Contribution of Foreign Direct Investment

in Bangladesh: An analysis
Khan Sarfaraz Ali**

Abstract

FDI (Foreign Direct Investment) is a well-recognized and focused issue in the discussion
of global economy. As a fast developing country with abundant natural resources and
peace seeking population, Bangladesh has already drawn the attention of the investment
world. It has the potential to be an entry port to the South Asian region. The geographic,
political and economic location of the country indicates its history of being a nation of
investors, traders and suppliers. This article is an endeavor to illustrate the role and
contribution of FDI in Bangladesh.

Introduction

Bangladesh is one of the least developed and most densely populated countries with 137
million people in the world, with more than 941 people per sq km. Only 15% of the people
live in urban areas; 46.6% of the population is under 15, and 75% of women have their first
child by the age of 17. The country is divided into 64 districts, 119 municipalities, 490
thanas (cities) and 59,990 villages1. Agriculture is the single largest producing sector of
economy comprises about 30% of the country's GDP and employing around 60% of the
total labor force (BBS: 2005). Bangladesh is a growing economy with 6.7% GDP growth
rate, which is now in the process of transition from a predominantly agrarian economy to
industrial and service economy. The country is continuously pursuing a liberalized
economic policy and following a pace of free market mechanism. This has fostered its
economic growth, attracted Foreign Direct Investment (FDI) flows remarkably and
expanded its export-base. In 2005 substantial improvement has been achieved. Foreign
direct investment (net) in FY 2004-05 rose up to US$ 800 million. By this year, gross
investment in the country was 24.4%, export growth was 13.83% and the trade-GDP ratio
increased up to 36.33%. A remarkable contribution of different sectors is visible during this
period. Contribution of manufacturing sector and agriculture sector to GDP were
respectively 17.05% and 16.912. This figure is really encouraging in the history of
Bangladesh.

** Associate Management Counselor, Bangladesh Institute of Management (BIM)

sarfarazbim@gmail.com / 01817528067

1
Statistical Pocket Book 2005. Bangladesh Bureau of Statistics
2
Bangladesh Economic Survey 2006. Bangladesh Bank

1
 2.0 Factors behind Foreign Investment in Bangladesh
Over the past four decades, the number of least developed countries have increased, but
their share in the world export has declined over the past 20 years and hit the rock bottom
of a mere 0.4% in nineties and increased slightly to 0.6 per cent at the beginning of this
millennium. But posting an average annual growth of over 5 per cent during the 1990s
Bangladesh has been an exception in this regard.

2.1 Foreign direct investment has a positive impact on the productivity of local firms. A
number of significant policy reforms like: Industrial Policy, PRSP (Poverty Reduction
Strategy Paper), Millennium Development Goal (MDG) are designed to create a more
open and competitive climate for foreign investment. Recently foreign investors are
being motivated to invest in the RMG (ready made garments) and agriculture sectors
with a view to turn the people of the country into resources and to mobilize resources.
The RMG sector alone has been able to provide employment for more than two million
people, of them 80% is female. The Bangladesh garment industry is the largest
employer of women in the formal manufacturing sector. Women from various class
backgrounds are employed in the RMG sector because they can be molded into
compliant workers. Fauzia Erfan Ahmed raises the idea that women are recruited to fill
certain positions because of stereotypes that women are more docile, easier to control,
and thus better suited to do repetitive manufacturing work, so that gendered divisions of
labor rise out of gender biases in society3. The growth of RMG and agriculture sector
has been contributing a lot in the national economy. At present foreign investors are
enjoying the following advantages:

 Tax holiday from 5 years to 7 years;

 Special incentives like a quota of 10 % fixed for non-resident Bangladeshis
in primary public shares;
 Tax exemption on the interest on foreign loans under certain conditions;
 Avoidance of double taxation in case of foreign investors on the basis of
bilateral agreements;

3
The Rise of the Bangladesh Garment Industry: Globalization, Women Workers, and Voice by Ahmed,
Fauzia Erfan. NWSA Journal - Volume 16, Number 2, Summer 2004, pp. 34-45

2
  Exemption of income tax up to 3 years for the foreign technicians employed
in industries specified in the relevant schedule of income tax ordinance;
 Tax exemption on income of the private sector power generation company
for 15 years from the date of commercial production;
 Facilities for repatriation of invested capital, profit and dividend;
 Six months' multiple entry visa for the foreign investors;
 Different type of FDI friendly Laws and Act.

