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A Report on FDI issues in Bangladesh
Executive Summary
As per as we know that foreign direct investment has a great impact on economic activities in every countries phenomena. In Bangladesh perspective FDI issues play a significant role for development in varies sector since Bangladesh is a one of the less developed country in the world. The financial market of the country is organized by the different types of the Governmental organizations, Non governmental organizations, Private Banks and different types of Multinational firms and Industries. In the economic sector of this country the Multinational firms are playing a very significant role. The two determinants which are directly related to FDI in Bangladesh are Poverty and Labor inventiveness. These two determinants are related to each other. Naturally poor countries like Bangladesh are more labor intensive. As the supply of labor Due to this lower wage rate the investors are very much willing to invest in labor-intensive countries As the supply of labor is more then the demand wage rate become low and production cost is low there. The determinants that attracted FDI in Bangladesh is not due to some isolated events rather it is almost same to the global reasons. But in some cases there exists some comparative advantages.
In corporate point of view, FDI is important because of improving profitability and enhancing shareholder wealth. Government also welcomes FDI so that large investment can inter into for create job opportunities; attain economy of scale and overall macroeconomic growth. In most cases, multinational companies engage in FDI because they are interested in boosting revenues, reducing cost or both.
Since there is a positive correlation between the investment and the development, it is obvious that due to the FDI Bangladesh has faced development in different sectors. We had shown some of related aspect that we are trying to discuss as far as we can in our report to show some of the direct impact of the FDI in the economic sector of Bangladesh.
Government Incentives for attracting FDI play a great role for consideration investment in any country. Tax holiday, Tax exemption, accelerated depreciation are the some of the issue which are directly related to invest in any country for foreign perspective. In this sector Government of Bangladesh give some attractive opportunities to MNC for invest more for that reason like EPZ, BEPZA have been established.
At the end we can observe that FDI is a major issue for development perspective and raise economic condition in any adverse situation for a developing country. So we should try to increase FDI in Bangladesh for changing our environment and looking forward to further develop in future.
- Introduction:
Bangladesh is a one of the less developed country in the world. The financial market of the country is organized by the different types of the Governmental organizations, Non governmental organizations, Private Banks and different types of Multinational firms and Industries. In the economic sector of this country the Multinational firms are playing a very significant role. The multinational firms are the key player in the globalize economies. To create, acquire or expand a foreign subsidy multinational firms undertake foreign direct investment. In this section we would like to show how the foreign direct investment works through multinational firms in Bangladesh. To show this first of all we have to be clear about the concept of the foreign direct investment (FDI). The foreign direct investment is an investment in a foreign company where the foreign investor owns at least 10 percent of the ordinary shares, undertaken with the objective of the establishing a lasting interest in the country, a long-term relationship and significant influence on the management of the firm. FDI flows include equity capital, reinvested earnings and the direct investment capital. Through the multinational firms FDI plays an important role in the financial and economic market. Because of the FDI the investment cost in Bangladesh has become cheaper comparer to the last few years and Bangladesh succeeded to develop herself as more competitive than other countries, which are potential from the investment point of view to foreign investors. Basically the FDI is the combination of the components such as:
i) Equity capital
ii) Reinvested earnings and
iii) Intra company loans or intra company debt transactions.
FDI refers to investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Further, in cases of FDI, the investor’s purpose is to gain an effective voice in the management of the enterprise.
- Literature Review:
Many policy makers and academics contend that foreign direct investment (FDI) can have important positive effects on a host country’s development effort. In addition to the direct capital financing it supplies, FDI can be a source of valuable technology and know-how while fostering linkages with local firms, which can help an economy. Based on these arguments, industrialized and developing countries have offered incentives to encourage foreign direct investments in their economies. Recently, however, the special merits of FDI and particularly the kinds of incentives offered to foreign firms in practice have begun to be questioned.
