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An Interesting
Topic

FDI
(Foreign Direct
Investment)

Foreign Direct Investment(FDI)

FDI is an investment made by a
company or entity based in one
country into an entity based in another
country.

Example: Telenor Group invest in Bangladesh as

Grameenphone Ltd and started its operations on March

Primary Objectives of FDI

FDI improve profitability and enhance
shareholders wealth by

Boosting Revenue and

Reducing Cost

Revenue Related Motives

1.When new source of
demand emerged and
potential for growth in the
foreign country is broad.

For example:

Bangladeshi Labor
67% of all
migrant
labor work in

USD 9774.09
Million (20152016)
More
than 7
million
Nation
als

Represe
nting
12% of
the GDP
of the
year

one of the
Gulf
Cooperation
Council (GCC).
countries:
Bahrain,
Kuwait,
Oman, Qatar,
Saudi Arabia
or UAE (ILO).

2. Find New Foreign Profitable

Markets

Export
s
Over
118
Countrie

Earn $94
m (201314)

Main
Export
Market
India 33%.

Exploit monopolistic
advantage
3.

For Example: Pran built its first

foreign plant in India in 2009. Pran
use advance technology to produce
quality product.

4. Reacting to the trade restrictions

For example: In 1985 US government
impose new rule for motor vehicles
import, For that reason in 1986
Japanizes Toyota built its plant in USA
to react on trade restriction.

Cost Related Motives

Taking full benefit from economies of
scale, specially firm with large
machinery.
Using cheaper foreign factors of
production.
Using foreign cheap raw materials in
production.
Diversify sales and production
internationally.
Reacting to exchange rate

1.Taking full benefit from economies of

scale, specially firm with large
machinery.
Economies
of
scaleare
the
cost
advantages that enterprises obtain, by
decreasing cost per unit of output with
increasingscaleas fixed costs are spread
out over more units of output.
Example: The printer quotes a price of
$5,000 for 500 books, and $10,000 for 2,500
copies. While 500 books will cost you $10 per
book, 2,500 will only cost you $4 per book.

Using cheaper foreign factors of

production.
2.

Example: Experience Clothing

Company Ltd. Of UK invests in
Bangladesh garments sector for
cheaper labor cost of production.
Knitting & other Textile producer of
Italy A-One (BD) Ltd. invests in
Bangladesh Textile industries for lower
production cost.

3. Using foreign cheap raw

materials in production
Marico Ltd. started its operation in
Bangladesh as Marico Bangladesh Ltd.
in 2000 to produce different types of
oil using the cheaper raw materials
(coconut).

4.Using advanced foreign

technology
Maruti-Suzuki A Japanese company started
its operation in India in 1981 in that contract
that the Japanese owner control the
business for a certain period and then it sold
its substantial portion of share to the Indian
owner as a result the Indian owner would get
the control. In 2007, the Indian owner got
the whole ownership of Suzuki company.

5. Diversify sales and production

internationally
For Example: Wal-Mart has not only
diversified internationally but has
spread its business into many
emerging markets as well. Because
foreign expansion diversifies WalMart's sources of revenue and thus
reduces its reliance on the U.S.
economy

6.Reacting to Exchange Rate

Movement
Between 1997-1998, A currency devaluation
occurred in Thailand and the Baht per dollar
was jumped 28 to 48. American businessman
take advantages from this opportunity and
they bought land and establish plant
there. When the Baht came
into the flexible situation
then the American Business
men commenced their
operation.

Resource/asset Seeking
Motives
Various inputs-including natural
resources
Technologies,
Skilled

personnel,

Physical

infrastructures and materials

Market Seeking Motives

Market
Size

size and per capita income

of GNP and projected rate of growth

Access

to regional and global markets

Country

specific customer preferences

Structure of the markets

Geographic factors related Motives

AN MNC can be motivated to FDI by
analysing the geographic factors including

The proximity of size to export markets

Availability

of local raw materials

Availability

of power, water and gas.

Political stability related Motives

Form

and stability of Government

attitude

toward private and foreign

investment by Government

customers
Degree

and competition

of anti-foreign discrimination

Tax advantage related Motives

MNC

companies always try to invest

those countries where tax advantages
are available

Tax

rate trends

Joint

tax treaties with home country and

others

Availability

of tariff protections

The Importance of FDI:

Foreign Direct Investments open a wide spectrum of
opportunities in the trading of goods and services both
in terms of import and export production.

Integration into global economy

Raising the Level of Investment

Trade

Example: South Korea's Samsung Electronics Co Ltd

has applied for a license to invest $3 billion in building
a second smartphone factory in northern Vietnam. This
project will gear the wheel of economy in Vietnam both
in terms of export and import of production.

