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Prospects of Foreign Direct Investment

in Bangladesh Economy

Prepared for:
Dr. Pinki Shah
Course Instructor: Microeconomics
MBA Program

Prepared by:
Md. Tanvir Hasan
ID. 091051019
Master of Business Administration
Semester: Summer 2009

ULAB, Dhaka
August 10, 2009
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Section A: Introduction

1.0 INTRODUCTION
Economic supremacy is the foremost feature of the current world. In order to survive,
Bangladesh has no other options but to attain economic development. Foreign Direct
Investment (FDI) is recognized as a key component for economic growth for Bangladesh.
Being one of the Least Developed Countries (LDC) with insufficient domestic savings rate for
investment after fulfilling its basic needs, the importance of foreign investment is
unquestionable. Foreign Direct Investment (FDI) will create employment, increase efficiency
of labor, encourage technology transfer and develop new exportable sector. To attract more
and more FDI the government of Bangladesh has been trying to establish private investment
friendly environment. A number of opportunities have been given by the Government of
Bangladesh (GoB) to attract foreign investors to invest in the country in some prospective
sectors. As Bangladesh does not have sufficient domestic savings for investment, foreign
investment is the most powerful ingredient for its economic development.

In international business FDI has become a significant component for many countries.
Nowadays Asian countries have a great influence in the global economy. Though Bangladesh is
comparatively lagging behind of them, there are a lot of opportunities to attain economic
development by undertaking some initiatives. Considering the above facts the overall purpose
of preparing the paper was to identify the prospect of Foreign Direct Investment in Bangladesh
Economy.

1.1 Defining FDI


FDI is defined as 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). FDI implies that the investor
exerts a significant degree of influence on the management of the enterprise resident in the
other economy. Such investment involves both the initial transaction between the two entities
and all subsequent transactions between them and among foreign affiliates, both incorporated
and unincorporated. FDI may be undertaken by individuals as well as business entities. Flows
of FDI comprise capital provided (either directly or through other related enterprises) by a
foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a
foreign direct investor. FDI has three components: equity capital, reinvested earnings and
intra-company loans.

Section B: Details Analysis

2.0 PRESENT FDI STATUS IN BANGLADESH


As a developing country, Bangladesh needs FDI for its ongoing development process. Since
independence, Bangladesh is trying to be a suitable location for FDI. However, the total inflow
of FDI has been increasing over the years. In 1972, annual FDI inflow as 0.090 million US$,
and after 33 years, in 2005 annual FDI reached to 845.30 million US$ and to 989 million US$
in 2006 (UNCTAD-2005, Bangladesh Investment Handbook 2007- BOI). Contribution of FDI
was not remarkable until 1980, a year of policy change. That year government enacted the
‘Foreign Investment Promotion and Protection Act, 1980’ with an attempt to attract FDI.
Enacting the Act government opens all sectors for FDI other than defense equipment and
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machinery, nuclear energy, forestry in the Table I: FDI inflows 1995-2006 (US$ in million)
reserved forest area, security printing and Year FDI inflow
minting, and railways (Foreign Investment
Promotion and Protection Act, 1980). 1995 92.3
1996 231.6
The table shows a fluctuating trend of the 1997 575.3
FDI inflows over the above mentioned 12 1998 576.5
years. Data shows that in 1999 there was a 1999 309.1
sudden fall in the FDI, and again in 2001, 2000 578.6
2002 and 2003 the falling tend continued for 2001 354.5
many reasons. Among others serious 2002 328.3
2003 350.2
political unrest during the period was a
2004 460.4
major factor that discouraged foreign
2005 845.3
investment in these years and it took quite
2006 989
some time to regain the confidence of
Source: Statistics Department of Bangladesh Bank.
foreign investors. It stabilized afterwards but
remained below the average achieved during 1997-2000. Later on during next two years period
it becomes alive again.
The graph shows inconsistent Exhibit I: FDI inflow trend from 1995-2006
proceeding of the FDI in Bangladesh
since 1995. It is a matter of great
concern that in spite of Bangladesh’s
comparative advantages in labor-
incentive manufacturing, adoption of
investment friendly policies and
regulations, establishment of EPZs in
different suitable locations and other
privileges, FDI flows have failed to be
accelerated. However, the year 2005 and
2006 show a substantial improvement in
FDI achievement.