Most of the micro studies on FDI spillovers, as Lipsey (2002) points out, tend to use manufacturing data and have regressed local firm productivity on within sector FDI. Although such studies find no horizontal technology transfer, the empirical work at the intra-industry level might not be suitable for capturing wider spillover effects on the host economy, such as those created by backward and forward linkages with domestic firms. FDI flows were associated with faster growth than in those developing countries that pursued inward oriented trade policies. Other studies cover only transition economies or industrialized countries covering different periods. In this paper we will try to analyze the impact of FDI on an economy.
- Methodology:
The paper aims is foreign Direct Investment in Bangladesh. To do this certainly econometric analysis is best. But due to the shortage of sources it was not possible for us to proceed with a primary survey. That’s why this paper consults with related articles and took information from secondary sources. Though it is possible for us to proceed with an econometric analysis with the secondary information, but due to the paucity of statistics we can’t do that. We followed the findings of various study paper.
- Motives for FDI:
In corporate point of view, FDI is important because of improving profitability and enhancing shareholder wealth. Government also welcomes FDI so that large investment can inter into for create job opportunities; attain economy of scale and overall macroeconomic growth. In most cases, multinational companies engage in FDI because they are interested in boosting revenues, reducing cost or both.
4.1. Revenue Related Motives:
When corporation reaches to its growth stage, it might face problems in farther expansion. That’s why; it needs to look for new sources of demand (may be outside the home country) to increase its sales. Similarly, it often search for enter into profitable market. Governments sometimes interested in exploit monopolistic advantages of some industry through providing incentives to foreign investors. Investors also find diversified portfolio internationally.
4.2. Cost Related Motives:
By using foreign factors of production, foreign raw materials, and technology corporations can achieve economy of scale by establish a subsidiary in a new market that may leads to production efficiency. In addition; investors engage in FDI to protect their foreign market share to react to exchange rate movements or to avoid trade restrictions.
4.3. Diversification:
International diversification is a common motive for FDI. It allows corporations to reduce its exposure to domestic economic conditions. In this way, the corporation may be able to stabilize its cash flows and reduce its risk. Such a goal is desirable because it may reduce the firm’s cost of financing. International project may allow corporations to achieve lower risk than is possible from only domestic project without reducing their expected returns. International diversification tends to be better able to reduce risk when the FDI is targeted to countries whose economies are somewhat unrelated to corporations’ home country economy.
- Trend of Foreign Direct Investment:
Global Perspective:
The notion of foreign capital flow is very ancient; it is almost as old as the history of trade and commerce. It gets expedite with the innovations, namely innovation of naval route and further innovation of telephone and telegraph as integration plays a great role in this regard. But till WW II, volume of foreign capital flow was very much insignificant. This is because of the restrictive policies and distrust of different countries to face great depression. But debt crises changed all scenarios: basically this is the starting point of large volume foreign capital flow. The following table shows the flow of foreign private capital from 1975-96. All the amount is measured in billion$
Foreign direct investment has also changed its direction with time. First, it has moved away from third world, it had met with resistance and expropriations climaxing in 1970s. Second, the United States has attracted more FDI inflows than any other nations in the early 1980s. The main direct foreign investors in the U.S. as of 1980s were the Netherlands, followed by United Kingdom, Canada and Germany, with Japan rapidly becoming a leading investor. Almost none of the FDI in United States is held by the investor from OPEC nations. Finally, since 1978 the People’s Republic of China has begun to host significant amount of FDI often as a partner in ownership. These direction changes have made a visible change in character of FDI. In mid 1970s, the prototypical foreign direct investment were American base extractors of mineral and other primary products, such as the American-Arabian Oil Company (Aramco) consortium in Saudi Arabia, the United Fruit Company in Central America etc.
Table: FDI by region: 1990 & 2001
| Region | 1990 ($B) | 2001 ($B) |
| Latin America | 10.3 | 85.4 |
| South, East, and SE Asia | 22.1 | 94.4 |
| West and Central Asia | 2.2 | 7.7 |
| Central and Eastern Europe | 0.6 | 27.2 |
| Africa | 2.5 | 17.2 |
Note: All figures are inward FDI.
