relating to assembling, manufacturing, trading and services, would be some of the areas that are picking up over the years. The following facts deserve attention in relation to assessment of Bangladesh as an investment destination:
Bangladesh has never defaulted in its debt-service liabilities to its donors. Bangladesh never experienced negative growth during last three decades. The frequency and intensity of natural disasters are far less in Bangladesh than the other south Asian countries.
Bangladesh exports readymade garments, knitwear, walking shies, leather goods, pharmaceutical, shrimp & frozen foods, vegetables, jute & jute products etc to sophisticated markets of EU, USA, Japan, and many other countries.
The cost of production especially cost of labor both skilled and semiskilled is comparatively lower.
Cost of living is also quite low and reasonable and there is no communal or ethnic problem.
English language is widely spoken and understood. The economy is opened up with rapid liberalization of import policies helping globalization of the economy. “The 15th Survey of Investment –Related Cost Comparison in Major Cities and Regions in Asia” conducted by Japan External Trade Organization (JETRO) in March 2005 found that the ‘The investment cost in Bangladesh has become cheaper compared to the last year and Bangladesh succeeded to develop herself as more competitive than other countries which are potential from the investment point of view to foreign investors.’
A recent World Bank published report entitled “Bangladesh: Growth and Export Competitiveness” acknowledges that during ‘90s, Bangladesh was ranked 11 th best performer amongst 62 low income countries in terms of cross country per capita growth comparison. CONCLUDING REMARKS The world has seen a spectacular wave of global corporate activity particularly during the second half of the last decade. This has been facilitated by advances made in the information technology. This trend, strengthened with the direction toward border less-economies, is drawing more and more TNCs 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.
We may now draw the following conclusions on the FDI reality and prospect in Bangladesh: •
Bangladesh has experienced a stable social and political order during the last decade.
•
Government policies on foreign investment are liberal, supportive and focused.
• Cost of doing business in Bangladesh is fairly competitive. • Incentive package for the foreign investors is lucrative and transparent. • There is an abundant supply of disciplined, highly motivated, low-cost workforce. • There exists a global market access for both primary and manufactured products originated from Bangladesh. • Entry and Exit policies for foreign investors are simple, transparent and liberal.
Chapter- V
Policy & Regulatory Framework of FDI in Bangladesh
Chapt er
5
Policy & Regulatory Framework of FDI in Bangladesh
5.1. Government & Policies: Bangladesh is a moderate, democratic and homogeneous country. It is a constitutional republic with a multi party parliamentary democracy. Elections are held on the basis of universal suffrage. The President is the head of state elected by the members of the parliament for a five-year term. Executive power is exercised by the cabinet headed by the Prime Minister, who is the leader of the house in the parliament. The President appoints the Prime Minister and, on her recommendation, other ministers. He also appoints members of the judiciary. Bangladesh has a four-tier local government system.
The Key features of the industrial policy are cited below: Industrial Policy: Key Features •
To expand the production base of the economy by accelerating the level of industrial investment.
•
To promote the private sector to lead the growth of industrial production and investment.
•
To focus the role of the government as the facilitator in creating an enabling environment for expanding private investment.
•
To permit public undertaking only in those industrial activities where public sector involvement is essential to facilitate the growth of the private sector and / or where there are over riding social concerns to be accommodated.
•
To attract foreign direct investment in both export and domestic market oriented industries to make up for the deficient domestic investment resources, and to acquire evolving technology and gain access to export markets.
•
To ensure rapid growth of industrial employment by encouraging investment in labor intensive manufacturing industries including investment in efficient small and cottage industries.
•
To generate female employment in higher skill categories through special emphasis on skill development.
•
To raise industrial productivity and to move progressively to higher value added products through skill and technology upgradation.
•
To enhance operational efficiency in all remaining public manufacturing enterprises through appropriate management restructuring and pursuit of market oriented policies.
•
To diversify and rapidly increase export of manufactures.
•
To encourage the competitive strength of import substituting industries for catering to a growing domestic market.
•
To ensure a process of industrialization which is environmentally sound and consistent with the resource endowment of the economy.
•
To encourage balanced industrial development throughout the country by introducing suitable measures and incentives
•
To effectively utilize the existing production capacity.
•
To coordinate with trade and fiscal policies.
•
To develop indigenous technology and to expand production based on domestic raw materials.
•
To rehabilitate deserving sick industries .
5.2. Industrial Policy : The industrial policy during post liberation period was not flexible enough to encourage FDI in Bangladesh. The gradual liberalization of industrial policy in Bangladesh started with the announcement of Industrial policy in Bangladesh started with the announcement of Industrial Policy – 1982. This was followed by successive reforms and amendments within the broad them of a liberalized and competitive economy. The current industrial policy was announced in May 1999. The industrial policy –1999 is based on the philosophy of free market economy. The private sector has been recognized as the engine of growth Maximum importance has been given on export oriented and export linkage industries. Industrial policy from post liberation period till the year 1999 is described in brief as under; a. Policy during the post- liberation period:
The attitude of the post –independent government in Bangladesh towards FDI was determined by the industrial policy statement of 1972. According the policy, FDI was allowed only in collaboration with the public sector and with a minority equity participation. No specific field of activity was excluded form participation by foreign investors. All acts or foreign collaboration were to be approved by the government, full freedom of transfer of annual profit after the payment of taxes was provided for repatriation of capital spread over a number of years and a
minimum dividend of 15% subject to availability of profits were guaranteed. Moreover, guarantees were provided that no nationalization would take place within a period of ten years from the placement of the investment and a fair and equitable compensation would be provided in case of nationalization. However, a significant change in the governments economic policy toward FDI was initiated in December 19975. The investment ceiling was increased and a series of important policy measures were initiated to increase the role of the private sector in the field of industrial development. The assurance of a moratorium on nationalization was totally deleted as it was feared that any mention of nationalization would inhibit foreign investors. b. Announcement of Industrial policy in 1982:
The new industrial policy (NIP) was launched in 1982 with a view to promote private enterprise and to impetus to promote FDI inflows in Bangladesh. The main objective of the NIP was to expand the manufacturing sector with increased participation of private sector and to limit the role of the private entrepreneur to the establishment of basic, heavy and strategic industries. There had been a number of incentives and
concessions for private sector investors such as
protection against exchange rate fluctuations, lower rates of interest for industries in least developed areas and export oriented industries, the exemption of royalty and technical know how fees from income tax and excise duty. c.
Development Up to 1986:
To accelerate the pace of industrialization, the government of Bangladesh announced the industrial Policy –1986 with the following objectives, strategies and procedures: • Increase contribution of industrial sector to gross domestic product (GDP) and resource augmentation.
