CHAPTER 1

Introduction
1.1 Statement of The Research Problem

Over the last three decades the transition of private capital in the disguise of foreign direct
investment as had the largest impact on the level of globalization, mainly because of the fact that
it is a very significant source of finance for developing a country and also because it leads to
increase in productivity through acting as a source of benefits like advanced technology,
specialists and overseas markets. As developing countries usually suffer from shortage of
resources and investments, it is not surprising that more often than not they try to encourage
dependancy on private sector investment for pushing forward the rate of economic growth.

It is believed that FDI encourages the promotion of economic growth through the augmentation
of investment. Thus, most developing countries and least developed countries (LDCs), look
forward towards FDI for all the sorts of advantages it has to offer to the nation getting it. FDI has
the potential to act as surrogate to investment from the locals and be a source of foreign
exchange which can dramatically reduce the burden of the balance-of-payments deficits. As a
result by consideration of the benefits FDI has to offer to the host country for stimulating
economic growth, South Asian countries, specially Bangladesh and India, over the last few
decades have come up with a wide array of changes in their policies to attract FDI.

In the middle of the 1990s, FDI started to shift from the developed countries like USA and UK to
the Asian countries like China and Japan; even though nobody would have guessed this to
happen as these Asian countries were almost out of the frame in terms of FDI. Due to this shift of
investment, South Asian countries have been greatly benefited. FDI has been one of the key
contributors in the development of a significant amount of South Asian countries.
From the early years of the 1990s, till today, authorities of most South Asian nations have come
to discern the advantages of FDI and have thus tried to bring about changes to attract it; as one
the driving engines behind globalization has been FDI.

Many foreign investors have turn theirs faces towards South Asia for investment mainly because
of the sheer size of the domestic market, the attractive policies of their governments and last but

1
not the least the positive view that the locals hold about international investors. But yet, in
comparison to other parts of Asia, this region has not been able to receive the amount of FDI it
hoped to have attracted. And there has been a severe discrimination in terms of the FDI received
by different nations of South Asia.

Hence, this paper clearly depicts the FDI policies and their changes with time in two different
South Asian countries namely India and Bangladesh. It, on an aggregate, examines the facts of
FDI inflows in these two countries. This paper also looks into the possible reasons of why
Bangladesh has underperformed so much compared to India.

1.2 Rationale for Its Study

Bangladesh has seen a considerable and a more or less consistent increase in economic growth
over last decade. This has made our citizens and government very happy because it is considered
as a sign that Bangladesh is slowly but steadily reaching towards becoming a developed nation.
As much as it is true, the main force behind the increase in GDP has been the massive increase in
consumption and most importantly government spending. But, this increase in GDP will not be
sustainable in the long term if it is not stimulated by investment; mainly Foreign Direct
Investment. However, even though we have seen increase in FDI over the last decade, a very
small part of it was Greenfield investment. And even though countries like India has almost
similar problems that we have, they have seen considerably more increase in inward FDI than we
have. This begs the question, why have they have succeeded but not us?

1.3 Literature Review

There has been individual and separate studies on the current situations of FDI in Bangladesh
and India but very few work has been done in trying to understand in detail what sets Bangladesh
apart from these countries. The current existing literatures have separately looked into the
advantages and disadvantages these two countries have but have not looked deep into why one
has performed better than the other. Thus this paper will try to fill in this gap in study by carrying

2
out a comparative study between these two countries by keeping the main focus on Bangladesh
and its potentials.

1.4 Scope and Objective of Study

The competition between Bangladesh and India in attracting FDI is a sort of zero-sum game. If
one gains, the others lose in some sense. And Bangladesh seems to be lagging behind in this
game. Therefore, the objective of this report is to prove that Bangladeshs FDI standing is much
worse than it is generally perceived and to show that some of the usual explanation of
Bangladeshs poor performance may have received more importance than they deserve. This
paper therefore will be a comparative study, trying to find the reasons behind why India has
performed than Bangladesh in the race of attracting FDI. Thus, this research will proceed with
the aim of learning how we can improve our attractiveness for the foreign investors in the future.

1.5 Research Design

The procedure used in this research was to collect data from various sources mainly from World
bank, IMF, Bangladesh Bank and other organizations as such. These were then used to show how
some of the conventional reasons which are given for lagging FDI are probably not as important
as perceived. I have done so by showing that some countries who are worse off than Bangladesh
in some these criteria are still attracting more FDI than us. This was used as proof to prove my
point. Then a few more practical and logical explanations were presented as an alternative to the
more popular justifications of why we are behind India.

1.6 Limitations of the Study

This research is mainly result of reviews of available secondary literatures and data. Respondents
are mainly academicians and businessmen with conversations based on no organized
questionnaire. Moreover, if higher government officials from the respective offices and foreign
investors were made part of the research then it could have been more useful.

3
 CHAPTER 2

A Conceptual Framework
2.1 Foreign Investment:

This type of investment can be done by both a individual person and also companies. However,
such endeavours are usually carried out by corporations who are looking to spread their
operation or activities outside the territory of their own countries. Due to the spread of
Globalization increasing amount of companies are taking steps to open foreign subsidiaries.
Sometimes it is done because of the benefits offered by the host country or sometimes it is
because of search for opportunities when the local market has become saturated.

2.1.1 Types of Foreign Investment

Foreign Investments can be classified in 4 broad groupings. The are the following:

Foreign Direct Investment:

It is the longterm commitment of a firm in a foreign country through the purchase of
things like buildings, factories, plants. etc. As this investment requires substantial
amount of money, they are usually done by big multinational companies.

Foreign Indirect Investment

This is also known as Portfolio Investments. These are short term investment made by
companies or individuals in a foreign company through the buying of its securities
which are traded in the stock market. This does not lead to control over the business.
Such investments are usually done for short term returns and thus requires smaller
investments. So, even individuals can get involved in indirect investment.

Commercial Loans
These are loans usually given by local banks to foreign companies or governments of
other nations.