After trade liberalization, the third world governments have switched of from taxing and nationalizing of FDI aggressively to owing it with tax breaks. Inward FDI to developing countries increased from $8.4 billion in 1980, to $ 37.6 billion in 1990, to $ 204.8 billion in 2001. This is spread throughout the globe, with substantial gains seen in many countries and in every region: This growth across regions makes the high connection of FDI to developing nations. In 2001, about 62% of inward FDI to developing countries went to five countries: China, Mexico, Brazil, Hong Kong and Poland. The reason behind this trend is that the multinational companies (MNCs) prefer to invest in the countries known to be safe, with relatively high level of political stability, infrastructures, education, well-enforced poverty rights etc.
The developing countries are now a much more important destination for global private capital. Their share of global FDI flow is now almost 40% compared with 15% in 1990 and their share of global portfolio equity flows is now almost 30% compared with around 2% before 1990s. The importance of private flows has also increased markedly in the economics of developing countries from 4.1% of domestic investment in 1990 to almost 20% in 1996. However, the developing countries differ widely in the degree of integration.
- Determinants of FDI:
The flow of FDI can be analyzed from the point of view of both theoretical and real world. An investor is always moved by profit. So s/he will invest to those sectors where s/he gets highest return. So there are two determinants of foreign direct investment from the theoretical point of view:
1. Poverty
2. Labor intensiveness.
These two determinants are related to each other. Naturally poor countries like Bangladesh are more labor intensive. As the supply of labor is more then the demand wage rate become low and production cost is low there.
| Country | Nature of intensiveness | Wage per hour (unskilled labor) without tax ($) |
| Bangladesh | Labor | 0.43 |
| Australia | Capital | 1 |
| United Kingdom | Capital | 1.25 |
| India | Labor | 0.60 |
| China | Labor | 0.65 |
Due to this lower wage rate the investors are very much willing to invest in labor-intensive countries. But in real world scenario is much more different than theory. From the real world pint of view the following variables act as a determinant of FDI flow:
6.1. Export Orientation:
Itis one of the determinants of FDI flow. Statistics reveal that high-FDI countries are a significant determinant of FDI. Whereas, in low FDI countries exports do not play a significant role. Singh (1995) performed a causality test and found that there exists a dynamic relationship between exports (particularly manufacturing) and FDI. Market facilities are the existing reason behind this.
6.2. The Size of the Market:
The size of the markettypically proxied by the level of GNP is an important determinant of FDI flow. Bandera and White (1968) found that market size to be a significant determinant of U.S FDI. Schmitz and Bieri (1972) also found that one period lagged GNP to be a significant variable in the FDI demand function. For developing countries, Root and Ahamed(1979), Torrisi(1985) found market size to be significant determinant. This type of FDI does not usually flow to very poor countries, where consumers do not have adequate purchasing power.
6.3.Usage of Incentives:
Tax incentives, financial subsidies, regulatory exemptions are usually some supplementary measures to an already enabling environment. Market imperfections can be addressed through these channels. However, due to lack of a sound business environment, these incentives may go in vain.
Access to the market is another determinant of FDI flow. FDI flow not only depends on the host country market rather the investors observe that whether they can access the nearby market at a low cost. This is the one of the reason behind invest in India.
6.3. Quality of Infrastructure:
The quality of infrastructure in recipient countries can be a critical determinant of FDI. Availability of crucial infrastructure, such as roads, highways, ports, communication networks, electricity, etc. should increase productivity and thereby attract higher levels of FDI. Following the literature, such as Loree and Guisinger (1995) and Asiedu (2002), this study uses the natural log of the number of telephones available per 1,000 people as a proxy for the quality of infrastructure. However, it should be noted that, in addition to availability, reliability of infrastructure (such as the frequency of telephone or power outage) is also a crucial indicator of the overall quality of infrastructure.
6.4. Rule of Law:
Rule of law is one of the prime concerns of the foreign investors. Before investing any country they analyze the law and order situation of that country. If the country is corrupt there is a possibility that the investors will not be invest to that country. This is because no body wants to be looser. If an investor has to pay lions share of his earnings as bribe and to the local hoodlums, certainly they will not prefer that situation. Not only do the laws need to be close in objective to corporate law in more developed countries, but also there has to be well-trained, independent judges and lawyers.