• Effect growth of industries with increased emphasis on private sector participation. • As a priority sector emphasis on small cottage and handloom industries. • Encourage investment from assembly to intermediate and basic manufactories. • Limit role of the public sectors. • Promote agro- Based and agro-supportive industries. • Accelerate import substitutions, export oriented and export linkage industries. • Encourage foreign investment in appropriate sectors. • Encourage foreign investment in appropriate sectors. • Encourage Bangladeshi ventures abroad in areas. d. Revised Policy in 1992:
The industrial policy 1992 is based on the philosophy or market economy. The salient features (excluding the features which are same as previous policy) of the policy are as under: • Develop the industrial sector in order in order to increase its contribution to the gross domestic product, income resources and employment. • Expand industries putting more emphasis on private sectors. • Encourage domestic and foreign investment in overall industrial development. • Expedite development of industries based on indigenous raw material and indigenous technology. • Confine the role of government particularly in establishing strategic and heavy industries. • Create possible opportunities for revitalizing and rehabilitating sick industries.
• Take appropriate measures for preventing environmental pollution and maintaining ecological balance. e. Latest Industrial Policy:
In order to achieve the objective of accelerating industrial growth and to gain a greater share of industry in the GDP as well as top make the industrial policy responsive to the changes occurring in the global economy, the present government announced the latest Industrial Policy- 1999. Salient features of this policy are as follows: • To expand the production base of the economy by accelerating the level of industrial investment, • To promote the private sector. • To attract FDI in both export and domestic market oriented industries. • To generate female employment in higher skill categories. • To diversify and rapidly increase export of manufactures. • To encourage the competitive strength of import substitution industries for catering to a growing domestic market. • To encourage balanced industrial development throughout the country by introducing suitable measures and incentives. • To coordinate with trade and fiscal policies.
5.3. Investment Protection/ International Agreements: • Legal Protection: The policy framework for foreign investment in Bangladesh is based on 'The Foreign Private Investment (Promotion & Protection) Act. 1980,’ which ensures legal protection to foreign investment in Bangladesh against nationalisation and expropriation. It also
guarantees non-discriminatory treatment between foreign and local investment, and repatriation of proceeds from sales of shares and profit. Similarly, adequate protection is available for intellectual property rights, such as patents, designs, trade marks and copyrights. • International
Agreements:
Bangladesh
has
concluded
bilateral
agreements for avoidance of double taxation and investment treaties for promotion and protection of investment with the following countries: • Bilateral agreements: Belgium, Canada, China, Denmark, France, Germany, India, Italy, Japan, Poland, Romania, Singapore, South Korea, Sri Lanka, Sweden, Thailand, The Netherlands, United Kingdom ( including Northern Ireland ). Negotiations are ongoing with U.S.A, Iran, Philippines, Qatar, Australia, Nepal, Turkey, Indonesia, Cyprus, Norway, Finland and Spain. • Investment treaty: Belgium, Canada, France, Germany, Iran, Italy, Japan, Malaysia, Pakistan, Philippines, Poland, Republic of Korea, Romania, Switzerland, Thailand, The Netherlands, Turkey, United Kingdom, USA, Indonesia. Negotiations are ongoing with India, Hungary, Oman, Maldova, DPRK, Egypt, Austria, Mauritius, Uzbekistan. In addition, Bangladesh is a signatory to MIGA ( Multilateral Investment Guarantee Agency), OPIC ( Overseas Private Investment Corporation ) of USA, ICSID (International Centre for Settlement of Investment Disputes) and a member of the WIPO (World Intellectual Property Organization) permanent committee on development co-operation related to industrial property.
5.4. Facilities & Incentives offered in Bangladesh: Facilities & Incentives induce new investors to establish a presence, to expand an existing business or not to relocate elsewhere. They may also be provided to
increase the benefits from FDI by stimulating foreign affiliates to operate in a desired way or to direct them into favoured industries or regions. As the use of investment restrictions has declined, incentives have become more prevalent across the world, especially because the market for FDI in some industries has become global.
•
Tax holiday:
Tax holiday facilities will be available for 5 or 7 years depending on the location of the industrial enterprise. For industrial enterprises located in Dhaka and Chittagong Divisions ( excluding Hill Tract districts of Chittagong Division) the tax holiday facility is for 5 years while it is 7 years for locations in Khulna, Sylhet, Barisal, and Rajshahi, Divisions and the 3 Chittagong hill districts. Tax holiday facilities are provided in accordance with existing laws. The period of tax holiday will be calculated from the month of commencement of commercial production. Tax holiday certificate will be issued by NBR ( National Board of Revenue) for the total period within 90 days of submission of application. •
Tax exemption:
Tax exemptions are allowed in the following cases:
Tax exemption on royalties, technical know-how fees received by any foreign collaborator, firm, company and expert.
Exemption of income tax up to 3 years for foreign technicians employed in industries specified in the relevant schedule of the income tax ordinance.
Tax exemption on income of the private sector power generation company for 15 years from the date of commercial production.
Tax exemption on capital gains from the transfer of shares of public limited companies listed with a stock exchange.
Accelerated depreciation:
Industrial undertakings not enjoying tax holiday will enjoy accelerated depreciation allowance. Such allowance is available at the rate of 100 per cent of the cost of the machinery or plant if the industrial undertaking is set up in the areas falling within the cities of Dhaka, Narayangonj, Chittagong and Khulna and areas within a radius of 10 miles from the municipal limits of those cities. If the industrial undertaking is set up elsewhere in the country, accelerated depreciation is allowed at the rate of 80 per cent in the first year and 20 per cent in the second year. Concessionary duty on imported capital machinery:
Import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares imported for initial installation or BMR/BMRE of the existing industries . The value of spare parts should not, however, exceed 10% of the total C & F value of the machinery. For 100% export oriented industries, no import duty is charged in case of capital machinery and spares. However, import duty @ 5% is secured in the form of bank guarantee or an indemnity bond will be returned after installation of the machinery. Value added Tax (Vat) is not payable for imported capital machinery and spares. Facilities: •
Land and factory buildings are available on rental basis.
•
Electricity, tele-communications, gas and water are provided by the zones.
•
Import and export permits are issued by EPZ within 24 hours.
•
Work permits are issued by BEPZA.
•
EPZ is a secured and protected area.
•
Recreational facilities are available.
•
Availability of food stuff and beverages on payment of nominal tax for foreigners working in EPZs.
•
Potential investors are required to deal only with BEPZA for investment and all other operational purposes.
•
Permanent residentship to a foreign citizen investing a minimum of US $ 75,000 or equivalent amount (non-repatriable); similarly citizenship to any foreign citizen investing US $ 5,00,000 or transferring US $ 1,000,000 to any recognised Bangladeshi financing institution (non-repatriable).