The Importance of FDI (cont.)

Technology diffusion and knowledge

transfer:

Developing countries by inviting FDI can introduce worldclass technology and technical expertise and processes to
their existing working process.
For example: In February 2011, Bangladesh reached an
agreement with Russia to build the 2,000 megawatt (MW)
Ruppur Nuclear Power Plant with two reactors, each of which
will generate 1,200 MW of power to meet electricity
shortages.

Increased competition

Overall development of a country is not possible without

creating employment for unemployed citizens. In this regard
FDI is working as a great helping hand of that particular host
countrys which cordially invites FDI.

Disadvantages of FDI
Despite having lot of contributions in the
economic growth of a country, FDI is not free
from limitations. The Barriers of FDI are..

Fall in domestic savings

Less corporate tax

Dualisticsocio-economicstructure

Control over Political Decision

FDI can be classified into Two forms

Horizontal form
Vertical form

Horizontal form
If the company Investing in the same
business in that from operates
domestically then it is called horizontal
FDI.

Invested

Vertical form
A company invest in a business or
company that plays a role of supplier
or distributor then it is called vertical
FDI.

FDI Can Be Achieved

By Two Strategies
1. Greenfield Investment
2. Brownfield Investment

First Strategy
Set up new plant and building in the
other countries from ground up.

This method is called Greenfield Investment

Example: Greenfield
Investment

Second strategy
Cross-Boarder Merger and Acquisition,
that involves acquiring an existing
foreign enterprise of the country of
interest.

Acquiring foreign
company
That is also called Brownfield investment

Example: Brownfield
Investment
In 2008 TATA motors acquired land
rover jaguar from Ford.

Acquired

TATA motors didnt have to build

new factory for his for its
operation.

Determinants of FDI

Determinants of
FDI(cont..)
Independent variables:
Market Attractivness
Trade Openness
Environment Risk
Energy Price
Dependable Variable:
FDI

FDI Model
fdi = 0 + 1gro + 2inf + 3 logcost + 4
logtel + 5 op + 6 risk + 7 tax +
fdi = FDI net inflows as a percentage of Gross
Domestic Product (GDP)
inf = the rate of inflation measured by annual
percentage change of consumer prices
Gro = growth rate of per capita GDP
Logtel = telephone main lines per 1,000 people
Logcost = labour cost per worker
Op = the degree of openness

Relationship among FDI

variables
FDI inflows are positively associated with a
countrys GDP per capita.
FDI inflows are positively associated with a
countrys manufacturing exports
FDI inflows in are negatively associated with a
countrys level of environmental risk
Political risk
Economic risk
Financial risk

Hymer FDI Theory

Hymer (1976) explained the theories of FDI
by comparing the difference between foreign
direct investment and portfolio investment
Hymer also analyzed that there are two
reasons why investors seek control
1. To make sure their investment is safe
2. To eliminate competition in foreign countries
and other countries.

Hymer FDI Theory (cont..)

Hymer stated that multinational companies
are motivated to invest in foreign countries
due to certain advantages .
For example: Getting factors of production
at a lower cost
Where market imperfection exists
multinational companies prefer to engage
in direct investments

Product Life Cycle Theory

Raymond Vernon (1966) product life cycle
theory has analyzed four production stages
beginning with invention of new product.
Vernon tried to understand the shift of
international trade and international
investment.

Product Life Cycle Theory

(cont.)
Stage 1- The enterprises are more focused on the
domestic market
Stage 2- When the product matures, enterprises
start exporting to developed countries.
Stage 3- When the product is standardized, the
enterprises would think less developed countries
could be good production place
Stage 4- The home countries will be an importer
since the production decreases

Uppsala model
The Uppsala model is a theory that explains how firms
gradually intensify their activities in foreign markets
Step i- gain experience from the domestic market before
they move to foreign markets
Step ii- start their foreign operations from culturally
and/or geographically close countries and move
gradually to culturally and geographically more distant
countries
Step iii- start their foreign operations by using traditional
exports and gradually move to using more intensive and
demanding operation modes

FDI in World Perspective

FDI in World Perspective

FDI in World Perspectives

(cont.)