3.0 FDI TRENDS


The increasing trend of FDI in recent years is a good sign for Bangladesh. But a sector-wise
analysis of FDI reveals that the foreign investors have so far made a major shift in their
investments in Bangladesh. Table II (Sector-wise analysis of FDI inflow) shows a shift of FDI
that has been made towards power and energy, manufacturing (especially in RMG) and
telecommunications, whereas agricultural, industrial and trade and commerce have been
neglected. Industrial sector that plays key role in the economic development of a country got
foreign investment US$ 494 million in 2000, which is the last highest amount of FDI in
industrial sector till 2005.
Table II: Sector-wise FDI inflow, 2000-2005 (calendar year) (US$ in million)

Sectors 2000 2001 2002 2003 2004 2005


Agriculture & Fishing (Total) 15.2 1.1 1.6 4.1 1.7 2.3
Power, Gas & Petroleum 301 192.4 57.9 88.1 124.1 208.3
Manufacturing Industry 193.5 132.2 142.9 165.2 139.4 219.3
Trade and Commerce 53.2 27.6 63.7 44 66.6 130.5
Transport and Telecommunication 5.4 0.9 48.5 45.9 127.5 281.9
Other services 10.3 0.3 13.7 2.9 1.1 3
Total 578.6 354.5 328.3 350.2 460.4 845.3
Source: Statistics Department of Bangladesh Bank.
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Owing to comparative advantages and Exhibit II: Sector-wise allocation of FDI in 2005
an accommodative policy regime, a
large chunk of the FDI has gone into
the ready-made garment. In 2005, FDI
inflows in Bangladesh have been
widely spread among the key business
sectors, where the profit is higher,
concerning on telecommunication
(33%), manufacturing (26%), energy &
power (25%), trade & commerce (15%),
service, agriculture & fishing (1%).

4.0 SOURCE OF FDI Table III: FDI inflow share in 2005


Bangladesh generally, Source/Regions FDI inflow % of share
depends on 36 countries
across the globe for FDI. Developed Economies 435.90 51.45
Western Europe- 245.90m
Among the sources, 21 European Union- 243.60m
countries belong to the Switzerland- 2.30m
developing transition North America- 142.50m
economics. In 2005, FDI has Other developed economics- 46.50m
Developing Economies 365.40 48.55
been originated from 30 Africa- 48.40m
different sources dominated Asia and the Pacific- 317m
by the developed economies Others 45.00 5.32
(51.45%) and a significant ADB- 12.70m
share of FDI also came from IFC- 31.70m
Others- 0.60m
developing economies
Source: Investment Bangladesh Handbook-BoI
(43.23%).

5.0 INTEREST OF FOREIGN INVESTORS


Bangladesh is one of the easiest locations for doing business in South Asia, better than Sri
Lanka and India. Besides, persistent growth in FDI is the best testimony of a favorable business
climate prevailing in Bangladesh (Doing Business in 2006: Creating Jobs, World Bank 2006)

In 2005, total FDI inflow in


Exhibit III: FDI inflow during 2001-06 (US$ in million)
Bangladesh was increased by
84 % amounting US$ 845
million- highest ever in any
year since her independence.
The growth is second highest
in entire South Asia
(Bangladesh Investment
Handbook 2007-BOI).
Bangladesh now ahead of
India in terms of FDI
Performance Index being
ranked 116th among 200
economies while India is
ranked 119th (World Source: Bangladesh Bank Enterprise Survey, 2006
Investment Report 2006).
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A component-wise analysis of FDI Table IV: Component-wise FDI inflow 2005


inflow in 2005 shows that about 50% of FDI Component Total ($m) Share %
FDI came as equity, 29% as
reinvestment and the rest as intra- Equity Capital 425.6 50.35%
company borrowing. The higher Reinvested Earning 247.5 29.28%
reinvestment rate indicates unwavering Intra-Company Loans 172.2 20.37%
confidence of foreign investors on Total 845.3 100%
overall investment climate of the
country and competitiveness.

In recent years, tremendous interests of foreign investors are shown to invest in Bangladesh. In
FY 2005-06, major foreign investors include Dhabi Group of United Arab Emirates, Singtel of
Singapore, Orascom of Egypt, YKK of Japan and Mircrosoft of USA. Besides, a number of
large investment proposals worth about US$ 10.5 billion are at negotiation and/or approval
stages. These include investment proposals from Indorama Group of Thailand, Luxon Global
of South Korea, Toray of Japan, Delta Arabia and other proposals from China, Malaysia,
India, Taiwan, UK, USA, Australia, Singapore, Thailand, Saudi Arabia, UAE and Kuwait.

6.0 COMPETITIVE ADVANTAGES

6.1 Location
Geographic location of Bangladesh is ideal for global trades with very convenient access to
international sea and air route.

6.2 Natural Resources


Bangladesh is endowed with abundant supply of natural gas, water and its soil is very fertile.

6.3 Human Resources


Bangladesh has a population of more than 138.8 million who are hard working and generally
intelligent. There is a profuse supply of disciplined, easily trainable and low-cost workforce
suitable for any labor-intensive industry.