Incentives:
A. Fiscal I. Tax Exemption a. Tax holiday for 10 years. b. Exemption of income tax on interest on borrowed capital. c. Relief from double taxation subject to bilateral agreement. d. Complete exemption from dividend tax for tax holiday period for foreign nationals. e. Exemption of income tax on salaries of foreign technicians for 3 years subject to certain conditions. II. Duty Free Import and Export a. Duty free import of machineries, equipment and raw materials. b. Duty free import of three motor vehicles for use of the enterprises in EPZs under certain conditions. c. Duty free import of materials for construction of factory buildings in the zones. d. Duty free export of goods produced in the zones. e. GSP facilities available for export to USA, European and Japanese markets.
f. Export from Bangladesh to USA enjoys Most Favoured Nation status (MFN).
B. Non- Fiscal I. Investment a. All foreign investments secured by law. b. No ceiling on extent of foreign investment. c. Full repatriation of profit and capital permissible. d. Repatriation of investment including capital gains, if any, permissible. e. Remittances allowed in following cases: - All post tax profit and dividend on foreign capital. - Savings from earnings, retirement benefits, personal assets of individual on retirement/termination of services. - Approved royalties and technical fees. II. Project Financing and Banking a. Off-shore banking facilities available. b. Local and international banking facilities also wide-open. III. Import a. Freedom from national import policy restrictions. b. Import of raw materials also allowed on Documentary Acceptance (DA) basis. c. Advantage of opening back to back L/C for certain types of industries for import of raw materials. d. Import of goods from Domestic Tariff Area(DTA) permissible.
e. Enterprises can sell their 10% of the product to the DTA on payment of duties and taxes under certain conditions. IV. Project Implementation a. Re-location of existing industries from abroad allowed. b. Re-location of industries from one zone to another within the country permissible. V. Operation a. Sub-contracting within EPZ allowed. b. Inter-zone and intra-zone export permitted. c. All customs formalities done at the gate site of the respective factory building within the zone. d. Permission for import/export given in the same day. e. Repairing and maintenance of machineries and capital equipment from domestic tariff area allowed.
VI. Employment a. Liberal employment of foreign technicians/experts allowed. b. Foreigners employed in the zones enjoy equal rights similar to those of Bangladesh nationals. VII. Support Services Customs office, Post office, Medical center, Fire station, Police stations are within the zone. 5.4. Facilities Investors :
and
Incentives for Foreign Investors:-
Tax
Incentives
for
Foreign
1. Tax Exemptions: Generally 5 to 7 years. However, for power generation exemption is allowed for 15years 2. Duty
: No import duty for export oriented industry. For other industry it is @5% ad valorem.
3. Tax law
: i. Double taxation can be avoided in case of foreign investors on the basis of bilateral agreements. ii. Exemption of income tax upto 3 years for the expatriate employees in industries specified in the relevant schedule of Income Tax ordinance.
4. Remittance
: Facilities for full repatriation of invested capital, profit and dividend.
5. Exit
: An investor can wind up on investment either through a decision of the AGM or EGM. Once a foreign investor completes the formalities to exit the country, he or she can repatriate the sales proceeds after securing proper authorization from the Central Bank.
6. Ownership
: Foreign investor can set up ventures either wholly owned on in joint collaboration with local partner.
Private investment from overseas sources is welcome in all areas of the economy with the exception of the four reserved sectors (mentioned earlier). Such investments can be made either independently or through venture on mutually beneficial terms and conditions. Foreign investment is, however, especially desired in the following major categories of industries: ď‚Ľ Export oriented industries;
ď‚Ľ Industries in the Export Processing Zones ( EPZs) ď‚Ľ High technology products that will be either import substitute or export oriented.
Facilities and incentives: (a) For foreign direct investment, there is no limitation pertaining to foreign equity
participation, i.e. 100 percent foreign equity is allowed. Non-resident institutional or individual investors can make portfolio investments in stock exchanges in Bangladesh. Foreign investors or companies may obtain full working loans from local banks. The terms of such loans will be determined on the basis of bank-client relationship. (b) A foreign technician employed in foreign companies will not be subjected to personal tax up to 3 (three) years , and beyond that period his/ her personal income tax payment will be governed by the existence or non-existence of agreement on avoidance of double taxation with country of citizenship. (c) Full repatriation of capital invested from foreign sources will be allowed. Similarly, profits and dividend accruing to foreign investment may be transferred in full. If foreign investors reinvest their repatriable dividends and or retained earnings, those will be treated as new investment. Foreigners employed in Bangladesh are entitled to remit up to 50 percent of their salary and will enjoy facilities for full repatriation of their savings and retirement benefits. (d) Foreign entrepreneurs are, therefore, entitled to the same facilities as domestic entrepreneurs with respect to tax holiday, payment of royalty, technical know-how fees etc. (e) The process of issuing work permits to foreign experts on the recommendation of investing foreign companies or joint ventures will operate without any hindrance or restriction. Multiple entry visa" will be issued to prospective foreign
investors for 3 years. In the case of experts," multiple entry visa" will be issued for the whole tenure of their assignments. Other Incentives: •
Citizenship by investing a minimum of US $ 500,000 or by transferring US$ 1,000,000 to any recognised financial institution ( Non-repatriable ).
•
Permanent residentship by investing a minimum of US$ 75,000 (nonrepatriable).
•
Special facilities and venture capital support will be provided to exportoriented industries under "Thrust sectors”. Thrust Sectors include Agro-based industries, Artificial flower-making, Computer software and information technology, Electronics, Frozen food, Floriculture, Gift items, Infrastructure, Jute goods, Jewellery and diamond cutting and polishing, leather, Oil and gas, Sericulture and silk industry, Stuffed toys, Textiles, Tourism.
Incentives to Non-Resident Bangladeshis ( NRBs) : Investment of NRBs will be treated on par with FDI. Special incentives are provided to encourage NRBs to invest in the country. NRBs will enjoy facilities similar to those of foreign investors.
Moreover, they can buy newly issued
shares/debentures of Bangladeshi companies. A quota of 10% has been fixed for NRBs in primary public shares. Furthermore, they can maintain foreign currency deposits in the Non-resident Foreign Currency Deposit (NFCD) account. 5.5.
Relaxation/
Liberalization
of
Exchange
Control Regulation: Bangladesh
'Taka'
is
convertible
for
current
external
transactions.