6.5. Repatriation of Capital and Profits:
Foreign investors must be guaranteed the unhindered ability to transfer their profits and capital out of the country. No investor will invest if profits and capital are impossible to repatriate. If repatriation is difficult, then foreign investors will construct a variety of non-transparent means to withdraw their investment. These means are often in the form of transfer pricing, loans to the investing company, sale of raw materials at above market price or exorbitant technical and management fees.
6.6. Return on Investment:
Higher rates of return on investment in recipient economies should naturally attract higher levels of foreign capital. Measuring the rate of return on investment, however, is difficult as developing countries generally lack well-developed capital markets. To get around this problem, the inverse of per capita income in its natural logarithmic form has been used in several studies, such as Edwards (1990), Jaspersen et al. (2000), and Asiedu (2002), as a proxy for the return on investment. The rationale is that return on investment should be positively related to the marginal product of capital, which should be high in capital-scarce poor countries where per capita income is low (or the inverse of per capita income is high). Therefore, the inverse of per capita income should be positively related to FDI inflow.
- Sponsoring Agencies and Their Areas of Responsibilities
- The term ‘ Sponsoring Agency’ means an agency engaged in promoting, assisting supervising and administering as well as offering pre and post registration assistance to industries. The list of sponsoring agencies responsible for private sector industrial development and their areas of responsibilities are as follows:
| Sl No. | Name Of The Sponsoring Agencies | Areas Of Responsibilities |
| 01. | Board of Investment (BOI)
Prime Minister’s Office, Jiban Bima Tower (19th Fl) 10, Dilkusha C/A, Dhaka-1000 |
All industries in the private sector except those under BEPZA and BSCIC. |
| 02. | Bangladesh Export Processing Zones Authority (BEPZA). | Industries located in EPZs |
| 03. | Bangladesh Small and Cottage Industries Corporation (BSCIC) | Small and cottage industries. |
8. FDI in Bangladesh:
The Government of Bangladesh has put in place a comprehensive array of policies aimed at bringing about significant socio-economic improvements to the people of Bangladesh and ultimately, self-reliance, for the nation. In recognition of the private sectors ability to contribute towards achievement of these goals, the government has recently implemented a number of significant policy reforms. These are designed to create a more open and competitive climate for foreign investment.
In order to achieve the objective of accelerating industrial growth and to gain a greater share of industry in the Gross Domestic Product (GDP) as well as to make the industrial policy responsive to the changes occurring in the global economy, the present government announced a new Industrial Policy-1999.
The main features of the Industrial Policy 1999 are as follows:
- To expand the production base of the economy by accelerating the level of industrial investment.
- To promote the private sector to lead the growth of industrial production and investment.
- To focus the role of the government as a facilitator in creation an enabling environment for expanding private investment
- To permit public undertaking only in those industrial activities where public sector involvement is essential to facilitate the growth of the private sector and/or where there are over riding social concerns to be accommodated.
- To attract foreign direct investment in both export and domestic market oriented Industries to make up for the deficient domestic investment resources, and to acquire evolving technology and gain access to export markets.
- To ensure rapid growth of industrial employment by encouraging investment in labor intensive manufacturing industries including investment in efficient small and cottage industries.
- To generate female employment in higher skill categories through special emphasis on skill development.
- To raise industrial productivity and to move progressively to higher value added products through skill and technology up gradation.
- To enhance operational efficiency in all remaining public manufacturing enterprises through appropriate management restructuring and pursuit of market oriented policies.
- To diversify and rapidly increase export of manufactures.
- To encourage the competitive strength of import substituting industries for catering to a growing domestic market.
- To ensure a process of industrialization which is environmentally sound and consistent with the resource endowment of the economy.
- To encourage balanced industrial development throughout the country by introducing suitable measures and incentives.
- To effectively utilize existing production capacities.
- To coordinate trade and fiscal policies.