6.4 GSP Facility


Most Bangladeshi products enjoy complete duty and quota free access to EU, Japan, Australia
and most of the developed countries and quota regime to USA had been ended on 1st January
2005. However, despite quota phase out, Bangladesh apparel has successfully taken up a better
position in US market and experiencing substantial growth.

7.0 SECTORS FOR PROSPECTIVE INVESTMENT


A number of competitive sectors exist for investment in Bangladesh. Textile, Spinning, Frozen
Foods, Leather, Electronics, Agro-based Industry, Information Technology, Ceramics, Light
Engineering, Natural Gas-based industries, Steel and Pharmaceuticals are the most prospective
areas for investment. Government of Bangladesh provides different types of incentives and
facilities to attract more investments in several areas.

7.1 Textile
RMG and textile sectors have enormous investment opportunities. The phenomenal growth in
RMG was experienced in the last decade. In 1984-85, no of Garment factories was 800 RMG
jointly with knitwear accounted for more than 70% of total investments in the manufacturing
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sector during the first half of the 1990’s. At present with about 4,000 factories and a workforce
of two million, 80% of which are women, employing over 50% of the industrial workforce and
having 75% of the total exports earning of the country. Government provides highly favorable
policy framework for investment in these sectors.

7.2 Frozen Foods


The frozen foods export is the second largest export sector of the country. Frozen food sector
has credible opportunities in Middle East, EU and North American countries and Far Eastern
countries. In 2004-05, total fish production was 22.16 lack metric tons of which 8.82 metric
tons were shrimp. At present, there are 868 fish hatcheries and farm of which 2.18 lacks
hectors of shrimp farm. Investment in frozen food sector with new technology and equipment
has a vast potential for growth.

7.3 Leather
Bangladesh produces between 2 and 3 percent of the world’s leather market. 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 labor 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.
In 2004-05 total export of leather goods was 220.93 million US$ on the other hand it is 257.27
million US$ during 2005-06 FY.

7.4 Agro-based Industry


Being an agrarian economy, agriculture has dominated in the economy for years. It has fulfilled
the preconditions of access to input and raw materials in setting up successful agro-based
industries. Alluvial soil, a year-round frost-free environment, adequate water supply and
abundance of cheap labor are available in Bangladesh. Increased cultivation of vegetables, spices
and tropical fruits now grown in Bangladesh could supply raw materials to local agro-
processing industries for both domestic and export markets.

7.5 Information Technology


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. A growing number of computer training schools and institutes are
being opened. Management of most of the IT firms is professionally strengthened with the
Bangladeshis who have studied and worked in both North America and Europe, and returned
home. The annual market size for IT including computer hardware, peripherals and software
was estimated to be worth approximately US$ 20 million. The market is fast growing at an
annual rate of about 25%. The country has over 400,000 PCs. Formalization of VOIP by the
early 2003 and telecom deregulation in mid 2003 would boost the overall IT sector lucrative for
investment.

8.0 SPONSORING AGENCIES & AREAS OF RESPONSIBILITIES


Sponsoring agency means an agency engaged in promoting, assisting, supervising and
administering as well as offering pre and post registration assistance to industries. The list of
sponsoring agencies responsible for private sector industrial development and their respective
areas of responsibilities are as follows:
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Name of the Sponsoring


Areas of Responsibilities incl. Registration Power
Agencies
Board of Investment (BOI) All industries under private sector other than mentioned at serial 2
and 3 below.
Registration of all industrial projects in the private sector outside
the authorities of BSCIC and BEPZA.
For institutional facility purposes, registration of industrial
projects financed by Commercial Banks or by different financing
institutions outside the authorities of BSCIC & BEPZA.
Bangladesh Export Processing Industries located in EPZs.
Zones Authority (BEPZA)
Approval of all projects to be located in the EPZs
Bangladesh Small and Cottage Small and cottage industries.
Industries Corporation (BSCIC)
Registration of industrial projects having capital investment not
exceeding Tk. 30.00 million (for BMRE maximum Tk. 45.00
million)
Financing Institutions (FI) and Approval and financing of projects having investment
Commercial Banks (CB) including of any amount.
Development Financing
Institutions (DFI) and
Nationalized Commercial Banks
(NCB)

9.0 INCENTIVES FOR THE FOREIGN INVESTORS


The foreign investors will choose Bangladesh for their next for investment destination as
Bangladesh conducted Bilateral Investment Agreement (BIA), Double Taxation, Treaties etc. to
protect the interest of them. The investors also enjoy the following incentives investing in
Bangladesh.