Individuals/firms resident in Bangladesh may conduct all current external transactions, including trade and investment related transaction, through banks in
Bangladesh authorised to deal in foreign exchange ( Authorised Dealers ) without prior approval of the Bangladesh Bank. Non- resident direct investment in industrial enterprise in Bangladesh and non-resident portfolio investment through stock exchanges in Bangladesh also do not require prior approval of the Bangladesh Bank. Remittance of post-tax dividend/profit on non resident direct or portfolio investment do not require prior approval. Sale proceeds, including capital gains on non-resident portfolio investment may also be remitted abroad without prior approval. Repatriation of sale proceeds of non-resident investment in unlisted companies is allowed by Bangladesh Bank on the basis of the net asset value of the shares of the company. Investors may obtain relevant procedural details by contacting any Authorised Dealer bank in Bangladesh . To facilitate investment, prior approval of the Bangladesh Bank is no longer required for • remittance of profits to their head offices by foreign firms and companies operating in Bangladesh • issuance of shares to non-residents against investment for setting up industries in Bangladesh. • remittance of dividends on such shares to the non-resident investors. • portfolio
investment
by
non-residents
including
foreign
individuals/enterprises in shares and securities through stock exchanges in Bangladesh . • remittance of dividends on portfolio investment by non-residents through stock exchanges in Bangladesh . • remittance of sale proceeds, including capital gains of portfolio investments of non-residents through stock exchanges in Bangladesh • remittance of principal and interest instalments on loans/suppliers credits obtained by industrial units from foreign lenders with approval of the BOI.
100% foreign owned (Type A) industrial units in the EPZs (Export Processing Zone) do not require prior permission of BOI for such foreign borrowing. • remittance in repayment of principal and payment of interest of such loans. • remittance
of
technical
fees
and
royalties
against
technical
assistance/royalty agreements in conformity with BOI guidelines. • remittance of savings of expatriate personnel at the time of their leaving Bangladesh, out of the salaries and benefits stated in their employment contracts as approved by BOI. • extension of term loans by banks on normal banking considerations to foreign firms operating in Bangladesh • extension of working capital loans to all foreign owned/controlled industrial and trading firms/companies by banks on the basis of bank customer relationship and normal banking practice. • obtaining of interest-free repatriable short-term foreign currency loans by foreign firms investing in Bangladesh from their head offices or any other sources through any authorised dealer.
5.6. Civil society and Stakeholders perception of FDI:
Many issues and concerns have been raised about FDI and related aspects by the members in the NRG meetings that provide important inputs to the study. Important issues are summarised in the following points: (i) FDI is important for growth, but inflow is insufficient: Many of the participants of the NRB meeting underscored the need for boosting investment to speed up the growth rate of the economy. The participants observed that despite the increase in domestic investment and FDI inflow in the past decades, it has not been sufficient to generate enough growth to rid the country of a prolonged underdevelopment trap. In addition to supplement domestic investment, FDI is important for transfer of technology and efficiency-augmenting managerial skills. It is also important in generating employment in a labour-surplus country like Bangladesh. However, contrary to the imperatives and expectations, actual FDI inflow has been quite low in the South Asian countries, especially Bangladesh. (ii) Poor FDI inflow is a reflection of poor investment environment in Bangladesh: The NRB meetings extensively discussed the factors behind the poor FDI inflow in Bangladesh. In this context, it was viewed that FDI outsourcing is largely location-specific, depending on profit opportunity and the expectations of the investors. In terms of incentive package, Bangladesh is at a high-ranking order compared to many developing countries as it allows 100 percent profit repatriation. Also, the country has the advantage of having cheap labour. Although some of the issues like democratic norms, human rights, market access, and the existence of a well organized civil society, have been debated as potential impediments, thepanel unanimously identified the country’s overall investment regime as the major hindrance to attract the desired FDI inflow. Poor investment environment is due to the following factors:

High cost of doing business due to huge transaction costs arising from
bureaucratic inefficiency, corruption, poor governance, etc.
Poor infrastructure facilities such as inadequate power supply, under-
developed transport and telecommunication service, inefficient and expensive port service.
Anti-investment bias of bureaucracy with reform inertia, inefficiency, lack of coordination, red tape in the government machinery due to systemic distortions. A high degree of political instability and intolerance as the democratic values and institutions are severely under-nourished.
Weak law and order situation that oppresses the business people in terms of
high incidence of toll extraction by the political and local miscreants.
Corruption and lack of good governance that increases the cost of doing
business and creates unfair competition within the business, distorts investment priority so as to end up with sub-optimum allocation of investible fund.
Narrow market size due to low per capita income, even though the country
has a population of more than 130 million people.
Poor investors’ confidence in the country due to the reasons mentioned
above, besides the factors such as anomalies in the regulatory framework, slow pace of privatization and the half-hearted implementation of reforms, have resulted in an erosion of investor confidence.
Inadequate and outdated business law and improper application.
Negative image of the country to potential investors because of the other
factors also such as policy inconsistency and improper treatment to some of the foreign investors etc.
Lack of local partners with adequate initiatives for joint ventures.
(iii) Other Issues: NRB members also raised the following related issues:
The measurement of FDI in Bangladesh is inadequate as it mostly
concentrates on equity investment and re-investment of the retained earnings of the existing foreign companies. Intra-company borrowings of foreign
companies are rarely included in FDI estimation. The Board of Investment is working now to have a more complete estimate of FDI.
Export-oriented FDI should be focused upon more because of the narrow
domestic market.
Sub-regional co-operation should play a special role in enhancing
investment, particularly in some sectors.
The issue of free trade between Bangladesh and USA, and between
Bangladesh and India, is very important to it. India and USA are the two major trading partners of the country. USA is also the largest foreign investor. Although both USA and Bangladesh may gain from free trade, formation of the Free Trade Agreement (FTA) between the two raises many questions that have to be resolved.