- To develop indigenous technology and to expand production based on domestic raw materials.
- To rehabilitate deserving sick industries.
8.1. Determinants of FDI In Bangladesh
The determinants that attracted FDI in Bangladesh is not due to some isolated events rather it is almost same to the global reasons. But in some cases there exists some comparative advantages. This two phenomenon determines the FDI flow in Bangladesh. The variables are:
Lower labor cost than any other countries of south Asia.
Labor cost comparison in the textile industry, 1998 |
|
| Country | Cost/hour |
| Bangladesh | $.43 |
| India | $60 |
| Pakistan | $40 |
| Srilanka | $49 |
Lower tax rate than any other countries of South Asia
Tax Rates in South Asia |
||
| Country | Corporate Tax | Branch Tax |
| Bangladesh | 35 | 40 |
| India | 35 | 48 |
| Pakistan | 43 | 43 |
A largely homogenous society with no major internal or external tensions and a population with great resilience in the face of adversity.
4. Broad non-partisan political support for market oriented reform and perhaps the most investor friendly-regulatory regime in south Asia.
5. Potentially significant market, especially with potential access to south Asia.
8.2. Trend of FDI Flow In Bangladesh
Though there are enough opportunities for foreign investors to invest in Bnagladesh they dont invest much. The following graph shows the flow of FDI in Bangladesh from 1981-2001.
But recently there is an increase in FDI flow in Bangladesh. During 2002 the inflow of FDI in Bangladesh was $360 million, a sharp jump. But how much of this registered FDI was actually materialized is a question.
8.2. Statistical overview of FDI in Bangladesh:
FDI by year in Bangladesh
| Year | FDI Projects | Capital Investment US$ |
| 2006 | 6 | $50.00 Mn |
| 2005 | 7 | $1.55 Bn |
| 2004 | 7 | $830.00 Mn |
| 2003 | 17 | $390.00 Mn |
Top multinational companies in Bangladesh
Shown below are the top multinational companies ranked by the number of FDI projects in Bangladesh since 2002.
| Company | Projects |
| Cotecna | 2 |
| Siemens | 2 |
| State Bank of India (SBI) | 2 |
| SingTel (Singapore Telecommunications) | 1 |
| Orascom | 1 |
Source Country of multinationals investing in Bangladesh
Shown below are the top 5 countries investing in Bangladesh since 2002. This is based on the number of FDI projects invested by companies from that country.
| Source Country | Projects |
| India | 13 |
| USA | 7 |
| UK | 5 |
| Germany | 4 |
| Malaysia | 3 |
FDI projects by cluster in Bangladesh
LOCOmonitor™ tracks FDI across all industries and classifies each FDI project into its specific industry cluster, sector and technology area. The number of foreign direct investment projects in Bangladesh within each industry cluster is shown below.
| Industry clusters | Projects |
| ICT | 9 |
| Heavy Industry | 8 |
| Business & Financial Services | 7 |
| Light Industry | 5 |
| Chemicals, Plastics & Rubber | 4 |
| Transport Equipment | 4 |
| Logistics & Distribution | 3 |
| Property, Tourism & Leisure | 2 |
| Food/Beverages/Tobacco | 2 |
| Consumer Products | 1 |
| Electronics | 1 |
FDI Projects by Key Business Function in Bangladesh
For every foreign direct investment project tracked by LOCOmonitor™, the key business function of the operation is recorded. The key business function of a project is defined as the main activity of the new operation. Shown below are the number of FDI projects in Bangladesh within each key business function.
| FDI Key Business Function | Projects |
| Manufacturing | 16 |
| Business Services | 9 |
| Sales, Marketing and Support | 9 |
| Extraction | 4 |
| Internet or ICT Infrastructure | 3 |
| Logistics and Distribution | 2 |
| Maintenance/Service | 1 |
| HQ | 1 |
| Customer Support Centre | 1 |
Product Wise Investment & Employment (industry in operation)
|
No. of industries in operation
|
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8.3. Portfolio Investment:
One of the major advances in the investment field during the past few decades has been the recognition that the creation of an optimum investment portfolio is not only simply a matter of combining a lot of unique individual securities that have desirable risk-return characteristics. Specifically an investor must consider the relationship among the investments if one is going to build an optimum portfolio that will meet ones investment objective.