Official Flows
These are helps or assistance for development purposes to countries provided by the
domestic nation

4
2.2 Foreign Direct Investment

The augmentation of FDI in any specific country is the direct consequence of sustainable
economics growth, liberalization of regulations and flexibility in terms of operation. In order for
an investment to be considered as foreign direct investment, the mother company must hold a
minimum of 10% of the foreign companies ordinary shares. In other words, it will be considered
as FDI if the mother company has the right to vote in the business. Owning shares less than 10%
is considered as Indirect or Portfolio Investment.

2.2.1 Types of Foreign Direct Investment

In terms of flow, FDIs can be classified into two different categories: outward and inward FDIs.

Inward: When capital of foreign countries are invested in the domestic resources
Outward: When local capital are invested in foreign resources.

In terms of Strategy FDI can be classified as:

Vertical Foreign Direct Investment

It occurs when a multinational company holds stakes or invests in a foreign company
from which it gets products which the MNC uses in its production process or the MNC
provides products which the foreign firm uses as inputs.

Horizontal foreign direct investments

Horizontal foreign direct investments occurs when a multinational company merely
opens a similar business as its own in a foreign country. This is the most common type
of FDI and it is usually done to avoid the trade barriers faced while exporting.

Conglomerate
In this type of investment, it involves the investing in a foreign business which is totally
unrelated to the domestic business. It is the most uncommon type of FDI.

5
In terms of Modes of Investment, FDI can can be classifies as:

Equity Capital:

Greenfield :
In this form of entry, the parent or mother company builds or establishes the business
in the foreign country totally from scratch. In other words the business is built form
group up.

Mergers and Acquisitions

It refers to the acquiring or getting hold of currently operating foreign companies
through amalgamation of the entities or the buying of one by the other.

Retained Earnings:
Earnings which are invested in the foreign subsidiary instead of sending them back to
the mother company or providing dividends.

Other Capital:
This refers to the short term or long term loans exchanges between the mother company
and its foreign subsidiaries.

6
2.3 Common Advantages of Inward FDI

Economic Growth
Foreign direct investment can help in increase the rate of economic growth of a country. This
has been shown to be true time and time again for the developing countries. Hence, the
determination of so many countries to attract as much FDI as possible. Economic growth is
accelerated through FDI by the injection of money into the economy.

Transfer of New Technologies

Foreign direct investment also assets the transfer of technologies which are otherwise not
available in the host country. When FDI is done, new technologies can be used by MNCs
which results in other competitions also finding out and using the same technologies. This is
mainly done through the acquiring of employees of MNCs to the domestically owned firms.

Human Capital Resources

Through foreign direct investment the MNCs develops the local human capital to improve
efficacy and efficiency by the use of training. This means the increase in performance and
productivity of those employees leads to the ultimate improvement in effectiveness of the
overall human resource of the host country.

Job Opportunity
Due to Foreign Direct Investment new job opportunities are created in a particular country.
Moreover, this leads to higher earnings because MNCs usually provide salaries higher than
the industry average.

Tax Generation
Foreign direct investment helps governments of the host countries to earn high amount of tax.
as this MNCs are usually big investors. their taxable income tends to be as well. So,
governments usually earn a lot of tax which can in turn be used for other development
purposes.

7
 Export/Import
When MNCs invests in foreign countries, they often to it to take advantage of the low cost
resources. This opens up doors of export opportunities for the host country.

2.4 Common Disadvantages of Inward FDI

Problems for Domestic Firms.

A common critique of FDI has been the fact that, investment from big MNCs can lead to the
going out of business of the local firms due to being unable to compete. This can also lead to
the killing of infant industries in the host country.

Monopoly.
Big MNCs can lead to monopoly situation in the industry they invest in. As they re usually
large, they can push out other competitors which can result in monopoly. This is bad because
local customers lose the leverage when monopoly happens.

Less Investment on Local Resources

MNCs more often than not invest more on equipments, machineries and Its instead of local
resources such as workers. So, the HR benefits of inward FDI are not as significant as some
might claim.

Profit Leakage
MNCs invest money to earn profit. So if they send back their earnings they are essentially
sending back more in the long run than they have investment.

Colonialism.
Many developing countries fear that big MNCs can invest so much that they might become
depended on the MNCs. This can lead to exploitation of the resources of the host country. As
a result a lot of people consider FDI as risky due to risk of colonialism.

8
 CHAPTER 3

FDI in India
3.1 Indias Economy at a Glance

Since the early 1990s, India has consistently been the fastest growing economy in South Asia.
Moreover, in terms of GDP and as well as population, India is the largest compared to all the
other South Asian countries. In the beginning of the 1990s, Indias GDP growth share was
around 70 percent of that of South Asia as a whole. And by 2015, this share has increased to a
significant 80 percent approximately.

This countrys economic growth rate in general has been 5.5 percent between the period 1980 to
1990. However, after massive reforms from the government, it increased to well over 6 percent
during end of the 1990s. And since then till the global recession it went close 9 percent. In the
last few years, it has averaged around 7 percent.

Graph 1: GDP Growth Rate, World Bank, (http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?

end=2015&locations=IN&start=1980&view=chart)

This has resulted in the massive growth of Indias GDP (nominal) from around 300 billion
dollars in the early 1990s to approximately 2.1 trillion dollars in 2015. Similarly, Indias per

9
capita income was only around 272 dollars in 1980, which has increased to around 1593.3
dollars in 2015. A whooping increase of 485% over just 35 years.

Graph 2: Per Capita Income, World Bank ( http://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=IN&view=chart)

The industrial and services sectors were the most important contributors in the massive growth of
Indias economy. The agricultural sector grew around 6 % during the first half of the 1980s,
which however plunged to approximately 2 percent during 20002004, and then jumped to about
3.5% in the last half of the 2000s. And from 2007 to 2016 to increased by around 79 percent.

Comparatively, industrial performance improved steadily, except in the first half of the 1990s.
Industrial growth rate which was 5.3 % in the first half of the 1980s increased to 6.2 in the
second half of the 1990s and further to 8.8 % in the second half of the 2000s. On the other hand,
the services sector growth follows the industrial growth trend.

10
3.2 FDI Trend

3.2.1 Volume

Indias FDI volume has increased dramatically over the years. Since the early 1990s India has
slowly liberalized entry to various sectors to attract more foreign investment. As we can see, this
has helped them to slowly improve since 1991. From 2005 the FDI has skyrocketed but that did
not sustain for long due to the world recession of 2008. But they came strongly mainly due to
the further liberalization policy of the Modi government through the Make in India initiative in
2014. Since then FDI has increased by 48%.