Greenfield Investments in
Automotive Industry 2013-2014

Major Country-wise FDI Inflows for FY

2015

FDI Infows (Net) (In

million US$)

300
250
200
150273.55
237.92
224.21
100
135.21
131.1
120.3
107.01
97.32
93.12
50
82.42
77.54
69.56
55.25
49.45
40.32
0

Country

FDI:
BANGLADESH
PERSPECTIVE

Economy of Bangladesh
Rapidly developing market-based
economy
According to IMF,
Bangladesh ranked as the
44th largest economy in the
world in 2011.
But still its a developing
countries with the
numerous potential of
foreign investment

Exports of textiles
and garments are
the largest source of
foreign exchange
earnings

Economic Overview
GDP total:
$223.941b(2015-2016)
GDP per
capita: $1466
(nominal:
2015-16)

Total
exports:
$33.50b
(201516)

Total
imports:
$40.69b
(201516)

Currency
: BDT (1
BDT=
$0.01282
05) (avg
2009-10

Foreign
reserves:
$27
billion(20
16)
Total FDI:
$1833m
(2015)

GDP growth
rate (%):
7.1%
(2015-16
est.)

FDI Inflows Quarterly During FY 2015

Gross inflow

Disinvestment

FDI Infows (in Million US$)

800

726.23

700
600

Net inflow

596.46

644.14

606.92

500
400

341.1

557.95
489.94

395.91

300
200

255.36

248.23

100

119.31

period

68.01

Total FDI for The Year 2015

2524.78

690.91

1833.87

Gross Infow

Disinvestment

Yearly Time Series Data on FDI

Infows (Net)
1900

1730.63

1700

1480.34

FDI Infows (Net) (In

million US$)

1500

1194.88

1300
1100
900

1833.87

913.02

779.04

700
500

Period

FDI infows by Components during

January-June, 2015 (In million US$)
Equity Capital
Intra-company Loans

Reinvested earnings

595.65; 54%

357.8; 33%
143.41; 13%

FDI infows (Net) by Non-EPZ and EPZ Area

1200

1096.86

1000

877.52

FDI Infows (Net) (in

million US$)

814.27
800
600

666.07
521.94

552.06

400
200
0

737.01
592.81

262.21
144.13

144.2

219.34

Jul-Dec 2013 Jan-Jun 2014 Jul-Dec 2014 Jan-Jun 2015

Total

Non-EPZ

EPZ

FDI Infows (Net) by Major sector for FY 2015

(In million US$)
330.81; 18%

389.58; 21%

36.79; 2%
83.36; 5%
197.22; 11%

199.54; 11%

80.44; 4%
29.22; 2%

38.7; 2%
96.59; 5%
351.62; 19%
Banking
Agriculture & Fishing
Fertilizer
Leather & Leather Products

Telecommunication
Textiles & Wearing
Gas & Petroleum
Others

Power
Food
Trading

Why Invest in
Bangladesh?
Strategic
Location of
Bangladesh

Youth &
Ambition

Competitive
Cost Base

Bangladesh
s Export
Competitive
ness

Fiscal &
Non-Fiscal
Incentives

Strategic Location of
Bangladesh
China and India between them

have vast and increasingly

prosperous populations, which
are projected to grow to three
billion by 2050. Bangladesh is
well situated in every sense to
take advantage of this
opportunity.

With improving education,

technology and economic growth,
Bangladeshs own market of 146.6
m people is becoming increasingly
attractive to business and foreign
investors.

Youth & Ambition

Unlike older
industrialized
societies with growing
legions of ageing
dependents,
Bangladesh has a very
youthful demographic.

66% of the
population are
economically active
(15 years and over).

The country is young

too, 40 years old.

English Widely
Spoken - The national
language is Bengali or
Bangla. Yet our
second language,
English, is widely
spoken, understood
and written.

Bangladeshs Export
Competitiveness
Manufacturing output has
seen steady growth, recently
in double figures. Bangladesh
provides significant benefits
to exporters.

Bangladesh offers a most liberal

FDI regime in South Asia, with
no prior approval requirements
or limits on equity participation
and repatriation of profits and
income in most sectors.

Bangladesh enjoys tariff-free access to the EU, Canada, Australia and

Japan. Bangladesh is the top manufactured products exporter to the
least developed countries as well as to Europe, with more than 50%
market share

Competitive Cost Base

BD has lots of welleducated, skilled and
energetic workers. And
the wages and salaries
are low

Dhaka's skilled labor

cost base is still less than
the other major cities.

Dhaka's management
grades are 2-3 times less
than in Singapore,
Shanghai, Bangkok.

Industrial estate rent in

Dhaka is cost effective
than Shanghai, Jakarta,
Bangkok

Reform Initiatives in Bangladesh

to Facilitate FDI
Automation
of investor
registration
processes at
BOI
Automation
of Company
Registration
with RJSC&F

Automation
of export
permit
issuance at
DEPZ
Cash subsidy
claim process
simplification
of
Bangladesh
Bank

Automation of investor
registration processes at BOI
BOI introduced
automated
registration
system for
both local &
foreign
investors in
2010.
Avg time to
register fell
from 42 days
to 12 days!