Chapter- VI
Inflow of FDI in Bangladesh
Chapt er
6
Inflow of FDI in Bangladesh
6.1. Inflow of FDI in Bangladesh Foreign Direct Investment (FDI) has long been recognized as an important channel of capital and technology flows from developing countries. World Investment report 2006 shows that, while North-South capital flaws continue to play an important role in economic development, the world of FDI is becoming increasingly multi-dimensional. One of the most significant recent features of
globalization has been the rise of FDI from developing a transition economy. This phenomenon presents new opportunities for developing home and host economies, with the international, “rules of the game” changing rapidly. Global Foreign Direct Investment (FDI) inflows rose substantially in recent years. This growth was spurred by cross-border mergers and acquisitions (M&As), which reflected strategic choices by transitional corporations (TNC) following increased corporate profits and the recovery of stock markets. “Current Growth is broad-based with inflows rising in 126 out of some 200 economies, reflecting high economic growth and strong economic performance in many parts of the world”said Dr. Supachai Panitchpakdi, Secretary-General of UNCTAD. According to World Investment Report, In percentage terms, developed countries attracted 59% of global FDI, developing countries attracted 36%, South, East and South-East Asia received 18% and South-East Europe and the Commonwealth of Independent States accounted for remaining 4%. The LDCs received only 1.1% of the total FDI. Also there is depressed condition, economy of Bangladesh can position itself within the Potential Index ranking well enough among 200 economies. The following table showing ranking of Bangladesh Table -6: Inward FDI Potential Index rankings 1990-2006
Year 1990 1991 1992 1993 1994 1995 1996
Rank 105 103 113 101 107 118 110
Year 1996 1997 1998 1999 2000 2001 2006
Rank 110 111 111 113 110 121 116
*Source: Bangladesh Economic Review 2006
Until early 1980’s many of the least developed countries including Bangladesh were skeptical of the intention of the FDI and perceived it as a tool for promoting
foreign interest. FDI inflows in Bangladesh have grown from a trickle during 1980 to above 300 million towards the end of 1990, in 2005 it stood at about 692 million (UNCTAD 2007) Figure-6 : FDI inflow in Bangladesh
*Source: UNCTAD
A component-wise analysis of FDI inflow in 2005 shows that about 50% of FDI came as equity, 29% as reinvestment and the rest as intra-company borrowing. The higher reinvestment indicates unwavering confidence of foreign investors on overall investment climate of the company and simultaneously, competitiveness of related business sectors. Table-7: FDI inflow in Bangladesh during 2005- Summary by FDI Component (in million US$)
FDI Components a. Equity Capital b. Reinvested Earnings c. Intra-company Loans Total
Jan-Jun
2005 Jul-Dec
Total
252.4 144.1 85.3 481.8
173.2 103.4 86.9 363.5
425.6 247.5 172.5 845.3
* Source: Bangladesh Bank Enterprise Survey, 2006
Share % 50.35% 29.28% 20.37% 100%
FDI Component
20.37%
50.35% 29.28%
a. Equity Capital
b. Reinvested Earnings
c. Intra-company Loans
Now, we will look at Figure-7, the investments of various countries in Bangladesh in year 1991 to 2005-.
Table-8: Country wise Sources (by region & economics) of foreign investment in 2005 Country UK China Switzerland Canada S. Korea India USA Singapore Netherlands Japan S. Arabia Germany Taiwan UAE Pakistan
FDI (Million US $) Year 2005152.8 11.4 2.3 .7 29.9 2.7 141.8 97.5 15.4 46.4 1.0 1.6 11.4 55.5 25.5
Country UAE Pakistan France Denmark Sri Lanka Hong Kong Thailand Singapore ADB IFC Egypt Norway Malaysia Others
*Source: Bangladesh Economic Review 2006
FDI (Million US $) Year 200555.5 25.5 1.7 18.3 4.1 53.1 .2 97.5 12.7 31.7 48.4 53.5 33.1 .5
6.2. FDI Proposals with BOI & BEPZA by Countries: Most of the FDI have been brought by companies registered with the BOI and the balances have been invested in companies registered with BEPZA. Figure-8: FDI Distribution by Regulating Authorities FDI Distribution by Regulating Authorities
13%
87% BOI Registered
BEPZA Registered
Table-6 presents a component-wise analysis of FDI inflow in 2005 accordign to its affiliation with the regulatory authorities, i.e. BEPZA and BOI.
Table -9: component-wise analysis of FDI inflow FDI Component a. Equity Capital b. Reinvested Earnings c. Intracompany Loans
BOI- Registered Entities (2005) 410.8
BEPZARegistered Entities(2005) 14.8
Total FDI (2005) 425.6
213.8
33.7
247.5
109.9
62.3
172.2
*Source: Bangladesh Economic Review 2006
6.3. Sector wise FDI Inflow s in Bangladesh A sector-wise analysis of FDI inflow in 2005 demonstrates that FDI in Bangladesh has been widely spread among the key business sectors concentrating on telecommunication, manufacturing, energy and power and trade and commerce.
Table -10: Aggregate and Sector-wise FDI inflow, 1995-2005(USD in million) FDI Sectors
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Agriculture & Fishing Power, Gas Petroleum Manufacturing
0 &
3.2
0.3 47
1.4
1.4
2.9
15.2
1.1
1.6
4.1
1.7
2.4
242.1 235.2 83.5 301.1 192.4 57.9 88.2 124.1 208.2
45.5 89.1 162.4 139.8 191.7 193.5 Industry (Total) 48.7 136.1 404.5 375.0 275.2 494.6 Trade &Commerce 41.3 92.3 158.9 164.3 27.5 53.2 Transport and 1.7 1.5 5.9 25.3 0.5 5.4 Telecommunication Other Services 0.5 1.6 4.7 10.5 2.8 10.3 Services (Total) 43.5 95.4 169.5 200.1 30.8 68.9 Total FDI to 92.3 231.6 575.3 576.5 309.1 578.6 Bangladesh
132.2 143 165 139.5 219.3 324.6 200.9 253.2 263.6 427.5 27.6 63.7 44 66.6 130.5 0.9
48.5 45.9 127.5 284.9
0.3 13.7 3.1 28.8 125.9 93
1.1 195.2 415.4
354.3 328.3 350.2 460.4 845.3
Source : Statistics Department, BB
The first major compositional shift was within manufacturing from importsubstitutes to export oriented manufacturing. A more recent shift of FDI has been towards services. These global changes are also evident in Bangladesh economy and have been driven in particular by the opening up of service industries to FDI. Foreign Direct Investment began entering trade sectors in the early nineties. With the country’s accession to the World Trade Organization (WTO), service sectors like Power and energy, bank, insurance, telecommunications and other sectors are being liberalized and progressively opened in Bangladesh.
6.4. Massive Bangladesh:
Boom
of
Foreign
Investment
in
Bangladesh has experienced a boom in foreign investment in the country over the last two years. The county will get up to $1 billion foreign direct investment within 2006 and expected to more inflow of fund.
In 2004 foreign cash flowing into the country reached $530 from $440 million despite political instability and natural disasters. In 2006 it target to get minimum of 2 billion. Why more companies were looking to do business in Bangladesh – the simple answer is a minimum cost of production is ensured here. A country of 140 million people, Bangladesh is a free market economy that has experienced a more than 5% growth rate in recent years.
In 1995, the Government of Bangladesh took a bold decision to open up the mobile telecommunication for private sector operations. Since its inception Grameen Phone has invested more than US$ 750 million. In 2004, out of total $660.8 million foreign investment, $237 million was invested in the telecommunication sector, a share of 35.93% of the total FDI in Bangladesh.
Lafarge Surma Limited (Lafarge of France)- invested in production cement with total of US$240 for a plant of dry process cement.