Before presenting portfolio theory, it is needed to clarify some general assumptions of the portfolio theory. This includes not only what we mean by an optimum portfolio but also what we mean by the term risk aversion and risk.
Risk: One way to define risk is the uncertainty of future outcomes. An alternative definition might be the probability of an adverse outcome.
Required rate of return: The overall required rate of return on alternative investments is determined by three variables:1) the economy’s Real Risk Free Rate (RRFR), which is influenced by two factors : time preference of individuals for consumption of income and the set of opportunities available in the economy; 2)
Nominal Risk Free Rate (NRFR), variable that influence NRFR, which include short-run ease or tightness in the capital market and the expected rate of inflation; 3) the risk premium on the investment. This risk premium can be related to fundamental factors, including business risk, financial risk, liquidity risk, exchange rate risk and country risk, or it can be a function of systematic market risk (beta).
Portfolio theory also assumes that investors are basically risk adverse, meaning that, given a choice between two assets with equal rates of return, they will select the asset with lower level of risk.
9. Government Incentives for attracting FDI:
9.1. Tax Holiday:
Tax holiday facilities will be available for 5 or 7 years depending on the location of the industrial enterprise. For industrial enterprises located in Dhaka and Chittagong Divisions ( excluding Hill Tract districts of Chittagong Division) the tax holiday facility is for 5 years while it is 7 years for locations in Khulna, Sylhet, Barisal, and Rajshahi, Divisions and the 3 Chittagong hill districts.
Tax holiday facilities are provided in accordance with existing laws. The period of tax holiday will be calculated from the month of commencement of commercial production. Tax holiday certificate will be issued by NBR ( National Board of Revenue) for the total period within 90 days of submission of application.
9.2. Tax Exemption:
Tax exemptions are allowed in the following cases:
* Tax exemption on royalties, technical know-how fees received by any foreign collaborator, firm, company and expert.
* Exemption of income tax up to 3 years for foreign technicians employed in industries specified in the relevant schedule of the income tax ordinance.
* Tax exemption on income of the private sector power generation company for 15 years from the date of commercial production.
* Tax exemption on capital gains from the transfer of shares of public limited companies listed with a stock exchange.
9.3. Accelerated Depreciation:
Industrial undertakings not enjoying tax holiday will enjoy accelerated depreciation allowance. Such allowance is available at the rate of 100 per cent of the cost of the machinery or plant if the industrial undertaking is set up in the areas falling within the cities of Dhaka, Narayangonj, Chittagong and Khulna and areas within a radius of 10 miles from the municipal limits of those cities. If the industrial undertaking is set up elsewhere in the country, accelerated depreciation is allowed at the rate of 80 per cent in the first year and 20 per cent in the second year.
9.4. Concessionary Duty on Imported Capital Machinery:
Import duty, at the rate of 5% ad valorem, is payable on capital machinery and spares imported for initial installation or BMR/BMRE of the existing industries . The value of spare parts should not, however, exceed 10% of the total C & F value of the machinery. For 100% export oriented industries, no import duty is charged in case of capital machinery and spares. However, import duty @ 5% is secured in the form of bank guarantee or an indemnity bond will be returned after installation of the machinery. Value added Tax ( Vat) is not payable for imported capital machinery and spares.
9.5. Other Incentives:
- Citizenship by investing a minimum of US $ 500,000 or by transferring US$ 1,000,000 to any recognised financial institution ( Non-repatriable ).
- Permanent residentship by investing a minimum of US$ 75,000 ( non-repatriable).
- Special facilities and venture capital support will be provided to export-oriented industries under “Thrust sectors” . Thrust Sectors include Agro-based industries, Artificial flower-making, Computer software and information technology, Electronics, Frozen food, Floriculture, Gift items, Infrastructure, Jute goods, Jewellery and diamond cutting and polishing, leather, Oil and gas, Sericulture and silk industry, Stuffed toys, Textiles, Tourism.