Entire
registration
process can be
completed
online

No need to
visit BOI office
or an
intermediary

Cost to
register fell by
82%

18% of
industrial
projects are
now being
registered
within 10 days
only!

Automation of export permit

issuance at DEPZ
BEPZA issued
automated
export permit
issuance
process at the
DEPZ in June
2010.

Average time to
issue an export
permit has
reduced by 33
percent!

No of interfaces between
companies and DEPZ authority has
reduced to 0 from 4!

Automation of Company
Registration with RJSC&F

Introduced automated
business registration in
March 2009.

The entire registration

process is now online.

26% reduction in time

required for
registration (23 days in
2009 to 17 days in
2012)

The number of visits to

RJSC&F has reduced
by 40%

98% reduction in time

required to obtain
name clearance (9 days
in 2009 to 1.58 hours in
2012)

Limitations of FDI
Complicate
d
Bureaucrac
y
High
Inefficiency

Political
Unrest

Corruption

Insufficient
Power
Supply

Inconsisten
cy in Policy
Implementa
tion

Recommendations for FDI

Control of
Red Tape

Improvem
ent of Law
and Order

Infrastruct
ural
Developm
ent

Efficiency
in Port
services

Acclamation on
Bangladesh
Citi Investment Research & Analysis
stated that Bangladesh, alongside
China, Egypt, India, Indonesia, Iraq,
Mongolia, Nigeria, Philippines, Sri
Lanka and Vietnam, is having the
most promising (per capita) growth
prospects.

Goldman Sachs branded Bangladesh

in its 'Next 11' list after the BRIC
nations.

Acclamation on Bangladesh
(Cont.)
JPMorgan Chase commented
that Bangladesh ranks fourth
in growth of economically
active population.
A 2012 HSBC report titled The
World in 2050, listed
Bangladesh as one of the top 7
countries expected to deliver
the fastest growth en route to
2050.

Acclamation on Bangladesh
(Cont.)

Morgan Stanley announced that Bangladesh

is at the very early stages of an investment
boom.

Reference: Books
1. International Financial Management by Jeff
Madura - Florida Atlantic University, 9 th edition.
2. International Business By Oded Shenkar,
Yadong Luo, Tailan Chi
3. Foreign Direct Investment by edited by
Kenneth A. Froot.
4. Foreign Direct Investment by Harrison G.
Blaine.
5. Foreign Direct Investment in Developing
Countries: A Theoretical Evaluation By Sarbajit
Chaudhuri, Ujjaini Mukhopadhyay

Reference: Papers and Journals

1. FDI Survey Report January-June, 2015 By Statistics
Department Bangladesh Bank.
2. World Investment Report-2015 by United Nations
Conference on Trade and Development(UNCTAD)
3. www.investopedia.com/Foreign Direct Investment
- FDI
4. en.wikipedia.org/wiki/Foreign_direct_investment
5. A study of foreign direct investment and
economic growth in bangladesh by Md. mamun
howlader
6. Foreign direct investment in bangladesh,
prospects and challenges and its impact on
economy by Afsana Rahman.

Reference: Papers and

Journals(cont.)
7. Impact of Foreign Direct Investment on
Bangladeshs Balance of Payments: Some Policy
Implications by Muhammad Amir Hossain.
8.Foreign Direct Investment Theories: An
Overview of the Main FDI Theories by Vintila
Denisia
9. Theories of international trade, foreign direct
investment and firm internationalization: a
critique by Robert E. Morgan and Constantine S.
Katsikeas

Question on Topic
1. What is FDI? What are the primary objectives of Foreign
direct investment?
2. What are the revenue related objectives and cost related
objectives of FDI? Give proper example with reference.
3. What are the others motives that is related to FDI?
4. Why FDI is important in the developing country like
Bangladesh? Are there any disadvantage? Explain?
5. What are the major types of FDI and how FDI can be
achieved ? Give proper Example.
6. How FDI can be determined and what are the factors that
influence the factors of FDI? How can we calculate FDI?
7. What are the theories of FDI? Explain Hymer FDI Theory ?
8. What is the condition of world FDI and what are the major
sources that influence FDI?

Question on Topic(cont.)
9. What is the present economic condition of
Bangladesh? How FDI develop the overall economy
of Bangladesh?
10. Why foreign investor should invest in
Bangladesh and what factors influence the
investment decision of foreign Investors?
11. What are the limitation of FDI, Explain? Do you
have any recommendation to attract foreign
investors?

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