Indian Tata group offer to invest of total of US$2 billion in steel industry, 1000 megawatt power generation project and in a fertilizer factory. This would be by far the biggest FDI inflow by any company in the history of Bangladesh. TATA is planning to invest $2.5 billion in Bangladesh. By the by, we have heard that it would create a large number of employment & $ 1 billion increase in export capacity of home country. TATA is saying that they could generate employment for 8,000 people, while creation of 100,000 employments is possible for local investor’s at the same cost
Recently Dhabi Group, a UAE based company, has proposed to invest $2 billion in Bangladesh on telecom sectors, tourism & hotel sectors etc.
An Egyptian telecom giant Orascom already has invested $ 150 million in Bangladesh’s mobile phone sector.
US oil company UNOCAL already a player in Bangladesh energy industry to set up a $200 million methanol plant. Except these, there are many more investors who are interested to invest in Bangladesh because according to business analysts, Bangladesh as one of the Asia’s most attractive business places where return to investment in many cases 3 to 4 times higher than many other South Asian or South East Asian countries.
6.5. Major Impediment Bangladesh:
to
Inflow
of
FDI
in
Despite the FDI friendly policies of the government and a culture of hospitality to foreigners, FDI records in the country in terms of the number of projects implemented- as compared to those officially registered- is frustrating. Of the 365 FDI projects registered during 1996-1998 only 72 went into production in end of 1999 while remaining 266 languished only as file cases. Even Tata Group’s proposal is hanging for years. Problems that have restricted FDI potentials in the country include the following: • Excessive bureaucratic interference • Alleged irregularities in processing papers • Inordinate delays in selecting project for feasibility studies. • Frequent changes in policies on import duties for raw materials, machinery and equipment etc. • 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. • Lack of professional personnel. – The technical, managerial and innovative skills in the country needed to efficiently handle entrepreneurial function including risk taking and planning and coordination and control. • Political instability including frequent hartals, poses as the real hazard. As well corruption, frequent policy shift, lack of stability and good governance, labour strike in recent times are giving wrong signals to prospective investors to invest in the country. Worsening law and order situation and sense of insecurity are being regarded as major problems for the foreign investors inside and outside the export processing zones, where such investors do mostly concentrate.
Chapter- VII
Impact of FDI inflow in Economic Development Chapt er
7
Impact of FDI inflow in Economic Development
7.1. Theoretical Overview: There are several benefits of FDI on a macroeconomic level, particularly for a Third World Nation such as Bangladesh, where inflows of foreign investment can help broaden economic production and growth. FDI provides capital from sources
abroad which the country is unable to supply domestically. Foreign investment helps to fill the saving-investment gap caused by the lack of domestic savings converting into investment. Bangladesh specifically faces many obstacles in expanding its cities with overpopulation and low GDP per capita. The inflows facilitate capital formation and the growth of a number of economic sectors, including industry, manufacturing, infrastructure, and energy. The expansion leads to a rise in the availability of jobs and a fall in the unemployment rate11. Consequently, GDP and per capita income increase which, in a developing country, fosters poverty alleviation. In addition, FDI strengthens ties with developed countries that yield cost advantages in the form of advanced technology transfers and resulting positive externalities. Increased financial associations also lead to stronger capitalistic markets and ideals of corporate governance and social responsibility. On the basis of this intricate link between FDI and growth/development, the trade regime of Bangladesh has been intensely liberalized to maintain the streams of investments and finances from abroad. These reasons also increase the effort of the government to try and make the country an attractive destination for FDI, which in itself has several benefits. The result has validated a reinforced incentive to educate and train the population to make Bangladesh’s labor force more competitive through higher national education expenditure. The effectiveness of domestic institutions such as the Grameen Bank, however, appears to be more effective in fostering investment in human capital (via female empowerment) than FDI. In a country like Bangladesh, where the economy is driven by high volume imports, a huge capital account deficit accumulates as foreign exchange flows out. Sattar (1999) notes that FDI is a fundamental and necessary component for longterm sustainable growth in Bangladesh. In this context, FDI enables various economic sectors to become efficient and increase the production of the economy. Sattar (1999) discusses the advantages of exports and FDI outflows in this context.
Outflows enable a nation to earn foreign exchange and improve its capital account; it can increase an already existing surplus or, as in the case of Bangladesh, reduce its budget deficit and possibly help bring about a surplus in the distant future. FDI inflows tend to deter the capital account has a strong association with higher import. However, when such inflows help raise the production capacity, the economy can become more export-oriented and gain foreign exchange currency. This earned currency can finance increased imports or inflows of foreign capital and, in turn, sustain further growth and development. Thus, Bangladesh has adopted a capitalistic, export-oriented growth strategy. Specifically, the relatively recent success of the RMG industry exemplifies this cycle. Empirical Evidence & Analysis: This section includes a series of regressions to underscore the many advantages and growth prospects that FDI inflows have brought to the Bangladesh economy. The objective is to not only gain insight into the country’s economic progress in recent years but to also provide a better understanding of its limitations. The methodology of the empirics constitutes a series of regressions to prove a significant correlation between FDI and economic growth. In trying to analyze such effects of a Third World Nation such as Bangladesh, it is important to recognize that data on key development indicators are often times missing or inaccurate. For this reason, the data used in the analysis will begin from 1995. An array of method can be used from this the most widely used method Least Squares is used for trend analysis. The Straight line trend is represented by the equation-
Yc = a + bX Where Yc = denotes the trend computed values to distinguish them from the actual Y values (FDI). a = is the Y intercept. b = represent slope of the line. To determine the value of the constant a and b the following two equations are used: ∑Y = Na + b∑Y
------------(i)
∑XY = a∑X + b∑X2 ------------(ii) Figure-9: FDI - Trend Analysis Linear Trend Value of FDI inflow by Least Square Method 900 800 700 600 500 400 300 200 100 0 1995
1996
1997
1998
1999
2000
FDI(actual
2001
2002
2003
2004
2005
Trend Value
The following tables express the coefficients and t-statistics of each independent x-variable to demonstrate its level of significance. The R-squared or coefficient of determination is included to represent how much variation in the dependent yvariable is captured by the regression. Table -11A: Effect of FDI Inflow (as % of GDP) and Socioeconomic Variables on GDP per Capital GrowthGDP per capita growth (annual %) FDI, net inflows
*(Significant at 5%) 0.014
(% of GDP) Time Trend (1995-2005) Observations
(2.40) 11
Note: t- statistics results
Table- 11A examines the relationship between FDI inflows (as a percent of GDP) and the annual growth in GDP per capita, which is arguably a better indicator for economic growth since it deals with the percentage change rather than the absolute value. Regression has been included as a benchmark to demonstrate the positive correlation between GDP per capita growth and FDI inflows. It suggests that a unit increase in FDI inflows (percentage of GDP) induces a 0.014 increase in GDP per capita growth. Table -11B: Effect of FDI Inflow ( as % of GDP) on Commodity Export Export of Goods and FDI, net inflows
Services 2.784
(% of GDP) Time Trend (1997-2005) Observations
(2.15) 0.73 09
Note: t- statistics results done at 5% level of significant
Table- 11B reveals that foreign direct investment is positively correlated with exports at the 5% level. It suggests that a $1 increase in FDI leads to a $2.784 increase in exports. The analytics provide an understanding of how FDI can help sustain economic growth. GDP is not included in the equation because exports are already a part of GDP and this would account for it twice. Lastly, it is important to note that a deeper analysis could have been provided if more data was available but it is necessary to consider that Bangladesh is a relatively new nation only 35 years of age. There are not as numerous data
collection agencies working domestically to convey such information while government corruption often times leads to misconstrued information.