2.2 Bangladesh is a FDI friendly country for its different development indicators.
According to UNDP, the country has achieved a significant progress in different sectors
during the last decades. Life expectancy at birth has reached up to 63.3%. Adult literacy
rate has increased to 41% where combined primary, secondary and tertiary gross
enrollment ratio is 57.1%. Women empowerment and gender development status is also
noteworthy. Gender related development index (GDI) of the country has reached up to
98.8%4. People working in different service sectors are well educated and can
communicate in foreign languages especially in English that is an advantage for the
foreign investors. In order to serve the foreign investors properly, the Government has
appointed skilled and efficient officers in vital positions. As a part of sound
communication, infrastructural development in transportation already covered the
whole country. Enormous progress in information and technology turned the country
into a connecting state. Political stability of the country already ensured the investors to
involve in business activities. All political parties are morally committed to co-operate
the foreign investors for the greater interest of the country. Both the public and private
sectors are committed to good governance that ensures transparency and accountability
and ultimately assisting to develop appropriate climate for foreign direct investment.

3.0 Contribution of FDI in National Trade and Development

Trade has gradually been liberalized over the past five years, although import duties and
supplemental taxes remain high and constitute the largest single sources of government
revenue. According to the United Nations Conference on Trade and Development
(UNCTAD) World Investment Report 2006, total inward foreign direct investment to

4
UNDP. Human Development Report 2006.

3
Bangladesh was $692 million in 2005, a 50% increase over figures for 2004. Outward
foreign direct investment flows were negligible. UNCTAD figures show that the stock of
inward direct investment grew 62% from 2000 to 2005. UNCTAD reports the following
annual FDI inflows (in millions) for Bangladesh:

1990-2000 2002 2003 2004 2005

$190 $328 $350 $460 $692

According to UNCTAD, the stock of inward FDI was $2,162 million in 2000, $3,098
million in 2004 and $3,508 million in 20055. Figures from the Bangladesh Bank (the
central bank in Bangladesh) show total net FDI flows (in millions) for the fiscal years
2002-2005 (ending June 30) as follows6:

2002 2003 2004 2005

$391 $376 $385 $776

The trend of foreign direct investment is very encouraging. The government is committed
and has been pursuing policies for supporting and encouraging foreign investment in
different sector. Recently FDI is playing a vital role to enhance national trade as well as
leading towards development. In financial year (FY) 2004-05, its gross domestic product
(GDP) was worth Taka 3684.76 billion at current market price (app. US$ 52.64 billion),
recording an increase from Taka 2,370.86 billion in FY 1999/2000 (app. US$ 47.12
billion). During the last decade, GDP growth remained steady and fairly robust at an
average annual rate of 5.0%, although there was a decline in GDP growth in FY 2001/02
mainly due to worldwide recession. This growth was 5.38% in 2004-05, which was mainly
attributed to the industry and services sector. During the period per capita GDP increased
steadily and stood at US$ 445 in FY 2004-05. The number of population below the poverty
line had declined from 46.2 percent in 1999 to 40.9 percent 2004. The incidence of
hardcore poverty also showed a declining trend during the same period. At present, the
country has been striving hard to increase its growth over 6 percent to achieve the
millennium development goals (MDGs) by 2015.

5
World Investment Report 2006. UNCTAD
6
Bangladesh Economic Review 2005. Bangladesh Bank

4
3.1 During the last five years foreign direct investment continued to increase. Increase in
shares of domestic savings and total investment in GDP is mainly because of increased
participation of foreign investors. A more recent shift of FDI has been towards
services. Most major economies in South Asia experienced significant increases in FDI
inflows: flows to Bangladesh, India, Pakistan and Sri Lanka rose by 50%, 21%, 95%
and 17% respectively7. The presence of these global changes is also evident in
Bangladesh economy and has been driven in particular by the opening up of service
industries to FDI. Owing to comparative advantage and an accommodative policy
regime, a large chunk of FDI has gone into the ready-made garment (RMG) sector for
establishing backward linkage industries, telecommunication, power, oil and gas
exploration sector. In fact, there is substantial change in the pattern of FDI inflow in the
new millennium and the foreign investors are looking at sectors like telecom, banks,
power and energy, where profit growth is likely to be high, which may alter the sectoral
composition in the days to come. Following table shows sector wise FDI inflow in
Bangladesh8:

Table 1: Sector-wise FDI inflow (1995-2005 in million US $):

Sector 2001 2002 2003 2004 2005
Agriculture & Fishing 1.1 1.6 4.1 1.7 2.3
Power, Gas & Petroleum 192.4 57.9 88.1 124.1 208.3
Manufacturing 132.2 142.9 165.2 139.4 219.3
Industry 324.6 200.8 253.3 263.5 427.6
Trade & Commerce 27.6 63.7 44 66.6 130.5
Transport & Telecom 0.9 48.5 45.9 127.5 281.9
Services 28.8 125.9 92.8 195.2 415.4
Total FDI in Bangladesh 354.5 328.3 350.2 460.4 845.0

As a developing country, Bangladesh needs FDI for its ongoing development process.
Since independence, Bangladesh is trying to be a suitable location for FDI. Special zones
have been set up and lucrative incentive packages have been provided to attract FDI.
However, the total inflow of FDI has been increasing over the years.

4.0 Conclusion and Recommendation

7
Ibid. UNCTAD
8
Bangladesh Bank. 2006

5
Foreign Direct Investment can undoubtedly play an important role in the trade and
development of Bangladesh in terms of capital formation, output growth, technological
progress, exports and employment. The share of FDI in GDP, however, indicates that the
potentials are far from being realized in the Bangladesh experience thus far. Nevertheless,
concerns remain about the possible effects of FDI, including the question of market power,
technological dependence, capital flight and profit outflow. The limited evidence gathered
above tends to support some of these apprehensions. On a positive note, service sector
growth appears well correlated with FDI flow to this sector. Further, this has a linkage
effect to the rest of the economy. In this context few recommendations are suggested in
brief:

 Tax Holiday may be guaranteed up to 10 years

 Exemption of income tax up to 5 years for the foreign technicians instead of 3 years
 1 year multiple entry visa for the foreign investors
 Simplifying the administrative procedures
 Ensuring one stop service to the foreign investors
 Proper application of FDI related Act and Laws
 Encourage the practice of good governance in every step.

Above all, considering the suggestions and advice of foreign investors and domestic
scholars may be an advance stair to accelerate foreign direct investment in Bangladesh.

4.1 References:
1. Ahmed, Fauzia Erfan. The Rise of the Bangladesh Garment Industry:
Globalization, Women Workers, and Voice. NWSA Journal - Volume 16, Number
2, Summer 2004, pp. 34-45.
2. BBS (Bangladesh Bureau of Statistics): Household Expenditure Survey
2004-05. Dhaka. 2006.
3. Bangladesh Bank. Bangladesh Economic Review. 2005. Dhaka.
4. Bangladesh Bank. Economic Survey. 2006. Dhaka.
5. GoB (Government of Bangladesh). Bangladesh: A National Strategy for
Economic Growth and Poverty Reduction. Ministry of Finance. 2002. Dhaka.
6. Statistics Department. Bangladesh Bank. 2006.
7. The Daily Star, September 30, 2005. Vol: 5, No. 479. Dhaka. Bangladesh.
8. Trade Organization.org/english/res_e/booksp_e/special_study_6_e.pdf

6
9. UNCTAD. FDI in Least Developed Countries at a Glance 2005/2006.
10. Vylder, S.D. (2007): The Least Developed Countries and World Trade
(Second Edition). Sida Studies no. 19.
11. World Bank (2005). "Global Agricultural Trade and the Developing
Countries"
12. World Trade Organization (2001). Market Access: Unfinished Business,
Special Studies.
13. United Nations Conference on Trade and Development (UNCTAD). World
Investment Report 2006.
14. UNCTAD. World Investment Report 2006: FDI from Developing and
Transition Economies: Implications for Development.
15. UNCTAD. World Investment Report 2004: The Shift towards Services.
16. http://links.jstor.org/sici?
sici=00130133(199601)106%3A434%3C92%3AFDIAGI%3E2.0.CO%3B2-S
17. http://www.wto.org/english/tratop_e/tpr_e/tp269_e.htm
18. http://www.state.gov/e/eeb/ifd/2007/80678.htm

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