Graph 3: FDI (net inflows), World Bank (http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=IN )

3.2.2 Sources of FDI

Mauritius has been the highest source of FDI in India for many years. and the source of over
33% of the total FDI inflow into India since 2000. There could be two operate explanation for
such amount of FDI from Mauritius: there are a lot of people of Indian origin in Mauritius and
Indias double taxation treaty with this country. However, in 2016 Singapore has surpassed
Mauritius with it being at 21% and Singapore being at 34%. Overall FDI inflows in India have
been more or less depended on Mauritius and now Singapore.

11
 Graph 4: Capital Mind ( https://capitalmind.in/2016/05/the-fdi-report-india-got-40-billion-in-fy16-singapore-overtakes-
mauritius-real-estate-loses-love/)

3.2.3 Sectors of Investment

As far sectors are concerned, the Service sector has always attracted the maximum FDI, followed
by IT, Real State and the telecom sector. But now, the scenario has changed a little. Even though
service sector is still at the top, investment in IT has increased significantly and in real states it
has plunged dramatically to only 2%.

Graph 5: Capital Mind ( https://capitalmind.in/2016/05/the-fdi-report-india-got-40-billion-in-fy16-singapore-

overtakes-mauritius-real-estate-loses-love/)

12
3.3 Evolution of Government Perception

Since independence, Indias attitude towards FDI has been rather inconsistent. At the beginning
it had positive notion of foreign investment. But with time India became more strict in order to
encourage local businesses to blossom. This continued till 1990 when reforms were starting to
take place. They became desperate to attract FDI and that trend still continues.

Till the 1970s, Indian government was not extremely restrictive of FDI. It wanted to positively
stimulate the countrys industrialization through the foreign capital inflow. However the
government was very cautious about the foreign investments. It ensured ownership and control
remained in its hand.

But till the early years of the 1990s, protection of fledgling industries became the Indian
governments first priority. So they became very restrictive in order to protect local firms from
foreign competition. Moreover, the sending back of profits and dividends of the MNCs led to
severe negative impacts on the Balance of Payment. Therefore, the government was forced to be
more restrictive towards FDI.

But after that that time the Government of India conducted many economic reforms and a
welcoming attitude towards FDI was massive part of it. In the early years of 1990, due to severe
BOP crisis India was having trouble borrowing from international market. Moreover, due to the
Gulf War, remittance from India working there almost came to a halt. India was drowning in all
sorts of problems. Therefore they were forced to become more friendly towards FDI.

FDI in India is done through two different routes: Automatic route and Approval Route.
Sectors under automatic route do require prior approval of the the government or the reserve
bank of India in order to invest in this sector. On the other hand, Approval Route is the requires
approval such as Banking. In the year 2000, most sectors were placed under the automatic route.
The easing of the FDI policy has been quite regular. Caps were gradually raised in a number of
sectors.

13
3.4 Main Attractiveness of India

World's largest democracy with 1.2 billion people. This means they have a very large customer
base for potential investors which in turn means a higher potential for profit- making.

India is a big country with land of abundant natural resources and diverse climatic conditions.
This leads to low costs and more availability of land and other resources for the use in
production.

Rapid economic growth in India. It is expected that Indias growth will start to outpace China's
within three to five years and hence will become the fastest large economy with 9-10% growth
over the next 20-25 years

India has a very large labour pool of nearly 530 million and this results into the labour cost
being quite cheap.

It has a large pool of skilled manpower with strong knowledge base with significant English
speaking population. As a result their nuclear and hi-tech industries are booming.

Young country with a median age of 30 years by 2025: India\'s economy will benefit from this
"demographic dividend

India has a number of Special Economic Zones (SEZ). The SEZ zones are considered as
foreign territory in all that concerns taxes and customs. Companies in the SEZ are eligible for a
total exemption from tax for the first 5 years and a 50% exemption from the tax due for the
next five years.

14
 CHAPTER 4

FDI in Bangladesh
4.1 Bangladeshs Economy at a Glance

Bangladesh is the third largest economy and third populous country in South Asia after India and
Pakistan. The size of Bangladeshs economy increased from around $22 billion in the first half of
the 1980s to an average of $72 billion during the last half of the 2000s. Bangladesh won
independence from Pakistan in 1971 through a war that had major impact on institutional and
physical capital. The economy was ravaged by acute food shortages and famines during the early
years. Bangladesh was designated a test case for development.

GDP growth rate was constant at an average of 3.2 % during the 1980s. However, it increased to
4.6 % in the first half of the 1990s and further to 5.01 % in the second half of the 1990s. In the
2000s, the GDP growth rate of Bangladesh improved to above 6 %. In spite of some fluctuations
in agricultural growth rate, the volatility in long-term GDP growth in Bangladesh is found to be
remarkably low among developing countries.

Therefore, growth of GDP has been accelerating in each successive period since the latter half of
the 1980s. The relatively low GDP growth rate during the 1980s was caused by low growth in
the agricultural and services sectors. The higher industrial and services growth are also reflected
in their increasing sectoral contribution to GDP. For instance, the industrial sectors contribution
to GDP increased from 21 % in 19801984 to above 28 % in the 20052010 and by over 7 %
during 19802010. Similarly, the manufacturing value added as a percentage of GDP increased
from 14 % in the 1980s to above 17 % in the 2000s. On the other hand, the services sector now
contributes over 52 % to the GDP. Therefore, like India, Bangladesh is now also led by the
industrial and services sectors.

Although Bangladesh has achieved consistent higher growth over time, its per capita income
remains quite low. The per capita income of Bangladesh at 2000 price increased from US$257 in
the first half of 19801984 to over US$330 during 19901995 and further to over US$496
during the last half of the 2000s. The higher GDP growth rate in the 1990s and 2000s resulted
from the higher savings rates, higher capital formation, lower level of inflation, and higher trade
growth. The average gross domestic savings rate in the period of 19801984 was only 6.28 % of

15
GDP; it increased to 15 % in the second half of the 1990s and further to 17.4 % in the first half
of the 2000s. In fact, domestic savings rate in Bangladesh is second highest after India.