7.2. Impact of FDI Inflow on Sector Development: Table 12.1, 12.2 and 12.3 depict the pattern of FDI inflow in different sectors and the sectoral growth rate over the last one decade. And such trend of FDI inflow in different sectors influences the country’s growth patterns of different sectors, particularly main three sectors, agriculture, industry and service. The industrial and service sectors get momentum and attain a steady increasing trend over the years, which are described in the following sections. Table 12.1: Impact of FDI inflow in Agricultural SectorYear 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
FDI inflow (USD in million) 0 0.3 1.4 1.4 2.9 15.2 1.1 1.6 4.1 1.7 2.4
Agriculture Sector growth (percentage) 3.1 5.9 3.2 4.7 7.4 3.1 0.01 3.1 4.1 2.2 4.67
Correlation Matrix FDI inflow in agriculture FDI inflow in agriculture Sectoral growth(agriculture)
Sectoral growth(agriculture) 1
-0.029495326
1
It is evident from the correlation matrix that inflow of FDI in agriculture sector does not necessarily has any impact on the growth trend of agriculture sector. Table 12.2: Impact of FDI inflow in Industrial Sector Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
FDI inflow (USD in million) 48.7 136.1 404.5 375 275.2 494.6 324.6 200.9 253.2 263.6 427.5
Sectoral growth(percentage) 6.9 5.8 8.3 4.9 6.2 7.4 6.5 7.3 7.6 8.3 10.45
Correlation Matrix FDI inflow in industry FDI inflow in industry Sectoral growth(industry)
Sectoral growth(industry)
1 0.126755702
1
The correlation matrix depicts that there exists some sort of correlation between the inflow of FDI in industrial sector and the growth rate of the same. It is positively correlated but weak. Therefore, we can say that the FDI inflow in this sector over the last one decade has some sort of impact on the annual growth of the industrial sector. Table 12.3 : Impact of FDI inflow in Service Sector
1995-96 1996-97 1997-98 1998-99 1999-00
FDI inflow (USD in million) 43.5 95.4 169.5 200.1 30.8
Sectoral growth(percentage) 3.9 4.5 5 5.2 5.5
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
68.9 28.8 125.9 93 195.2 415.4
5.5 5.4 5.4 5.7 6.4 7.7
Correlation Matrix
FDI inflow in service FDI inflow in service Sectoral growth(service )
Sectoral growth(service) 1
0.330326617
1
It is evident from the correlation matrix that FDI inflow in service sector is positively correlated to the annual growth pattern of the sector over the past decade. Therefore, the higher growth trend in service sector is achieved due to recent FDI inflow in telecommunication, banking and power and energy sector. 7.3. Employment Situation: Due to scarcity of data on non-EPZ employment, it is difficult to draw a complete picture relating to employment generation impact of FDI. A recent study by FICCI in 2004 had the goal of ascertaining the size of employment by foreign companies in the domestic tariff area. According to this survey, a total of 129,549 persons were employed in foreign firms, accounting for 0.68 percent of total manufacturing employment of Bangladesh, the highest share of workers in foreign companies was employed in the consumer-goods and apparels industries. In the EPZs, the number of workers increased from about 130,000 in FY03 to 140,050 in FY04, which is about 0.74 percent of country’s total manufacturing employment.
During last five years , more than 1.8 million new jobs have been created in BOIregistered project alone. Year wise breakdown of new jobs creation from FY 2001-2002 to 205-2006 is illustrated in the following graphFigure-10: Potential Employment Opportunity Potential Employment Opportunities in BOIRegistered Projects 425232
418529
2004-05
2005-06
373625 319516 273754
2001-02
2002-03
2003-04
*Source: Bangladesh Economic Review 2006 Table-13 shows the number of industries, investment cost and manpower utilization of seven EPZ at Dhaka, Chittagong, Comilla, Mongla, Uttara, Iswardi and Adamzee EPZ. Upto June 2006, 242 idustrial units were operational in these seven zones with a total of investment cost pf US$ 979.46 million. A total of 1,77,809 manpower has been employed in these industries. According to the proposal another 66,007 jobs will be created. Table-13: Industries under Bangladesh Export Processing Zone and Their Performance in terms of Investment and Employment generation (up to June 2006) Goods
Number of
Total Investment
Total
Ready Garments
Industries 49
(US$ million) 253.28
Manpower 94742
Electronics
15
52.27
3001
Textile Goods
26
239.23
20158
Metal Goods
12
20.57
815
Leather Goods
12
52.36
5280
Plastic Goods
12
21.24
1025
Cap
07
43.12
12583
Terrytowel
16
34.89
4491
Knit textile
21
84.28
19028
Garments Goods
30
76.01
6013
Others 41 102.19 10674 Total 242 979.46 177809 *Source: BEPZA & Bangladesh Economic Review 2006
7.4. Revenue Impact Foreign investors are a potentially important source of revenue for host countries, and these revenues can in turn support economic and social development through increased public investment. It has been estimated that foreign investors in Bangladesh are paying around $13.20 million annually to the government exchequer. However, much revenue-earning opportunity is often lost due to excessively generous incentive packages offered to FDIs.