a) Tax Exemptions : Generally 5 to 7 years. However, for power generation exemption is


allowed for 15 years.
b) Duty : No import duty for export oriented industry. For other industry it
is @ 5% ad valorem.
c) Tax Law : i. Double taxation can be avoided in case of foreign investors on
the basis of bilateral agreements.
ii. Exemption of income tax up to 3 years for the expatriate
employees in industries specified in the relevant schedule of
Income Tax Ordinance.
d) Remittance : Facilities for full repatriation of invested capital, profit and dividend.
e) 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.
f) Ownership : Foreign investor can set up ventures either wholly owned on in
joint collaboration with local partner.
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10.0 FACTORS AFFECTING FDI IN BANGLADESH


The vital element and major factor about foreign investment of any country is political
stability, stable government, sound economic policy, a strong industrial base and peaceful
atmosphere. Bangladesh, like other developing countries, is far from achieving these ideal
conditions although progress has already been made in some but not in all sectors. Some of the
problems that cause poor inflow of FDI in Bangladesh have been highlighted below:

10.1 Bureaucracy
The activities of bureaucrators in some government agencies create problems in the
implementation of the project, thereby giving rise to acrimony and legal hassles. In
consequence, these adversely affect the attractiveness of a country for future potential
investment.

10.2 Weak Infrastructure


The infrastructural inadequacy like, power, fuel supply, telecommunication, road and railway
communication, required manpower, trained workers, modern management technique and
above all inadequate and insufficient port and shipping facilities hamper foreign investment.
However, these type of facilities are available in EPZs.

10.3 Political Unrest


Political unrest, due to lack of understanding between government and oppositions, delays the
implementation of the project. The recurrence of strike and hartal in the country pollutes the
investment climate and affects the fruitful operation of any project. It makes the investors
unhappy and also hampers image of the country to the foreign investors.

10.4 Lack of Good Governance:


Lake of good governance stands in the way of promotion of FDI in Bangladesh. It has been
observed that there is tradition to change established rules and regulation overnight to give
benefit to particular applicant. Thereby causing uncertainty and shaking the confidence of
investors. On the other hand, affiliation of workers union with political parties also hampers
good governance.

10.5 Ineffective Judiciary System


The old and outdated law and the poor functioning of judicial system in the country have
discouraged many of the prospective investors.

10.6 Lack of adequate information


The image of Bangladesh is unfavorable for investment to the outside world. The cultivation of
favorable image requires dissemination of information related to macro economic situation,
industry policies, lists and descriptions of political joint venture partners, privatization
programmes, laws and regulations governing FDI, administrative structures and procedures
relevant to FDI. Apart from these information, foreign investors may not likely to come to
Bangladesh.
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Section C: Conclusion and Recommendations

11.0 CONCLUSION
Bangladesh has considered FDI as more favorable factor for stimulating economic growth. A
number of factor lie behind this new orientation: slowdown of the world economy along with
political unrest in the international arena, declining trend in public capital or foreign aid and
the globalization of production and services. Though there are some interrelated administrative
barriers which result inferiority in policy formulation and implementation, competitive
drawbacks, poor quality of skills and infrastructure, ineffective institutions, and below average
governance which dampen potential of FDI. Besides the above, it has also been found out that
Bangladesh is not full of hindrances of FDI, but some opportunities and prospects are also
available in this host country. In very recent the quarrelsome political environment has been
changed and hopefully, new era will be started of investment for the native and foreign
investors.

12.0 RECOMMENDATIONS
In the view of foregoing detail findings, discussion on the key findings and subsequent
conclusions, a number of recommendations have been offered. It is suggested that the offered
recommendations are prioritized before going into action. Some recommendations have policy
implication and so those should be dealt with cautiously with inclusion of strong policy
advocacy strategy in the process.

Following recommendations are being offered:

• Political reformation ensure of good governance;


• Dynamic and independent government agencies, improve coordination among them,
and ensure accountability and transparency;
• Developing diplomatic relations and devoting efforts to shift FDI track;
• Ensuring power and energy supply.
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REFERENCE
Bangladesh Bank Annual Report- 2006
FDI Inflow Survey 2005, Board of Investment, Bangladesh
Kafi, Md. Abdullahel et al (Dec. 2007), “Foreign Investment in Bangladesh: Problems and
Prospects”, The Journal of Nepalese Business Studies-2007, Vol. IV No.1, pp- 47-61
Muttakin, Mohammad Badrul et al (2005), ‘The Investment Scenario in Bangladesh-
Problems and Prospects’ Pakistan Journal of Social Sciences 3 (4): pp- 534-540 ©
Grace Publications, 2005
UNCTAD-2005, Bangladesh Investment Handbook 2007- BOI
Doing Business in 2006: Creating Jobs, World Bank 2006
Foreign Investment Promotion and Protection Act, 1980
World Investment Report 2006
URL: http://www.boi.gov.bd ;
URL: http://www.nbr.gov.bd