Trade has contributed significantly to GDP. Total trade as a percentage of GDP increased from
around 20 % during 19801984 to 30 % during 19901994 and further to 44.8 % during 2004
2010. The current account balance improved steadily in the 1990s and 2000s. The foreign
exchange reserve increased from 1.44 months in 19801984 to 4.81 months in 19901994,
declined to 2.33 months during 20002004, and increased to 3.3 months. More importantly,
external vulnerability represented by short-term debt also shows constant improvement over
time. Therefore, the wide-ranging policy reforms since the beginning in the 1990s have positive
impact on the economic growth of Bangladesh.

4.2 FDI Trend

With the introduction of free trade policy in most parts of the world, partnership between the
leading business groups of different countries has become virtually inevitable. The industrial and
FDI policy Bangladesh reflects the commitment of a democratically elected government to the
principle of market economy where in foreign investors have almost total freedom in choosing
the field and also of investment. But we have seen that the gloomy performance of Bangladesh in
attracting FDI.

Although FDI flows have increased rapidly then decreased throughout the world, foreign
investment in Bangladesh has more or less increased very slowly. In order to properly capture a
countrys performance, it is necessary to the analysis of trends in absolute volume of FDI
inflows.

16
4.2.1 Volume

Bangladeshs ability to attract FDI has always been question. But after the birth of the modern
democracy since 1991, the subsequent government have taken measures to consistently liberalize
trade policies and since 1996 various rapid measures were taken to attract foreign investment.
Since then Bangladesh has taken baby steps but yet after more than 45 years of Independence our
FDI is still one of the lowest in the world. It is currently only around $2.24 billion and we were
able to only grab $8.73 billion from 2010 till 2015. This very poor performance if compared with
some of our neighbours.

Graph 6: FDI (net flows), World Bank (http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?locations=BD)

4.2.2 Sources of FDI

Over the years Bangladesh has always hoped and seen FDI coming in from the western
countries. In the period FY2015-2016, the story was no different. USA was at the top in terms
net investment in the form of FDI with investing around $450million mostly on the Gas and
Petroleum sector ($213 million) and Power sector ($180 million). At second position was UK
which invested around $307million of which most was invested on the Banking sector which
was around $161million (refer to table no. )

17
 FDI Net Flow for FY 2015-2016

Table 1: FDI in Bangladesh, Survey Report 2016, Bangladesh Bank

4.2.3 Sectors of Investment

As we can see form the table below, the most attractive sector so far for investment in the year
2016 has been the telecom sector which baged around $573 million out of the approximate
$2332 million total inflow. On the third position was the infamous Textile industry which saw an
FDI investment of $364 million.

Graph 7: World Investment Report 2016, (http://www.thedailystar.net/business/fdi-yet-pick-despite-govt-

efforts-1417558

18
The distribution of FDI by home countries shows that remarkable change has also occurred in
the country wise distribution of FDI inflow into Bangladesh as revealed. Developed market
economy dominated foreign investment in Bangladesh. This pattern has substantially changed
recently with USA and UK is the leading position now. But during 1997/1998 Malaysia was the
leading position followed by Japan Singapore and Hong Kong. The source of foreign investment
in Bangladesh has changed because of investment in gas and oil exploration sector by the USA
and UK.

The distribution of FDI inflow among the various industrial sectors will make it clear that gas
and petroleum, textile, banking, telecommunication, food, cement, leather and power have been
the prime choice of the foreign investors. This sectoral distribution has changed previously
chemical and textile sector was the prime choice of the foreign investors. The sectoral
composition of FDI has been changing significantly from the primary sector to manufacturing
and service sector.

4.3 Evolution of Governments Perception

During the liberation war in 1971 a nationalist mentality was born which gave Bangladeshis a
spirit of freedom and dignity of independence but it also resulted in a more reserved position in
case of economic policy. Policy makers at that period used to see foreign companies access with
a negative eyes. Foreign investments were discouraged as a result foreign direct investment
(FDI) inflow in Bangladesh till 1980 is very insignificant.

In the late 1980s and 1990s, Bangladesh announced a series of measures and liberalized its FDI
policy framework. In recent years, Bangladesh has significantly improved its investment and
regulatory environment, including the liberalization of the industrial policy, abolition of
performance requirements, and allowance of full foreign-owned joint ventures. Since 1996, new
sectors have been opened up for foreign investment, including the telecommunications sector
which has provided huge dividend.

19
FDI is encouraged in all industrial activities in Bangladesh excluding those on the list of reserved
industries such as production of arms and ammunitions, forest plantation and mechanised
extraction within the bounds of a reserved forest, production of nuclear energy, and printing and
minting fresh currency notes.

Nonetheless, foreign investors enjoy the same incentives as domestic entrepreneurs in respect of
tax holidays, accelerated depreciation allowances, concessional duties on imported capital
machinery, and other measures, as contained in the Industrial Policy 1999 and 2005. The
establishment of convertibility of the taka for current account transactions, in April 1994, has
facilitated foreign investment, by eliminating the requirement to obtain prior approval from the
Bangladesh Bank on current account transactions.

Additionally, there is no limitation pertaining to equity participation by a foreign investor.

Investments can be undertaken independently or through joint ventures with the local, private, or
public sector. All foreign investments must be registered with one of the three sponsoring
agencies: the Bangladesh EPZs Authority (BEPZA), the Bangladesh Small and Cottage
Industries Corporation (BSCIC), or the Board of Investment for all other private investment.

The country encourages foreign investment in export-oriented industries and in high-technology

products that either substitute imports or add to exports. Foreign investments may be undertaken
either independently or through joint ventures, with either the local, private, or public sector. The
government has liberalized its industrial and investment policies in recent years by reducing
bureaucratic control over private investment and opening up many areas. Bangladesh allows
entry of foreign investment into all sectors other than the five reserved sectors, which are
reserved only for public investment and even domestic private investment is not allowed in
these.

The legal policy allows 100% equity participation by foreign investors, provides for fair and
equitable protection against nationalization or expropriation by the state, provides full
indemnification in the event of financial loss due to civil unrest, and ensures repatriation of

20
invested capital, dividends, and the proceeds from the sale of shares. Repatriable dividends, if
invested, are treated as new investments. For bringing in new investments, government approval
is not needed. Foreign firms and companies may also raise loans locally and they do not require
the permission of the central bank for remittance of profit, technical assistance fees, and
royalties.