9.6. Incentives to Non-Resident Bangladeshis ( NRBs):
Investment of NRBs will be treated on par with FDI. Special incentives are provided to encourage NRBs to invest in the country. NRBs will enjoy facilities similar to those of foreign investors. Moreover, they can buy newly issued shares/debentures of Bangladeshi companies. A quota of 10% has been fixed for NRBs in primary public shares. Furthermore, they can maintain foreign currency deposits in the Non-resident Foreign Currency Deposit (NFCD) account.
9.7. To Facilitate Investment, Prior Approval of the Bangladesh Bank is No Longer Required for:
- Remittance of profits to their head offices by foreign firms and companies operating in Bangladesh
- Issuance of shares to non-residents against investment for setting up industries in Bangladesh.
- Remittance of dividends on such shares to the non-resident investors.
- Portfolio investment by non-residents including foreign individuals/enterprises in shares and securities through stock exchanges in Bangladesh .
- Remittance of dividends on portfolio investment by non-residents through stock exchanges in Bangladesh.
- Remittance of sale proceeds, including capital gains of portfolio investments of non-residents through stock exchanges in Bangladesh
- Remittance of principal and interest instalments on loans/suppliers credits obtained by industrial units from foreign lenders with approval of the BOI. 100% foreign owned ( Type A) industrial units in the EPZs (Export Processing Zone) do not require prior permission of BOI for such foreign borrowing.
- Remittance in repayment of principal and payment of interest of such loans.
- Remittance of technical fees and royalties against technical assistance/royalty agreements in conformity with BOI guidelines.
- Remittance of savings of expatriate personnel at the time of their leaving Bangladesh, out of the salaries and benefits stated in their employment contracts as approved by BOI.
- Extension of term loans by banks on normal banking considerations to foreign firms operating in Bangladesh
- Extension of working capital loans to all foreign owned/controlled industrial and trading firms/companies by banks on the basis of bank customer relationship and normal banking practice.
- Obtaining of interest-free repairable short-term foreign currency loans by foreign firms investing in Bangladesh from their head offices or any other sources through any authorised dealer.
10. Barriers to FDI in Bangladesh
REASON BEHIND THE LOWER INVESTMENT FLOW TO BANGLADESH
After having lots of potential Bangladesh cannot attract enough FDI. The reasons are:
- Large perceived gap between good policies and weak implementation (Pace of liberalization).
- Low levels of skills and training in the workplace.
- Unreliable power supply and poor transport and communication.
- Periodic flood and cyclone.
- Law and order problems.
- End of export quota as provided by MFA to RMG industry.
If we want to analysis about the FDI in Bangladesh we find that most of the FDI go to the energy sector. FDI in manufacturing sector in Bangladesh is not so high. This is because that the domestic market in Bangladesh is too small. Another reason is that the poor people are not capable to consume the quality goods. Since the India is our neighbor country and has a very big economic market some of the big investors choose Bangladesh economy looking at the Indian market. But Indian Government imposes high tariff and non-tariff barriers to getting access in their local market. Which discourage the foreign investors? Another important barriers for the FDI in Bangladesh is the Political crises. Since Bangladesh is a democratic country so the opposition party some times create political crises. Hartal is one of the impediment activities, which severely discourage the foreign investors. In the view of the foreign investors, lack of adequate and sufficiently focusing on improvement of the low and order situation. Weekly holiday on Friday and Saturday is not adjusted to international holiday, it losses three days in international transaction practices. However, infrastructural problem like energy and communication system is not proper developed.
10.1. Political Violence:
Incidents of politically directed damage to foreign projects or installations have occurred, although violence targeted against business concerns generally has been isolated and criminal, rather than political, in nature. Extortion of money from businesses by thugs claiming political backing is common. Clashes between supporters of rival political parties and their student and youth wings and even factions within the same party are frequent occurrences. General strikes and blockades called by political parties mostly affect businesses by keeping workers away with the threat of violence and blocking transport, resulting in productivity losses. Vehicles and other property are at risk from vandalism or arson during such programs, and looting of shops has occurred.