Chapter- VIII
Conclusion & Recommendation
Chapter
8
Conclusion & Recommendation
8.1. Conclusion There is no doubt that globalization has resulted in large increase in FDI. Greater inflow of FDI has bolstered deeper integration of World economies. Though there are some serious potential drawbacks of FDI, developing countries are not in a position to turn back from FDI. But, what they can and should do is to try to minimize its negative effects. They should look at ways to make FDI more
meaningful. The proponents of foreign direct investment (FDI) argue that FDI brings prosperity to the recipient countries through technological transfer, increasing volume of exports, enhancing job opportunities, and increasing government revenue. FDI not only increases the stock of domestic capital to finance new development projects, but also simultaneously provides access to new technology and managerial and marketing know-how. Despite these merits of FDI, opponents argue that it increases dependency of the recipient countries which makes them vulnerable to the footloose nature of FDI. Another view is that development of a country should come through a process of domestic industry development such as development of small and medium scale enterprises (SMEs) and state-owned enterprises (SOEs). But whatever the opponents' view, FDI is generally welcomed in Bangladesh as well as worldwide. If we analyze the FDI in Bangladesh, most of the FDI has gone to the energy sector. Comparatively FDI in manufacturing sector is not high. Huge investments already exist in our energy sector, but we are not still sure how much capability our Petrobangla and BAPEX have achieved from the technology brought by international oil companies. We must have to learn the technology; we must try to reduce dependency on them. Otherwise, we would not get much benefit from FDI. This may be due to the fact that Bangladesh has a small domestic market and is not fully capable of consuming quality goods due to poor economic conditions of the people. This study has undertaken a scientific approach to examining the relationship between FDI and economic growth. Though the country is performing much better than the dire straits of extreme poverty during the 1970s and 1980s, it remains poor and populous with very low income per capita. Such inadequacies have stifled growth and development. Therefore, FDI is pivotal in providing Bangladesh the necessary finance and capital to achieve sustainable growth as well as poverty
alleviation. FDI is playing an important role in the economic development of Bangladesh in terms of capital formation, output growth, technological progress and exports. Nevertheless, concerns remain about the possible negative effects of FDI including problem of monopoly, technology dependence, and capital flight and profit outflow. This fact has been revealed from the earlier chapter’s data and correlation matrix. As we have seen from the growth pattern of industry and service sector, which is positively correlated with the FDI inflow, investment in the service sector is not discouraging. It has a linkage effect on the economy. Statistical analyses were used to exemplify the essential function of foreign investment in maintaining economic growth. FDI inflows have been able to increase GDP by raising the economy’s output capacity and full employment level. These enhancements are allowing the country to become more exportoriented and continue on its quest for development. Overall, FDI can provide the necessary tools for Bangladesh to progress further and realize higher growth levels by utilizing all its resources to their fullest potential.
8.2. Recommendation Foreign Direct investments are coveted by developing countries because these countries do not generate internally enough investible resources to invest and accelerate their economic growth. Bangladesh, as developing country, needs ample investment in its economy to spur its growth. Thus it is the time to address the issue of attracting a much volume of FDIs by Bangladesh and to do it promptly and effectively. • Bureaucracy of a country is entrusted with the important task of execution of public policy, management and delivery of public goods. Efficiency of a country’s bureaucracy has direct and indirect bearings on both domestic and external investment flows. Appropriate reform
measures are needed in the country’s entire administrative system. While it is not possible to eliminate bureaucracy, there is a serious need to improve its efficiency and productivity. Adequate training of officials and simplification of laws are important in this regard. Bureaucratic control and interference in business and investment activities must be minimized on a priority basis. • Overall law and order situation in Bangladesh is far from satisfactory. The use of ‘cadres’ by political parties gives rise to terrorist activities directly and indirectly. The business people are oppressed by the high incidence of toll extraction by the political and local miscreants. Businessmen allegedly have to pay involuntary tolls at almost every stage of business operations. All this increases cost of doing business and lowers business competitiveness. Law and order situation must be improved through appropriate reforms in law enforcement and the judicial system. Total overhauling of the police force is essential in this regard. • A poor infrastructure facility is one of the prominent hurdles for investment in Bangladesh. Although there has been a modest improvement in the road infrastructure in the recent years, overall infrastructure facilities are still inadequate. Inadequate power supply is another major problem. Many industrial units look for alternative sources of power resulting in higher operational costs. Although Bangladesh is a labour surplus country, there is a shortage of highskilled manpower as demanded by modern investors, particularly by the foreign ones. Bangladesh should invest more in physical and social infrastructure. Rapid growth in the power sector is a must. Telecommunication sector must be expanded and modernized so as to supply the growing demand for telecom services at internationally competitive costs. It should be able to provide support towards the
development of information communication technology (ICT). Higher education needs to be restructured so as to develop more skilled manpower suitable for production and management activities at international standards. • Chittagong Port, the major seaport of the country, is one of the most cost ineffective seaports in the world. A recent survey shows that the average turnaround time for a ship in Chittagong Port is around 9-12 days, whereas the international standard is 2-3 days. Low quality service, delay and uncertainty in loading and unloading of goods, lengthy custom clearance process, frequent strikes, inadequate facilities for container shipment, all this adds to the cost of transaction. Port efficiency must be improved. The custom clearance procedure should be simplified so that it is completed within a few hours. A new port at a different location, preferably a deep-sea port should be set up. • There is a strong complementarily between domestic investment and FDI both local and foreign investment. Greater participation by the private sector may encourage foreign private investment as well. Further, market distortions need to be minimized to ensure a competitive business environment. A pro private sector business environment is essential to stimulate inflow. • The development of an industrial park could be very helpful in creating a congenial environment for investment in selected areas even within the context of overall poor investment environment in the country. Availability of ready infrastructure along with some security support in an industrial park may attract foreign investors for investment in profitable ventures. • Foreign investors actively consider the size of the domestic market when making investment decisions. However, Bangladesh does not have a large domestic market for many goods. Hence, we have to encourage FDI in export-oriented industries. The following steps may be suggested to further attract export-oriented FDI:
•
New Export Processing Zones (EPZs) may be set up closer to the capital or
the port city so as to minimized transport costs.
•
Implementation of the ongoing EPZ projects should be fostered.
•
Instead of relying just on common products for export such as ready-made
garments (RMGs), FDI must be attracted to new export items where Bangladesh has some proven comparative advantage like plastic products, food products, ceramics, etc. Identified export-led investment projects must be promoted among the foreign investors through sectoral profiles. • Regional co-operation has become important as a means of economic cooperation among countries in a region. It may also help in enhancing FDI inflow. Free trade arrangement under regional co-operation may relax the problem of limited market size by ensuring a unified regional market. • One of the most important factors in attracting FDI is the image of the country as perceived by potential foreign investors. Unfortunately, Bangladesh suffers due to a poor image in the international arena. Despite various government actions, overall image of the country has not been very bright because of poor governance, distorted market, halfhearted reforms campaign, inadequate private sector development, poor infrastructure, political instability and natural disasters, etc. Other factors that are responsible for a poor image of the country are policy inconsistencies, lack of proper treatment to foreign investors and instability of policy etc. Following points may be recommended to improve the image of the country:
• Positive developments must be promoted abroad among the potential investors to minimize the negative image;
•
Foreign investors should be treated very cordially. Visa requirement and
complexities should be minimized further;
•
Reforms process must be speeded up and further de-regulation
implemented;
•
Policies and actions must be consistent, so that no wrong signal is
conveyed to the investors; and policies must be communicated to investors and concerned domestic regulatory bodies; and
•
A national consensus about the need for FDI and its benefits should be
built up.
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