4.4 Main Attractiveness of Bangladesh

Bangladesh h a young and energetic population where 58 percent f the population less
than 30 years ld. Th rate f urbanization growing ft 28 percent f the population
urbanized. It estimated t grow t a 3.1 percent rate annually.

A respectable growth rate f 6 percent n GDP w maintained over the last 10 years.
Bangladesh h totally lived up t t standards which w set high when Goldman Sachs
included t n the list f the Next 11 countries n 2005.

A competitive edge over other countries n the form f cheap labor h md Bangladesh
the second largest exporter f readymade garments n the world. It accounts fr 77 percent
f Bangladeshs total merchandise export. Technological advancement, dedicated labor
force, n open trade regime, infrastructural development and effective government policies
r the major reasons behind this success.

Bangladesh has a strategic location which works as a gateway to the countries of the Asia-
Pacific region.

Huge customer base who are getting richer with the development of the country. This
means more opportunity to make make profit. This has been proved by the
telecommunications industry successfully.

Standard f living n Bangladesh growing. Increasing number f population having

access t electricity, healthcare and education h enlightened the nation t achieving t
double digit growth and a middle income country b 2021.

21
 CHAPTER 5

Findings & Analysis

Even though Bangladesh and India have many things different from each other, yet there are
many many things which these countries have in common such as in terms of demography,
weather, culture and so on. Yet there are many things in terms of which India is different from
Bangladesh such as in the case of economy, politics, infrastructure and so on.

Usually the obvious difference that India has with Bangladesh are regarded as the reasons why
India is ahead of us. The common reasons which are cited to explain why India has been
successful in attracting more FDI than Bangladesh are normally infrastructure, corruption, trade
openness and son on. But are these explanations enough to explain the difference in FDI among
them ? This is exactly what we will try to answer in this chapter.

Keeping that in mind, in this chapter we will indulge in analyzing the differences India and
Bangladesh have in terms of volume and components of FDI inflow. Then we will look into the
different reasons which are given by many in order to explain the disparity in the volume of FDI
between the two countries and most importantly, we will look at how such explanations are
sometimes weak to justify the difference which the two countries have in terms of the inflow of
foreign direct investment within these countries.

5.1 Comparison of FDI Data

In this section we will try to see and compare how Bangladesh and India differ from each other
in terms of the categories used to measure FDI in a any country or nation. As already mentioned,
we will look into many reasons of common understanding of disparity of FDI between the two
countries. But to understand it better we first have to find out how much difference is there
between the countries. To do this, I will be presenting in the following page a concise table of the
different parameters of FDI and where each of them are standing. This will give us a clear idea of
how poorly Bangladesh is performing when they are compared with the performance of the
country India.

22
 FDI Data

India Bangladesh

FDI inflow (2015-16) $ 44.21 billion $ 2.235 billion

FDI (2010 - 2015) $194.8 billion $8.73 billion

FDI (% of Equity) 72.12% 25.23%

FDI (% share in South Asia) 82% 4%

Table 2: World Investment Report 2016 (http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf)

5.1.1 Volume

As we can see from the table, Indias total volume of FDI is significantly higher than that of
Bangladesh. India was at around 44 billion dollars where as Bangladesh was at only 2 billion
dollars approximately. That is a huge difference of about 42 billion dollars. Out of all the South
Asian countries, after Afghanistan, Bangladesh has the highest difference with India in terms of
the volume of inflow of FDI.

The gap between the countries becomes even more prominent when we look at the difference
between the two countries for the period of 2010 to 2015. It is clear that Bangladesh has
underperformed very significantly compared to India. In this period, India has earned a total
investment of approximately 195 billion dollars and Bangladesh is not even close to its rival,
with only almost a mere 9 billion dollars,

5.1.2 Components

The problem of low inflow of FDI in Bangladesh becomes even more pervasive when we look
into the components of FDI in Bangladesh and then when compare it with India. It becomes clear
that India is indeed performing very much better than we are. At first we will look into a
graphical representation of India and then we will look into Bangladesh.

23
 Indias Ratio of FDI components

Equity Capital Re-Invested Earnings

Other Capitals

6%

22%

72%

Bangladeshs Ratio of FDI components

Equity Capital Reinvested Earnings

Other Capital

17%
25%

58%

24
It is clear that even the small FDI that Bangladesh has is not with out bad news. Whenever, a
country wants FDI inflow. It wants it in the form of Equity Capital. The higher the ratio of equity
capital, the better it is for the country. This because it would mean more money coming into the
country which will mean more jobs, more flow of money, and more growth for the country as
whole .

But as we can see in the case of Bangladesh, Equity Capital is only around 25% of the total FDI
inflow for the period of 2015-2016. And chance of the FDI is Reinvested Earrings which means
the money made by already existing foreign firms in the country are reinvested in the business
instead of taking back to their home country. This is a good thing, but not what is desired
because it means this is an existing money of the economy which is being rolled over to carry out
the business. But in the case of Equity Capital, fresh new inward cashflow is experienced by the
economy which helps to grow the economy much faster. But for India we can see, the scenario is
totally the opposite. Around 72% of Indias FDI inflow came as Equity Capital. This is a huge
difference between the two countries.

5.2 Popular Justifications of Disparity

Whenever the question of FDI comes around, people try to cite different reasons for answering
why Bangladesh has been lagging significantly behind compared to its rivals. And there are some
default answers which are given to explain it; for example, infrastructure, governance, less
liberalism in terms of trade barriers, skilled labour and so on.

And their explanation seems to stay consistent when they are justifying the unprecedented gap
between the flow of FDI between India and Bangladesh. They say as Bangladesh is behind India
in most off the index of these generic reasons, so this must explain why India is so much better in
attracting FDI than Bangladesh.

The purpose of this section is to explain these argument in detail, taking some, but not all, of the
reasons which are usually accepted as the justification for the disparity between the countries.