10.2. Corruption:
Corruption at all levels in the bureaucracy is rampant, and should be taken into account by foreign investors considering business in Bangladesh. The World Bank estimates that corruption exacts a toll of 2-3% on annual GDP growth each year. Transparency International’s Corruption Perception Index has ranked Bangladesh as the most corrupt nation for four consecutive years. Local and foreign business persons often report their experiences with petty corruption, such as paying extra “fees” for obtaining government services (post office boxes, telephone lines, licenses, customs clearance). Complaints of higher-level corruption in the fair awarding of public and private tenders are frequent, as are allegations of insider trading in the stock market. In this regard, business people consider Bangladesh Customs to be among the worst, a thoroughly corrupt organization in which officials routinely exert their power to influence the tariff value of imports and to expedite or delay import and export processing at the ports. A mandatory pre-shipment inspection system of import valuation was introduced in 2001 to help reduce discretionary power of customs officials, and lower costs, and improve efficiency at Bangladesh’s trade entry points. However, Bangladeshi Customs officials are often the first to point out that the valuation system remains weak.
The now defunct Bangladesh Bureau of Anti-Corruption Bureau (BAC) was notoriously subservient to the ruling party and corrupt. In February 2004, Parliament passed legislation to create an independent Anti-Corruption Commission (ACC), which was formally established in November 2004. Provisionally staffed with employees of its predecessor organization, the ACC was embroiled in personnel and other controversies within weeks of its formation
10.3. Terrorist attack:
Bangladesh is presently considered as one of the most risky area in South Asia. Killings, extortion and other crimes, however, have now reached a new height making people really scared. Some foreign investors are already decided to withdraw their investments.
Recent bombing in every district, attacked on judges and lawyers, threatening foreign embassies, NGOs’, school, and local administration make the situation even worst to local investors too. Neighbor country also not feels comfortable with our risky environment. Overall, situation is not favorable to any investors in this country and this problem should be address properly very soon.
11. The Impact of the FDI in Bangladesh:
Since there is a positive correlation between the investment and the development, it is obvious that due to the FDI Bangladesh has faced development in different sectors.We would like to show some of the direct impact of the FDI in the economic sector of Bangladesh. 1. Because of the FDI the saving gap has been plugged. In Bangladesh the energy sector has taken most of the FDI which is developing day by day. FDI also provided the much needed foreign exchange. It supplemented the local saving of 18.33 percent to attain the national rate of 22.74 percent. 2. FDI gives support to the sect oral transformation. Due to the FDI the contribution of the industry in GDP has raised from 21.5 percent in 91-92 to 27.17 percent in 02-03, while that of services from 49.74 percent to 50.9 percent. 3. The share of the industrial sector has raised in absolute term from tk- 327830m from tk- 462380m in 02-03, This was possible because of the FDI.
11.1. Economic Growth vs. FDI:
A country’s economic growth is dependent on several financial factors which have direct and indirect influence over FDI. In 2004-2005 GDP growth of Bangladesh was 5.6% which is pretty good condition for investing.
Interest rate: Overall interest rate of Bangladesh is high enough to slower its economic growth and reduce investment from foreign and local investors. Interest rate causes low demand for product as well.
Exchange rate:exchange rates influence our flow of FDI also. Though Bangladesh now a days follows managed freely float exchange rate system, yet the rate is not properly reflected by the market. As we have a trend of depreciating exchange rate, investor could assess their profitability easily because it has an impact on high export in future.
Inflation: As inflation rate of this country is still in tolerable range, investors are not much rigid in taking investing decision in this economy.
Conclusion
The age of autarky has gone away. Today a country can’t live only with itself. For the case of developing countries and the LDCs the problem is more acute as they have scarce resource but vast poverty, lower level of human capital formation. So keeping isolated means to shut the door of development. China is a prime example of this phenomenon. So to develop a country well directed foreign private investment is essential at this moment for LDCS.