25
5.2.1 Infrastructure

Infrastructure is cited as one of the most important aspects in determining whether foreign
investors will be encouraged to go and invest in a prospective country. This becomes even truer
for developing countries. Some people argue that poor infrastructure will definitely mean that
foreign investors will not come into the country to invest because it will lead to lesser efficiency
in carrying out a business. Infrastructure comprises of the basic amenities or facilities which a
society needs to operate smoothly. This may include things like buildings, roads, power supply,
water supply and so on. These are even more important for companies to operate because
without any firm will suffer with high cost and lower productivity than its capacity.

In the following table it is shown how India stands against Bangladesh in terms of Infrastructure.
One of the most reliable sources for infrastructure comparison among countries is the Global
Competitiveness Report by the World Economic Forum.

Infrastructure Index

Ranking Points

Bangladesh 123 2.56

India 81 3.72

Table 3: Global Competitiveness Report 2015-2016, World Economic Forum (http://www3.weforum.org/docs/gcr/

2015-2016/Global_Competitiveness_Report_2015-2016.pdf)

From the table it is clear that India is doing very well in terms of Infrastructure. While it is
ranking at 81 in the world with a point of 3.72, Bangladesh is ranked at 123 with only 2.56 as
points. The disparity is unprecedented and extremely eye-catching. Some people will argue that
this has led to the big differences in FDI inflow between India and Bangladesh. They say, why
would a foreigner invest in Bangladesh, when India is a far larger country

26
5.2.2 Governance

According to the above mentioned surgery, another issue that a lot of people claim is looked at
by the foreign investors before investing in a country is the quality of governance in the host
country. The logic is good governance is directly linked with business efficiency and reduction of
opportunity cost. In the absence of it, costs incurred by businesses, foreign or otherwise, quietly
and reliably increases.

A good measurement of good governance in different countries is provided by World Bank

through its World Bank Governance Indicators report which is published every two years. It
measures good governance in terms of Control of Corruption, Government Effectiveness,
Political Stability and Absence of Violence, Regulatory Quality, Rule of Law and Voice and
Accountability.

As we can see in the below tables, India has outperformed Bangladesh in all of these aspects

Table 4: Worldwide Governance Indicators (www.govindicators.org)

http://data.worldbank.org/data-catalog/worldwide-governance-indicators

27
5.2.3 Ease of Doing Business

Conducting business in a country must be easy otherwise foreign investors will not feel
comfortable to invest and will therefore look to invest in countries where the business
atmosphere is conducive to operating a business. According to the World Bank, Ease of Doing
business is defined as the regulatory environment is more conducive to the starting and
operation of a local firm. And it is measured by them based on some specific criteria. The Graph
below shows those criteria and where India and Bangladesh stands in each of them; both in a
world and South Asian context.

Bangladesh India

World Ranking 176 130

South Asian Ranking (filtered) 7 4

Starting a Business 6 8

Dealing with Construction 5 7

Permit

Getting Electricity 8 1

Registering Property 7 3

Getting Credit 8 1

Protecting Minority Investors 5 1

Paying Taxes 6 5

Enforcing Contracts 8 6

Trading Cross Borders 7 4

Table 5: The World Bank, Doing Business, June 2016 (http://www.doingbusiness.org/rankings)

From the table we can see that even though, Bangladesh is ahead India in terms Starting a
Business and Dealing with permits, it is behind India in all other standards. In particular more
serious is the criteria of Electricity, enforcing contracts and getting credits. And in all of three
standards Bangladesh is the worst out of all 8 countries of South Asia; whereas India is the best
in two of the standards. In such a situation, some people may argue, foreign investors are bound
to be discouraged to invest in Bangladesh.

28
5.3 Problems with Popular Justifications

The common justifications given by people for Bangladeshs failure in attracting FDI when
compared to India, are important but they should not be given more importance than they
deserve. These factors may have impacted us but to say that these are the most plausible
justification cannot be more farther from the truth.

Therefore, this section will show why some of those common justifications do not deserve the
attention from critics that they receive when trying to explain Bangladeshs performance. We will
do this by suing their same logic, but this time we will compare some African countries; how
they are doing in these indexes and how they are performing in comparison to India.

5.3.1 Infrastructure Argument

Some may argue that as India is ahead of Bangladesh in terms of infrastructure (81 and 123 in
ranking respectively), then this must explain why Bangladesh is lagging behind India in terms of
FDI inflow. This argument is based on the premise that poor Infrastructure will definitely drive
away foreign investors as this means poor business efficiency and higher opportunity cost.

Infrastructure Index

Ranking Points

Bangladesh 123 2.56

Myanmar 134 2.09

Nigeria 133 2.1

Mozambique 126 2.43

Table 6: Global Competitiveness Report 2015-2016, World Economic Forum (http://www3.weforum.org/docs/gcr/

2015-2016/Global_Competitiveness_Report_2015-2016.pdf

29
The graph presented on the page before shows some of the countries which are expected to have
less developed Infrastructure in their country compared to Bangladesh. Therefore, according to
some these should imply that these countries should have more foreign investment coming in
than Bangladesh because, some say with poor infrastructure it is quite impossible to attract funds
or investment from abroad. We will now test this assumption.

Total FDI inflow from 2010 to 2015

$ billion

Bangladesh 8.7

Myanmar 12.6

Nigeria 35.5

Mozambique 24.0

Table 7: World Investment Report 2016 (http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf)

From the table above, we can see that even though all this countries have poorer forms and
facilities related to infrastructure, but still all of them experienced higher foreign investment
from the period of 2010 to 2015. This definitely puts the need to question the arguments that a
well developed infrastructure is an absolute must to attract FDI in a country and that is what
mostly explain the disparity between India and Bangladesh.

30
5.3.2 The Governance Argument

Commonly a good base of governance from the government or the authorities are cited as a
prerequisite for attracting FDI in a country. On the outset it seems logical because for example, if
level of corruption is high, foreign investors will have to go through a lot of hassle both mentally
and financially in order to carry out a business. Or if political stability is turbulent then it can
lead into greater uncertainty in terms of business environment which can result into reluctance
from investors to invest as they might see it as an impediment to profit making. This seems very
logical and it might be true to some extent. But are these issues really the deciding factor when
talking about lagging FDI inflow in a country. The following two tables will show that the
answer is perhaps NO.

31
 Table 8: Worldwide Governance Indicators (www.govindicators.org) http://data.worldbank.org/data-catalog/
worldwide-governance-indicators

Five countries have been shown, including Bangladesh, in the table above along with the
position of each country in the each of the criterion of good governance as measured by the
World Bank. As we can see all the other countries are doing far worse than Bangladesh in almost
all of the criteria. In other words, Bangladesh is suppose to have better governance capabilities
than the other four countries. But does this mean more FDI as some might argue? No as we can
see clearly all of this countries have better inflow than Bangladesh.
Table 9: Total FDI inflow from 2010 to 2012

$ billion

Bangladesh 8.7

Myanmar 12.6

Nigeria 35.5

Angola 10.6

Dem. Rep. of Congo 13.6

32
5.3.3 The Ease of Doing Business Argument

As already mentioned in Section 5.2.3, how easy it is for businesses to operate in a country can
be measured in many different ways. One of the most accepted ways are the organized by the
World Bank in its Doing Business Report, where they look into certain aspects like starting a
business, registering property, getting credit and so on.

The argument that is often put forward to explain why India is far ahead of Bangladesh is often,
that in India it is easy to do business when compared to Bangladesh. And as proof news reports
often cite the ranking of the two countries in the Doing Business report where, as previously
mentioned, India is in 130 and Bangladesh in 176. But does this really explain why we are
lagging behind? I beg to differ because the flowing tables will prove otherwise.

Comparison in terms of Ranking and Total FDI

Ranking (Ease of Doing Total FDI (2010-2015)

Business)

Bangladesh 176 $ 8.7 billion

Angola 182 $10.6 billion

Dem. Rep. Congo 184 $ 13.6 billion

Table 10: The World Bank, Doing Business, June 2016 (http://www.doingbusiness.org/rankings)

We can see in the table above, that even though Angola and Democratic Republic of Congo were
ranked lower than Bangladesh, they had a higher foreign investment flow in their country than
us. Does this mean the easiness of doing business in a country does not matter to investors? No it
matters but all the criterion within the measurement is given equal weight but such should not be
the case. Some of the factors which re measured must matter more than some other and we will
show this to be true in the next chapter.

33
5.3.4 Labour Rights Argument

A lot of people argue that beside caring about the labour cost of a country, foreign investors also
look at how the labours are treated in a country before investing in there. the main argument is
based on the ethical issues that arrive in such situations. Developing countries, like Bangladesh
and India, are highly susceptible to treating labour rights with disdain. And both countries are
very well known worldwide for this. Particularly, Bangladesh has been the sufferer of this due to
the tragic Rana Plaza incident. This incident is looked at as an example of the dire situation of
the employees in Bangladesh. In such a situation, it is said that Investors are less likely to be
interested to open businesses because this will also impact their brand image worldwide. People
might accuse them of exploiting poor workers in these countries.

In this regard, however, India is not far away from Bangladesh. In fact, in the last three reports
called the ITUC Global Rights Index, both India and Bangladesh has scored 5 consecutively. A
ranking of five means, these countries are the worst to work in. Moreover, China has also scored
a 5. But we all know the FDI in both India and China are very high.

So, this is proof enough that the argument that investors do not come to Bangladesh and instead
go to India because our Labour Rights are in dire strait, is a very poor argument.

Graph 8: Global Rights Index, 2016 (https://www.ituc-csi.org/IMG/pdf/survey_ra_2016_eng.pdf)

34
5.4 Potentail Justifications

In this section we will look into some of the issues which could more appropriately justify the
reasons behind Bangladeshs under performance in terms of FDI inflow when compared to India.
The arguments will be provided along with the underlying rationale behind the claims.

5.4.1 Countrys Image

It is very important to come up with a more comprehensive understanding of the significance of

the image of a country for the possible effect that it might have on foreign investors decisions to
come go to a country. This is true more so for a country like Bangladesh as it is interested in
enhancing the effectiveness of FDI promotion programs.

Even though India has its problems, it has portrayed itself around the world for many years as a
very strong and vibrant nation. This has definitely helped in installing confidence in their country
and society and due to that we are seeing such surge in FDI in their country. But has Bangladesh
been able to create a positive image through out the world? The answer is unfortunately no. In
fact the opposite has happened in the recent past. Over the years we have always been known as
country of beggars. And the credit for which goes partly to the our government. our governments
have always portrayed us as extremely poor and fragile country in order to attract donations and
other international aids. But they did not realize how it has affected our image as potential
investing country. Why would any foreigner invest in a fragile or weak country?

Moreover, the recent fiasco relating to the Rana Plaza has also severely jolted the already weak
image of Bangladesh. Now Bangladesh is identified by both the buyers and final consumers, as a
country which exploits its labours. And it has mostly to do with the failure of governments to
ensure political influence when it comes to gaining unprecedented benefits to earn more profit.

On top of that, our government currently has led and has widely published the crack down on
domestic terrorist organizations. This according to their view is a positive thing as they believe it
ensures everyone that steps are being taken to tackle the problem. However, I think this sends a

35
negative message to the foreign investors as they will start recognizing Bangladesh as a place
where terrorism is wide spread. Terrorism is also present in India, in fact in some cases to higher
extent. But yet they have handled it discreetly in order avoid sending the wrong message the
investors all over the world.

5.4.2 Trade Relations between India and Bangladesh

It is very much widely known that there is a huge trade gap between India and Bangladesh. This
has always been the case and it is increasing with time. Various so called measures have been
taken by the India government to allow Bangladeshi products a fair chance in India but it is an
open secret that most the goods which received this benefit were not something that Bangladesh
concentrates much on a national level. Therefore, overall India has many tariff and non-tariff
barriers imposed on Bangladeshi products

But scenario is quite opposite in Bangladeshs case. Our markets are flooded with Indian goods
and factor mobility from India to Bangladesh is also very high is also very smooth. Government
imposes very little restrictions. This is what has resulted in the huge gaps between the countries.

These information are very much related to the FDI discussion. Because this one-sided trade
liberalization initiatives will naturally rise question in an investors mind that if he can invest in
one country and then sell its product both in the local market also in the markets of the
neighbouring countries with minimal restrictions, then there is no reason why he will increase his
costs by investing huge sums money in the neighbouring country. Moreover, the investor will not
choose Bangladesh because if he does he has to face restrictions on entering India and on top of
that, as already mentioned above, India provides abundant electricity, coal, gas and other services
to the investors. This is something which Bangladeshi government has failed to ensure for the
foreign investors.

36
5.4.3 Electricity Shortages

Even though this measurement is part of the Doing Business Report, the problem as mentioned is
that all the criteria receives equal weight when calculating the rankings. Lack of electric power is
the extremely, if not the most, important aspect in terms of easiness of doing business. Without
proper electricity supply Bangladesh cannot expect to improve its FDI flow significantly anytime
soon. To prove this point the following tables are given:

Ranking Electricity Ranking Total FDI (2010-2015)

Bangladesh 176 187 $ 8.7 billion

Angola 182 171 $10.6 billion

Dem. Rep. Congo 184 178 $ 13.6 billion

India 130 21 $194.8 billion

Table 11: The World Bank, Doing Business, June 2016 (http://www.doingbusiness.org/rankings)

It is clear from the table that, even though Bangladesh was ranked higher in terms of ease of
doing business compared to the other two countries, it was lower in ranking in electricity supply
capability in comparison to both the African countries. This, in my view, partly explains why
even after being lower in overall ranking, Bangladesh is behind Angola and Dem. Rep of Congo
in attracting FDI inflow.

And we can see where India stands among all of them. It is ranked as 21 in the world for
ensuring electricity for businesses. It is the most basic need for ensuring smooth operation of
business and Bangladesh is not even close to India in terms of providing this basic necessity to
potential and current foreign investors. Why will then people invest?

37
5.4.4 Enforcement of Contracts

Same as the shortage of Electricity problem, enforcement of contracts are given equal weights in
the Doing Business report, but that should not be the case. This is because this has always been
said by many experts as one of the main problems, and the data seems to support it as well. WE
will indulge into a similar analysis as in the case of shortage of electricity to prove the point.

Ranking Enforcement of Total FDI (2010-2015)

Contracts Ranking

Bangladesh 176 189 $ 8.7 billion

Angola 182 185 $10.6 billion

Dem. Rep. Congo 184 155 $ 13.6 billion

Table 12: The World Bank, Doing Business, June 2016 (http://www.doingbusiness.org/rankings)

In this case also we can see, overall ranking of Bangladesh is higher, yet it is sitting at a lower
position in case of enforcing contracts. This might explain why Bangladesh is lagging behind
both these countries. This is because foreign investors will always be reluctant to inject their
money in a place where contracts are legal binding but not enforceable. Even if it is, it might take
many years to resolve the case.

With in that time, any business man can incur severe losses. Any investor will try their best to
avoid such kind of uncertainty. And this could explain why India has been a more attractive place
to operate in South Asia than Bangladesh. India is currently standing at 172 in the world, which
is definitely not a modest number but it is much better than that of Bangladesh, which is literally
the second worst country in the world in terms of the ability of enforce contracts which are
legally binding.

38
 CHAPTER 6

Conclusion and
Recommendations
6.1 Recommendations

The consistent supply of electricity and other forms power has to be ensured by the
government of Bangladesh as soon as possible. This is a basic necessity in the business world
and with out it both foreign and local businesses will not invest due to the risk of not being
able to operate smoothly and cost effectively.

The government should pursue Private Public Partnerships in different sectors; specially the
infrastructure sector. This will attract more FDI because a long term commitment of these
projects with a sovereign government ensures consistent flow of revenue. Moreover, years of
PPP with foreign investors are also likely to increase trust which can motivate foreigner to
invest fully in other sectors or projects.

Bangladesh has geographical advantage when we consider that we are right in the middle of
West Bengal and places like Assam, Tripura and Meghalaya. It costs Indian businesses a lot to
transport goods made in the west side to east side. Therefore it would cost them much lesser if
they set up Production in Bangladesh and then transfer them to the eastern parts. Our
government has failed so far to attract such investment from India.

Government has to be extremely proactive in order to improve the deteriorating image of

Bangladesh worldwide. We are know as poor, volatile and terrorism prone country. This
negative perception of foreigners has to change if we ever want to rich heights of the Indian
volume of FDI. BIDA has been established last year, before that there was the the Board of
Investment and so no separate investment promotion bureau was present.

Bangladeshs weak contract enforcing ability is proof of the weakness of judiciary system. And
weak judiciary the chances of fraud becomes high as justice cannot always be relied upon.
With such uncertainty no foreign investors will have the courage to invest due to the severe
uncertainty present. Bangladesh government has to improve the judiciary to earn the trust of
potential investors.

39
6.2 Conclusion

Not long after the Liberation of the country, Bangladesh was predicted to be one of the failed
states of the world. With such a small land area, high population, and limited resources, a lot of
people claimed the future was Bangladesh was very bleak. Proving all these speculations to be
wrong, the country has significantly outperformed the expectations from them. However, it has
not performed according to its potentials specially in terms attracting FDI inflow. It has only
attracted $2.23 billion in 2016.

India on the other hand, has seen the opposite to happen. Initially after their independence, India
was very skeptical about foreign investment because they thought it world stop the growth of
local industries. But after the economic crisis of the early 1990s they started to free up their trade
policies. This initiative has provided unsurmountable dividends to India, more so that they have
ended up grabbing around $44 billion in 2016.

The common reasons trying to justify the difference have been things like infrastructure,
corruption, governance and so on. Some of these reasons are considered to be the most important
by many people. However, as this paper has shown, that some of these justifications should not
be given the importance they get. As proof it has shown that some of the countries, for example,
has worse infrastructure than Bangladesh, yet these countries have managed to attract more FDI
than us. This shows that even though infrastructure is important for investors it probably is not as
important as people think it to be. This has been the main premise of the argument which has
been presented in this paper.

After that, a few of the potential justification for the disparity that is present between India and
Bangladesh has been provided. It has been show that the importance of the host countrys
goodwill, the trade relation between neighbours, shortage of electricity and the weakness of
enforcement of contracts are probably the most significant reasons which justifies why India has
been so much better in bagging FDI inflow than we have.

40
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